The Neutral Corner - October 2005
By Jisook Lee
Associate Director of Neutral Management
During the course of an arbitration hearing, a panel may hear evidence of serious wrongdoing that the panel believes warrants further investigation and possible disciplinary action. In such cases, arbitrators may refer the matter for disciplinary action to the appropriate NASD district office.
Arbitrators have the sole discretion to make a disciplinary referral based upon evidence presented during the arbitration. Evidentiary referrals may be appropriate if the broker-dealer firm or individual representative shows unethical or dishonest conduct, the broker-dealer or individual representative violated securities laws or NASD rules, or the misconduct involved abusive sales or trading practices.
When arbitration panels refer matters for investigation, NASD takes such referrals very seriously. Recently, NASD issued sanctions against a brokerage firm as a result of an arbitration panel's disciplinary referral.
Case Example: Meyers Associates, L.P.
In March 2003, Claimant filed an arbitration claim against Meyers Associates, L.P. (Meyers or Firm). During the arbitration, numerous discovery disputes arose that required the intervention of the arbitration panel. At the conclusion of the arbitration, the panel referred Meyers for possible disciplinary action, prompting NASD's Enforcement Department (NASD) to investigate the Firm's discovery practices during the arbitration proceeding.
On March 1, 2005, NASD filed a disciplinary proceeding against Meyers.1 In response, Meyers submitted an Offer of Settlement to NASD, which NASD accepted and issued an Order Accepting Offer of Settlement that included sanctions.
Following is a brief summary of the arbitration proceeding that led the panel to refer Meyers for possible disciplinary action.
In June 2003, Claimant filed her first request for discovery. After no response from Meyers, Claimant filed a motion to compel. The panel ruled in favor of Claimant and ordered Meyers to produce the requested documents and information.
Meyers produced some, but not all, of the documents ordered by the panel. Consequently, Claimant filed a second motion to compel. The panel again ordered Meyers to produce the required documents, this time imposing a sanction of $1,000 per day if such documents were not produced.
Meyers did not respond to the second order issued by the panel, prompting Claimant to file a motion for sanctions. Meyers then responded, assuring Claimant that the outstanding documents would be forthcoming; however, the Firm once again failed to comply fully with the discovery orders.
Claimant then submitted a status report to the panel, setting forth Meyers' failure to respond adequately to the discovery orders. The panel ordered Meyers to respond fully to the production requests by a certain date or the sanctions would be increased from $1,000 to $5,000 per day. The panel further ordered Meyers to submit a sworn affidavit executed by the chief executive officer (CEO) specifying which documents could not be located or no longer existed.
After the due date had passed, Claimant filed a second motion for sanctions, arguing that the Firm failed to produce all of the additional documents or provide an affidavit from the Firm's CEO. The panel issued an order requiring Meyers to pay Claimant $57,000 in sanctions for its willful and intentional failure to comply with the prior order. The panel further ordered Meyers to pay $20,000 in sanctions for its willful and intentional failure to comply with the affidavit requirement set forth in the previous order. Meyers failed to pay the sanctions and filed a motion for reconsideration of the sanctions; the panel eventually reduced the $20,000 sanction for failure to submit an affidavit from the CEO to $10,000.
Order Issued by NASD
As a result of Meyers' repeated failure to comply with its discovery obligations and to comply with discovery orders issued by the panel, NASD concluded that Meyers violated NASD Code of Arbitration Procedure (Code) Interpretive Material (IM)-10100 and NASD Conduct Rule 2110. NASD accepted the Offer of Settlement and ordered the following sanctions against Meyers: (1) a censure and (2) a fine in the amount of $25,000. In addition, the Firm was directed to revise its written supervisory procedures, requiring it to notify all counsel representing the Firm in arbitration proceedings of its policy to comply with discovery requirements set forth in the Code and to comply with all discovery orders issued by arbitration panels. Finally, Meyers was required to advise NASD within 60 days of the date of entry of the Order Accepting Offer of Settlement that it had implemented the written supervisory procedures.
NASD takes very seriously referrals from arbitration panels. As a result of an arbitration panel's diligent observation and determination to ensure that a fair hearing was conducted, NASD investigated the allegations against Meyers and issued sanctions to deter future misconduct.
If an arbitrator wants to refer for disciplinary action a party that is an NASD firm or associated person, the arbitrator should use the Disciplinary Referral form located on the Dispute Resolution section of NASD's Web site. An arbitrator may also obtain a referral form from NASD Dispute Resolution (NASD DR) staff, which should be completed at the conclusion of the arbitration and submitted to staff. Arbitrators should not discuss in the form the basis for their award in the arbitration case; rather, they should discuss only those facts and circumstances that underlie the decision to make the referral for disciplinary investigation.
1 Department of Enforcement v. Meyers Associates, L.P., formerly known as Roan-Meyers Associates, L.P. (BD No. 34171), Disciplinary Proceeding NO. CE2050003.
