September 25, 2006
Ladies and Gentlemen:
Dispositive motions have become a routine matter in securities arbitration. Given their frequency and the lack of published standards, something has to be done. The NASDs proposal to state that dispositive motions are discouraged and may be granted only in extremely rare circumstances is a step. But more is required in view of the rights and privileges given up by public customers in arbitration.
BACKGROUND: SECURITIES ARBITRATION IS NOT VOLUNTARY, AND MOTIONS TO DISMISS ARE INCREASING
As a practical matter, securities arbitration between customers and broker-dealers is not voluntary dispute resolution. To do business with nearly any broker-dealer, a customer must sign an agreement, which includes, among many other provisions, compulsory arbitration. The bargaining power of the parties to customer agreement is not equal. The terms of the agreement are not negotiable. The agreement is take it or leave it.
By signing the agreement, the customer gives up important rights and privileges. Those rights and privileges include, among others, a jury trial, a judge, appeal, public hearing, judicial resources such as legal libraries and law clerks, published rules, and published precedents. The procedure to which the customer is relegated under the agreement insisted upon by the broker-dealer provides a panel composed of (a) a minimum of one arbitrator with connections to the securities industry and (b) possibly entirely of non-attorneys. Arbitrators do not have law clerks. Few have legal libraries that are easy to use. Often, arbitrators who are attorneys are neither experienced nor trained in litigation matters. Most attorney-arbitrators have no experience whatsoever in representing parties in securities litigation or arbitration. The arbitration hearing is not public. Arbitrators are not required to follow the law. Appeal from an award is limited.
Into this mix, respondents increasingly file dispositive motions. In the past three years, I have had to oppose dispositive motions based highly technical – albeit, erroneous -- grounds including, for example, (a) whether fraud under the 1933 Act or Blue Sky Law was alleged with the particularity required under the Federal Rules of Civil Procedure, (b) whether a case brought within four years of opening an account and five months of closing was barred completely by all applicable statutes of limitation, and (c) whether pleading of controlling person liability requires allegations of culpable participation when that requirement expressly is rejected by the Ninth Circuit and California courts. In each of these examples, discovery was in its early stages and had not been concluded. In each of these examples, I expended substantial time preparing and submitting an opposition and preparing for oral argument. In each of these examples, the panel expended substantial time reviewing ( I assume) the pleadings, the moving papers, the opposition, reply, and possibly legal authorities, hearing arguments, and deliberating on the motion. In each case, the motion was denied. Ultimately, each case settled.
PROPOSAL: MAKE CLEAR THAT FULL EVIDENTIARY HEARINGS ARE A MATTER OF GENERAL RIGHT AND ADD SAFEGUARDS
Against this background, the proposed rule should be modified to state:
1. Parties generally have the right to a full evidentiary hearing in arbitration except in extremely rare circumstances. Making this clear in the NASD proposal may reduce the resources expended on technical motions which lawyers may make in court.
2. Dispositive motions before a full evidentiary hearing may be made to decide a defense or counterclaim, as well as a claim. The NASD proposal is limited to claims. Extremely rare circumstances may arise for arbitrators to decide defenses or counterclaims before a full evidentiary hearing.
3. The panel can defer consideration of the motion and time for filing an opposition until the conclusion of a full evidentiary hearing or other times.
Additionally, in view of the important rights which customers give up by signing the arbitration agreement forced upon them, dispositive motions should be allowed only when the following safeguards are present:
1. The Chair of the panel is an attorney. We do not entrust motions to court proceedings to untrained, inexperienced judges.
2. The Chair of the panel is experienced in litigation, vetted to assure that he or she is knowledgeable of general litigation principles, general tort and contract principles, and securities matters in particular, and is trained specifically to deal with dispositive motions. This is a natural extension of item number 1.
3. All parties to the arbitration are represented by attorneys. Arbitration often is promoted by the securities industry and NASD as something that is simple and quick. Individuals often are encouraged to file claims in pro per. These individuals then should not be subjected to the complexity of law and motion practice grafted from court proceedings.
4. Specific standards for such motions are published. Presently, no standards for motions exist. Practitioners are left with no guidance. The court systems have express rules governing form and substance and years of precedents. The securities arbitration system has neither.
5. The standards for such motions require that the panel follow the law and specifically limit the panels scope of authority to grant such motions in strict compliance with the applicable law. Generally, arbitrators' failure to follow the law is not a ground for vacatur. If we are going to cut off a customer's right to a remedy without a full evidentiary hearing, we should make clear that arbitrators must follow the law.
6. Any order granting a dispositive motion must set forth findings of fact and conclusions of law, including what law is being applied, to allow judicial review. This is a natural extension of item number 5.
Finally, the NASD should build a statistical data base which collects information beginning as of January 1, 2001, on all dispositive motions. The data base should include at a minimum the grounds for the dispositive motion, who filed it, what was the outcome, and whether the customer was represented or in pro per. If those data indicate the rise in motions as practitioners relate anecdotally, additional measures may be required.
The NASD proposal may cut back on the expense and waste of resources caused by the current dispositive motion practice in securities arbitration. But in the long run, if dispositive motions continue unabated, standards must be published so that everybody knows what rules govern the dispute.
William P. Torngren
117 J Street, Suite 300
Sacramento, CA 95814
Telephone: (916) 554-6447
Facsimile: (916) 554-6445-