From: Scott R. Shewan
Affiliation: Born, Pape & Shewan LLP
July 14, 2005
SEC Release No. 34-51856
Dear Mr. Katz:
I have just had an opportunity to review the comment letter submitted by Rosemary Shockman and Robert Banks in connection with the proposed revisions to the NASD Code of Arbitration Procedure. I wholeheartedly agree with the contents of that letter. During the short time that I have before the expiration of the comment period, I would like to add a couple of my own comments. The following should be viewed as supplementing the comments of that letter; I do not believe anything would be gained by restating those comments, as I could not have stated my own position any better than it was by Ms. Shockman and Mr. Banks.
Definition of Public vs. Non-Public Arbitrator (Rule 12100(n))
I believe that too many industry-related arbitrators are making it into the public pool. In addition to the comments in the Shockman/Banks letter, I would note that there is nothing to prevent an attorney from being designated as a public arbitrator even if his law firm devotes 50% of its time to industry clients, so long as that individual lawyer does not devote more than 20% of his or her own time to representation of the industry. This defies common sense, and ignores ethical rules which provide in all states that a client of a law firm is a client of each member of the law firm. I believe the attorney rule should be amended to take into account the amount of time devoted to industry work by the law firm as well as the individual lawyer.
NLSS and Arbitrator Roster (Rules 12400, 12402, 12404, 12405, 12406)
I cannot overemphasize my agreement with the Shockman/Banks comments on the idea of a chair-qualified list. We already have too many "professional neutrals," who recognize that they will never be appointed to subsequent panels if they truly call it like they see it.
I must also stress that the proposed rule, while well-intentioned, does not go far enough in reducing the number of times that the NASD will be required to appoint a "cram-down" arbitrator, meaning an arbitrator who is appointed from off-list after the lists have been exhausted (whether by party action or arbitrator unavailability). It is extremely important that a second list be prepared and that the parties have an opportunity to have input on the arbitrators who eventually serve. I recently had a cram-down arbitrator appointed to my panel who, in 42 customer-member cases, had voted against the customer 34 times, and gave only small awards in the other cases. Despite the evident pro-industry partiality, the NASD refused to disqualify the arbitrator and the arbitrator refused to recuse himself. How can my client have any confidence that he will have a fair hearing? How can I or my clients have faith in a system where, more often than not, there is an arbitrator appointed without any input?
Efforts to reduce the incidence of cram-down appointments should be at the top of the priority list in any re-write of the NASD Code. Unfortunately, the current revisions will not accomplish anything in this regard.
Dispositive Motions (Rule 12504)
This is another well-intentioned proposal, but it will not have the intended effect. Dispositive motion practice is already abused in NASD arbitration (another specious motion to dismiss landed on my desk as I wrote this letter). The industry uses these motions in an effort to wear down the claimants, and to make the process more expensive. Moreover, the industry figures that they may occasionally find a friendly panel which will grant their motion. By codifying the possibility of dispositive motions, the floodgates to these meritless motions will be opened further. Moreover, it must be made clear that motions which are really only disguised summary judgment motions should never see the light of day. It is becoming more common for respondents' lawyers to file these motions, make representations about the facts, and then refuse to turn over discovery which would show that the represented facts are disputed. While it is true that such motions are rarely granted outside of timeliness issues, the entire process becomes more costly and frustrating for all parties when these frivolous motions must be briefed and argued before the entire panel. Naturally, the Claimant is usually charged a hearing fee for the telephone call necessary for the hearing on the Respondent's motion.
The Shockman/Banks letter is correct--the right to a hearing is what sets arbitration apart from the overly formal and paper-driven procedures which are experienced in litigation.
Again, I echo the comments contained in the Shockman/Banks letter. I thank you for your consideration of my thoughts.
Scott R. Shewan
Born, Pape & Shewan LLP
642 Pollasky Avenue, Suite 200
Clovis, California 93612
Phone: (559) 299-4341
Fax: (559) 299-0920