Message from the Editor
In addition to comments, feedback, and questions regarding the material presented in this publication or other arbitration and mediation issues, The Neutral Corner invites readers to submit articles on important issues of law and procedure relating to mediation, arbitration, or other alternative dispute resolution processes. We reserve the right to determine which articles to publish.
Please send your articles to Jisook Lee, Editor, The Neutral Corner, at NASD Dispute Resolution, One Liberty Plaza, 165 Broadway, 27th Floor, New York, New York 10006.
Dispute Resolution News
Arbitration case filings from January 1 through September 30, 2005 reflect a 28 percent decrease compared to cases filed during the same nine-month period in 2004 (from 6,406 in 2004 to 4,615 in 2005). At the same time, the number of cases closed from January 1 through September 30, 2005 increased by seven percent compared to the same period in 2004.
The overall turnaround time to process an arbitration case (hearing and simplified decisions) from January 1 through September 30, 2005 reflects a 3 percent decrease compared to the turnaround time during the same time period in 2004 (14.9 months in 2004 and 14.4 months in 2005).
Important Information for Parties and Neutrals Affected by Hurricane Katrina
As a result of the catastrophic damage to New Orleans caused by Hurricane Katrina, NASD Dispute Resolution (NASD DR) granted automatic extensions of arbitration deadlines until September 30, 2005 in pending arbitration cases with a New Orleans hearing location. The extension did not apply to injunctive relief cases filed under Rule 10335 of the Code of Arbitration Procedure. In cases in which an injunction was currently in effect, the parties were directed to seek a stay from a court of competent jurisdiction.
The administrative stay applied to the following: hearings, initial prehearing conferences, and prehearing conferences scheduled between August 29 and September 30, 2005; answers; replies to cross, counter, and third-party claims; ranking lists; chairperson selection; 20-day exchanges; responses to motions; post-hearing submissions; and all other due dates. Additionally, NASD DR did not serve newly filed statements of claim in cases where one or more of the respondents had a New Orleans mailing address until October 3, 2005. The parties were able to modify the stay upon unanimous written agreement.
If the stay caused a party undue hardship, NASD DR advised that it would consider exceptions upon written request from any Hurricane Katrina-affected party. All parties were provided with an opportunity to respond to such requests. The Southeast Regional Director, with the concurrence of the President of NASD DR, decided whether to grant such requests.
NASD DR staff continues to assist parties in rebuilding files at no cost, generating status reports for the firms to assist in identifying parties and their contacts, and identifying cases where answers, arbitrator selection lists, and rescheduling dates were due. These steps were taken to aid the affected firms and parties in moving cases back onto the active docket.
All arbitrators and mediators who have relocated from the devastated areas should contact Peggy Duzant with current contact information at (212) 858-4310, or by email.
Fall Securities Conference
The 14th Annual NASD Fall Securities Conference will be held November 16-18, 2005, in San Francisco, California. In addition to regulatory issues, the program will address hot topics in securities arbitration and mediation. Experienced attorneys representing broker-dealers and investors, an arbitrator, NASD Dispute Resolution (NASD DR) senior staff, and program attendees will jointly tackle "real-life" issues that arise in NASD arbitrations. The faculty will also discuss current topics in securities dispute resolution.
View more information about the Fall Securities Conference.
NASD Dispute Resolution Mediation Program Hosts Settlement Month and Celebrates Its 10-Year Anniversary
October is NASD Dispute Resolution's (NASD DR) annual Mediation Settlement Month. During Settlement Month, NASD offers savings on mediation rates and filing fees in all of NASD DR's hearing locations and hosts special programs designed to promote mediation and to educate potential parties about the benefits of the program.
This year's Settlement Month marks NASD DR's seventh annual settlement event and the 10th anniversary of NASD DR's Mediation program.
Mediation is a voluntary, non-binding dispute resolution process in which a trained, impartial individual helps parties negotiate and reach a settlement acceptable to all parties involved. Once the parties reach an agreement through mediation, they sign a settlement agreement. What distinguishes mediation from other forms of dispute resolution—principally arbitration and litigation—is that the mediator does not impose a solution but rather works with the parties to reach a mutually agreeable resolution.
Schedule of Reduced Fees during Mediation Month
During Settlement Month, hundreds of mediators agree to reduce their normal fees, allowing NASD DR to offer substantial savings to parties. In past Settlement Months, the number of cases where parties agreed to mediate increased by 40 percent or more over other months. NASD DR reduces, by one-half, its normal mediation filing fees for all cases:
During the past 10 years, NASD DR Mediation staff has processed over 12,500 cases involving a wide variety of securities disputes, with a cumulative settlement rate of 81 percent. Participants' evaluations consistently report satisfaction with the process. In separate surveys of parties mediating with NASD DR, 80 percent of those who responded agreed that mediation saves time, and 77 percent agreed that mediation saves money.
Mediation Settlement Day in New York
For the fifth consecutive year, NASD DR co-sponsored Mediation Settlement Day in New York City, which took place on Thursday, October 20, 2005. Organized by the Association of the Bar of the City of New York, NASD DR, and a working group of mediation providers, the event was co-sponsored by a coalition of more than 90 alternative dispute resolution programs, bar associations, community-based programs, schools, and public and non-profit organizations.
