From: Seth E. Lipner
To the SEC
I write in response to the proposal by the NASD to implement a rule requiring arbitrators, at the request of a public investor party to an arbitration, to provide reasons for the arbitration award in that party’s case.
I am Professor of Law at the Zicklin School of Business, Baruch College, CUNY. I am also a member of Deutsch & Lipner, a Garden City New York law firm which represents aggrieved investors in arbitration. I am a two-time past-President of the Public Investors Arbitration Bar Association (“PIABA”), and I have served on the NASD’s National Arbitration and Mediation Committee.
I have long been an advocate of reasoned awards in arbitration. See e.g. Lipner, Ideas Whose Time Has Come: Single Arbitrator and Reasoned Awards, PLI's Securities Arbitration 2000, at p659. I have long argued that arbitrators have no right to keep the basis for their decisions secret from the investing public - as the current system permits. Public investors who are compelled to use the NASD’s monopolistic system of dispute resolution are entitled to know, if they choose, why they won or lost.
Providing arbitrator reasons will have numerous salutary benefits beyond satisfying curiosity. Investors are suspicious about submitting disputes to industry self-regulatory organizations; requiring arbitrators to give reasons will allay some of those legitimate concerns. Providing for reasons will also require arbitrators to think through their decisions, providing an added measure integrity to the process. And once reasoned awards become ubiquitous, future participants in the process will come better to understand arbitrator thinking, and perhaps to make more informed arbitrator selections. Bias, for example, may be revealed in a reasoned award, while it can be kept hidden in an unreasoned one.
Some investor advocates fear increases in motions to vacate flowing from the new rule, but this commentator is unconcerned. Indeed, there are a greater number of federal and state court vacatur cases these days which criticize unreasoned awards. See e.g. Tripi v. Prudential Securities, Inc., 2003 WL 22208351 (S.D.N.Y. 2003); See also Hardy v. Walsh Manning Securities LLC., 341 F.3d 126 (2d Cir. 2003); ***. These cases suggest a higher level of judicial scrutiny of questionable awards when arbitrators offer no reasons, and a lower level of scrutiny when the arbitrators provide reasons. See ***.
Finally, investors are sometimes damaged by the arbitrators’ refusal to give reasons - damage that cannot be undone. For example, in Rich v. SSB, NASD Case #***, the arbitrators rendered a lump-sum, unreasoned award of about $500,000 in favor of the investor. SSB then went to court and obtained a stay of enforcement because of the existence of a class action settlement which released the investor’s WorldCom claims, representing about ½ of the proffered damages. The investor then sought an explanation from the arbitrators, hoping that the arbitrators would explain that at least some of the damages were attributable to non-WorldCom losses. But the arbitrators declined, insisting on their right to secrecy. The investor is going to thus collect nothing.
It is time to stop the practice of letting arbitrators rule without reasons. The option of choosing - which this Rule provides - is a fair one. Investors have a right to know, because they are suspicious of the process. Investment firms have no similar (justified) fear. And those investors who either do not wish to know, or who fear (for whatever reason) the consequences associated with vacatur, can choose not to ask. And the industry respondent cannot foist reasoned awards on any unwilling investor as a method of trying to bolster a threat of a vacatur motion.
The NASD will be preparing a training manual for arbitrators writing reasoned awards. In doing so, the NASD must be very careful to give appropriate guidance, without simultaneously giving arbitrators “model awards”, which will inevitably become meaningless ‘scripts’ which arbitrators will slavishly copy. The NASD must reach out to PIABA and responsible elements of the securities industry, as well as the (few) arbitrators who even today habitually write reasons for their awards, as it tries to fashion appropriate guidelines.
Indeed, as the NASD re-considers the form of its awards, it should modify that form (in all cases) to reflect an important piece of information that is absent from awards -- the amount the investor sought “at the hearing.” The current award form only provides the amount sought “in the claim”, i.e. at the “pleading” stage. Since investor advocates usually refine the original amount sought and present a precise (rather than preliminary) damage calculation at the hearing, the amount sought at the hearing ought to be recited in the award, so that the public reading awards has a better sense of actual, instead of distorted, “recovery rates”.
This commentor supports and applauds the NASD’s rule proposal. But providing the option of reasoned awards is just one necessary step in improving and reforming securities arbitration. Improving the pool of arbitrators, e.g. by eliminating from the pool those arbitrators with industry ties, is a far important reform than the one currently proposed.
Seth E. Lipner