Subject: File No. SR-FINRA-2010-036
From: Richard A Stephens, Esq.
Affiliation: Attorney and FINRA Chairman

October 11, 2010

Dear SEC and FINRA:

I write these comments in partial support, and in partial opposition, to the new Rule proposal at SR-FINRA 2010-036 to allow mid-case referral to FINRA Enforcement. I make these comments as an active claimants' attorney for FINRA arbitrations for many years, a member of FINRA's Chairman Arbitrator roster, and a former Attorney with the SEC's Division of Enforcement and Division of Investment Management.

In sum, an arbitrator who makes a mid-stream referral for continuing frauds should not be removed from a panel for post-appointment "bias" or "prejudice" caused by pleadings or evidence seen, since such post-appointment bias is expected, normal, and judicially permissible.

As structured, the new Rule will be counterproductive and result in a windfall bonus to defrauders, irreparable harm to claimant-investors, and result ultimately in the concealment of ongoing broker fraud during the course of proceedings leading up to final hearings. Claimants will be slitting their own throats, giving themselves a "death penalty", for bringing any information to the panels before final hearings that would jeopardize their arbitration cases by withdrawal of an entire panel that claimants had been cultivating for months to be against the broker's misconduct. Allowing a defrauder to get rid of an entire panel mid-stream, merely because the panel has been convinced by good claimant advocacy that imminent fraud persists against other investors, would be a great reward to the defrauder, and a dagger into the heart of a claimant who alerted the panel to the continuing offenses, thus totally discouraging the revelation to panels of ongoing frauds. Moreover, if an arbitrator thinks he is going to be thrown off a case, and also given a "death penalty", by making a mid-stream referral, there is every incentive to wait until the end of the final hearings, thereby again frustrating the intent of FINRA and the SEC to stop Madoff-type frauds mid-stream.

While FINRA and the SEC should be applauded for making efforts to enhance enforcement involving ongoing frauds, the windfall to defrauders by the ability to get rid of arbitrators who have been educated by claimants about ongoing frauds is nonsensical. To reward the wrongdoer, and harm the innocent victim, should be the last thing FINRA and the SEC would want. The free option to an ongoing defrauder to get rid of a panel is not only an outrageous violation of FINRA's neutrality, but it reflects a naivet as to the law of neutrals, which permits arbitrators to form opinions on the evidence after they are appointed. See Spector v. Torenberg, 852 F. Supp. 201, 209 (S.D.N.Y. 1994)(emph. add.):

"Considering these allegations in their entirety, the Court finds no evident partiality. With respect to Mr. Weiss's comments on sanctions, an arbitrator is not precluded from developing views regarding the merits of a dispute early in the proceedings, and an award will not be vacated because he expresses those views. See Ballantine Books, Inc. v. Capital Distributing Co., 302 F.2d 17, 21 (2d Cir. 1962."

Accord, Advest, Inc. v. Asseoff, 1993 U.S. Dist. LEXIS 4839 (S.D.N.Y. 1993)(emph. add.):

"The contention that Arbitrator Hochman's opinion was formed from the very beginning is insufficient to establish clear evidence of impermissible impartiality. Respondents do not claim that they were prevented from asking any questions or from calling their witnesses. Even if Arbitrator Hochman interfered with questioning of witnesses and telegraphed his views, the court cannot hear evidence about, or vacate, the award because Arbitrator Hochman's bias arose, if at all, from the claims and the evidence rather than from an impermissible source such as financial or personal interest in the outcome."

Accord, Newco AG v. PN Enters., 1996 U.S. Dist. LEXIS 1186 (S.D.N.Y. 1996):

"In addition,'an arbitrator is not precluded from developing views regarding the merits of a dispute early in the proceedings, and an award will not be vacated because he expresses those views." Spector v. Torenberg, 852 F. Supp. 201, 209 (S.D.N.Y. 1994).

Given this law precluding motions to vacate based on bias or partiality from claims and evidence reviewed after the appointment of the arbitrator, it makes no sense for FINRA to include in its new Rule a death penalty for both the panel and the claimant's chances of success on the merits:

"The Director will notify the parties of the referral because a referral of a potentially serious, ongoing, imminent threat to investors could cause a party to question the neutrality of the arbitrators going forward. After receiving this notification, any party may request that the panel, at the time of the referral, withdraw from the case upon the Directors disclosure of a mid-case referral... If a party requests that a referring arbitrator withdraw, the entire panel at the time of the referral, must withdraw."

It does not matter whether a referral "could cause a party to question the neutrality of the arbitrators going forward" because arbitrators naturally become biased as they see the evidence and that is not a basis for vacatur, as the courts declare. FINRA would essentially cause harm to the claimants, often vulnerable senior citizens, who had been cultivating the panel with pleadings and evidence during motions, by getting rid of the panel that he has convinced through good efforts, and now would be damaged by the defrauder having free strike of the entire panel. Why in the world would any claimant show anything to a panel about ongoing frauds before final hearings? This ultimate consequence harms claimants who would no longer be free to advocate their cases from inception to finality, for fear of the draconian striking of an entire panel midstream. FINRA and the SEC will kill the goose that laid the golden eggs. and for what? Nothing.

The part of the Rule proposal about mid-stream referrals should stay but the ill-advised and foolish permission given to defrauders to throw out the panel should be deleted completely.


Richard A. Stephens, J.D., LL.M.

Boca Raton, FL
Member of Bar: FL, NY, Cal., D.C.