The Neutral Corner - June 2006
Study of Arbitration Recovery Statistics
By Seth E. Lipner*
Many commentators in the securities arbitration field calculate arbitration recovery statistics by dividing the amount awarded by the amount sought in the statement of claim. This method can be problematic because the amount sought in a statement of claim does not always accurately reflect the amount the claimant requested at the hearing. Using such statistics to determine, for example, the probable outcome or settlement value of future cases may be misleading. This article discusses the factors that may contribute to these discrepancies.
Overstated Claims
In many cases, the amount a claimant demands in the arbitration statement of claim bears only a tenuous relationship to the damage incurred. Because arbitrators decide cases based upon damages proven—not damages alleged—computing the ratio between the amount awarded and the amount alleged in the statement of claim may not always be accurate. The claimant often pleads damages that are higher than what is proven at a hearing for numerous reasons:
- There is no penalty for overstating damages in the claim. As the amount of damages increases, the filing fees only increase marginally, providing little economic disincentive for over-estimating the losses.1
- While some attorneys do their accounting work in advance, many find it unnecessary to expend, at an early stage, the money necessary for a detailed economic analysis. Unlike court, where an early demand for a Bill of Particulars (a detailed statement of claims) providing the amount of damages is routine, arbitration rules do not require the claimant to submit a damage calculation until 20 days before the hearing.
- In complex cases, where damages are multi-faceted or hard to compute, an attorney must, at the pleading stage, err on the side of over-inclusion. For example, claims for capital losses may not take into account income earned as an offset (i.e., without regard to "netting"). In other situations, initial long-shot claims for lost profits may be later abandoned or marginalized. In short, claimants will include every possible loss at the claim stage, regardless of their probability of success.
- In these days of high market volatility, the measure of damages is likely to depend on the chosen time period and the securities analyzed. Naturally, at the pleading stage, the claimant may choose an advantageous period to look at or seek to separate losers from winners. However, at the hearing, that same claimant may retreat to another, more logical or persuasive position.
- At the hearing, the claimant may accept some measure of comparative fault, give up some claims to enhance others, or otherwise limit his or her claims. This acquiescence is rarely, if ever, made during the pleading stage.
- In certain cases, claimants seek measured damages by comparing the account to what a well-managed portfolio would have earned during the same time period. In cases where such an award is justified, the "measure" offered in the claim might be different from the ones arbitrators used in the award.
For the above reasons, claimants will generally overstate the amount of damages they request in the statement of claim.
Damages Requested at the Hearing
In contrast to the statement of claim, the claimant will often put forth a detailed accounting of losses at the arbitration hearing. This accounting is likely to be less (in some cases significantly less) than the lump sum requested in the statement of claim. In some cases, the accounting may be less because:
- The claimant does not have all of the account statements at the time of filing, or learns information after filing that reduces the damages sought.
- The prehearing vetting process between counsel may also reveal errors in an early damage calculation, which will require a reduction of damages.
- The desire not to appear "greedy" may also cause counsel to eliminate some claims at the hearing.
Therefore the amount requested at the hearing may be very different from the amount requested in the statement of claim.
Arbitration Awards
Arbitration awards do not always reflect the amount of damages the claimant ultimately requested. Instead of stating the amount of damages the claimant sought at the hearing, the award usually cites the amount of damages requested in the claim. The award would provide a more accurate assessment of what happened at the hearing if it contained the amount of damages the claimant requested at the hearing, which would provide more meaningful data to those trying to judge the attitude of the arbitrator, the quality of proofs, or the likely outcome of similar cases.
The Pool of Cases Going to Award
The majority of securities arbitration cases settle or are withdrawn before award. Thus, the pool of cases that go to award is far less than the total number of cases in the arbitration forum. This fact affects the way we must look at award statistics.
The pool of filed cases generally includes an array of suitability-type cases2. These cases involve risk-averse investors, risk-willing investors and a wide variety of in-between investors—in other words, a fairly "normal" distribution.3 All else equal, risk-averse investors are more likely to settle than are risk-willing investors. Thus, as the following (oversimplified) chart shows, the pool of claimants going to arbitration hearing (i.e., not settling) is dominated by risk-willing claimants.
| Risk-averse | Risk-willing | |
| Cases Filed | 100 | 100 |
| Cases to Hearning | 34 | 66 |
This chart demonstrates that if 200 people file claims, with half representing risk-averse investors and the other half representing risk-willing, and we assume that risk-averse claimants settle twice as often as risk-willing investors, the pool of cases going to arbitration hearing contains twice as many risk-willing claimants as risk-averse (66/34). Because risk-averse claimants generally settle more frequently than risk-willing claimants, the pool of non-settling cases will have a relatively higher percentage of risk-willing individuals than the pool of cases at the time of filing.