On Mediation Settlement Day, dozens of New York-area organizations, along with a few throughout the country, conducted special programs designed to promote mediation and to educate potential parties and attorneys about the mediation process.
Kenneth Feinberg, one of the nation's leading experts in mediation and alternative dispute resolution, served as the Honorary Chairperson and the Keynote Speaker for the Mediation Settlement Day 2005 kick-off event held in New York City on October 6.
For more information about NASD DR's Mediation program, please visit the Dispute Resolution section of NASD's Web site.
Subscription for Monthly Dispute Resolution Updates
Please be sure to register to receive free, online monthly arbitration and mediation updates. NASD DR will automatically send you information and news including important dispute resolution information about training opportunities, recruitment needs, new speeches, news releases, announcements, publications, and new features to our Web site.
You may register to receive updates on our Web site.
SEC Rule Filing
Proposed Rule Change to Amend Rule 10308 of the NASD Code of Arbitration Procedure Relating to the Classification of Arbitrators
On August 30, 2005, the SEC published for comment in the Federal Register a proposed rule change to NASD's Code of Arbitration Procedure (Code) to amend the definition of a public arbitrator. The proposed rule change, SR-NASD-2005-094, will amend the arbitrator classification criteria in Rule 10308 of the Code to ensure that individuals with significant ties to the securities industry do not serve as public arbitrators in NASD arbitrations.
View additional information on this proposed rule change.
Northeast Regional Update
During the next two months, the Northeast Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
If you are interested in attending a Basic Panel Member Training program in any of these cities, please contact Cheree White at (212) 858-4063, or by email.
Mid-Atlantic Regional Update
The Mid-Atlantic Regional Office co-hosted an NASD arbitrator and mediator recruitment luncheon with Arbitrator Dwight Howes on September 15, 2005 in Pittsburgh, Pennsylvania. In addition, the Mid-Atlantic Regional Office co-hosted a recruitment event with Arbitrator Shepherd Tate in Nashville, Tennessee on October 14, 2005.
If you know of someone who is interested in serving as an arbitrator in one of the following hearing locations: Charleston, West Virginia; Wilmington, Delaware; Charlotte or Raleigh, North Carolina; or Pittsburgh, Pennsylvania, please have these individuals contact our Recruitment Supervisor, Neil McCoy, at (212) 858-4283, or by email.
During the next two months, the Mid-Atlantic Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
If you are interested in attending a Basic Panel Member Training program, please contact Karen Carter at (202) 728-8327, or by email.
Midwest Regional Update
On September 7, 2005, the Midwest Regional Office held a focus group in Wichita, Kansas with various arbitrators, party representatives, and representatives from the Kansas Securities Commission, attended by NASD staff and senior management.
During the next two months, the Midwest Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
If you are interested in attending a Basic Panel Member Training program, please contact Deborah Woods at (312) 899-4431, or by email.
West Regional Update
On November 15, 2005, the West Regional Office will hold a focus group in Boise, Idaho with various arbitrators, party representatives, and NASD staff.
In an effort to recruit arbitrators, the West Regional Office attended the Better Investing Education Event in Reno, Nevada held October 1, 2005. The West Regional Office also plans to recruit arbitrators at the following upcoming conference:
Fall Forum of the Utah State Bar
- Salt Lake City, Utah - November 11, 2005
During the next two months, the West Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
If you are interested in attending a Basic Panel Member Training program, please contact Tiffany Hansmann at (213) 613-2684, or by email.
Southeast Regional Update
During the next two months, the Southeast Regional Office will conduct the following in-person Basic Panel Member Training program:
If you are interested in attending the Basic Panel Member Training program, please contact Lanette Cajigas at (561) 447-4911, or by email.
Question and Answer: Procedures after the Death of a Claimant
Question: What procedures should a panel follow if a claimant dies unexpectedly prior to the conclusion of a case?
Answer: If a claimant dies prior to the conclusion of a case, the panel should determine whether the claimant's estate wants to proceed with the arbitration. The panel should remain sensitive to the wishes of the estate and give the estate an adequate opportunity to review its options and advise NASD Dispute Resolution and the panel of its decision. If the claimant's estate decides to pursue the arbitration claim, the estate should file a motion to amend the statement of claim (motion to amend) to name the estate as the proper party to the arbitration.
The panel should issue a decision on the motion to amend. If the panel grants the motion to amend, the estate must then file an amended statement of claim. If the claimant's estate does not respond to the panel's request for a decision or declines to pursue the arbitration, the panel should dismiss the matter without prejudice. An award memorializing the panel's decision will be issued soon thereafter.
Linda D. Fienberg
George H. Friedman
Kenneth L. Andrichik
Jean I. Feeney
Richard W. Berry
Barbara L. Brady
Elizabeth R. Clancy
Judith Hale Norris
Associate Director of Neutral
Management and Editor of
Nicole Haynes - Northeast Region
Lisa Lasher - Southeast Region
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