The claimant's risk preference can directly affect both liability and damages in suitability cases. Because risk-willing investors generally have weaker cases than risk-averse investors, the pool of suitability cases going to award is abundant with relatively weak cases. By studying awards in those cases, we learn little about how the average or good suitability case will fare at a hearing. Obviously, the arguments put forth in this section apply only when looking at a broad population of cases.4
Useful Information from Awards
Even though arbitrators do not usually provide reasons for their awards, parties can still discern useful information by looking at an individual arbitrator's awards, especially those who have decided a fair number of suitability cases. Parties may recognize patterns in an arbitrator's willingness to award statutory interest, attorneys' fees or punitive damages; or a propensity to award nothing or very little. It is key to remember, however, that large-scale statistics about win and recovery rates may not necessarily be accurate indicators of future outcomes, even in strong suitability cases.
Pro Se Cases and Inadequate Representation
In some cases, claimants represent themselves (pro se). There are also cases that go to award in which the claimant was not adequately represented. Both of these factors—lack of representation and lack of adequate representation—may keep the recovery ratio lower than it would be if all claimants were sufficiently represented by counsel.
Conclusion
Any study of arbitration recovery statistics must take into account the aforementioned anomalies when considering the accuracy and representational value of the pool of cases going to award.
*Seth E. Lipner is Professor of Law at the Zicklin School of Business, Baruch College, CUNY. He is also a member of the firm Deutsch & Lipner, which represents investors in their claims against the financial services industry. Professor Lipner is the author of Securities Arbitration Desk Reference, which will be published by West Publishing in September 2006.
The views expressed in this article are solely the author's, and do not necessarily reflect NASD's views or policies.
1 An exception might exist for small cases (under $50,000), where inflated demands can affect filing fees in both paper and single-arbitrator cases. An investor with a $50,000 case who wants a single public arbitrator will not likely inflate the claim.
2 Only suitability-type cases were used for this analysis because the majority of investor cases involve suitability claims. The analysis may or may not hold (depending on the circumstances) in other sorts of cases.
3 If the distribution is skewed, it is generally skewed toward the risk-averse (meaning there are more cases filed for risk-averse investors than for risk-willing investors). The reasons are simple:
(1) Risk-averse investors are more likely to have grievances worthy of undertaking the expense to file the arbitration; and
(2) Investors who demonstrate a history of investment risk-aversion will also find it a lot easier to find counsel to represent them.
If skewing exists, it makes the analysis here even stronger.
4 In any large population, there will be exceptional cases (e.g., intransigent respondents, personal situations). In addition, the "quality" of cases exists on a continuum from very weak to very strong. But the analysis holds for a large population, regardless of the settlement rate one plugs into the chart.
Dispute Resolution News
Closure of the Mid-Atlantic Regional Office
Effective December 31, 2006, NASD Dispute Resolution will close its Mid-Atlantic Regional Office. All cases currently assigned to the Mid-Atlantic Region will continue to be administered by that office, unless we notify parties in writing that their case has been reassigned.
On June 12, 2006, NASD Dispute Resolution realigned the regional office assignments for several of its 68 hearing locations. All new cases filed on or after June 12, 2006 will be assigned according to the new hearing location assignment plan. NASD will continue to offer 68 hearing venues, with at least one in each state, and in Puerto Rico and London. We will not be closing any of our remaining four regional offices.
A map and complete listing of the new hearing location assignments is available on our site.
Case Filings
Arbitration case filings from January 1 through May 31, 2006 reflect a 15 percent decrease compared to cases filed during the same five-month period in 2005 (from 2,610 cases in 2005 to 2,224 cases in 2006).
The overall turnaround time to process an arbitration case (hearing and simplified) from January 1 through May 31, 2006 decreased by 6 percent compared to the same period in 2005 (from 14.5 months in 2005 to 13.7 months in 2006).
Training in London
NASD will be one of the sponsors of an alternative dispute resolution (ADR) conference titled, "Transatlantic Perspectives in ADR," in London, England, on July 26-28, 2006. The event will focus on bringing together practitioners, academics, government officials and policy makers to share ideas and experiences about ADR.
More information about the conference is available at www.drs-ciarb.com.
Update to Award Information Sheet
Rule 2130 expungement procedures apply to arbitration cases filed on or after April 12, 2004. The rule imposes additional requirements for industry parties seeking expungement of customer dispute information. Among other things, arbitrators must affirmatively find that expungement of such information is appropriate based on one or more of the prescribed standards in the rule. Specifically, the rule requires that arbitrators find that:
- The claim, allegation or information is impossible or clearly erroneous; or
- The registered person was not involved in the alleged investment-related sales practice or violation, forgery, theft, misappropriation or conversion of funds; or
- The claim, allegation or information is false.
NASD will review any such finding when determining whether to grant a request to waive Rule 2130's requirement to name NASD in the court proceeding when confirming the award.
To assist arbitration panels in cases involving expungement requests, we revised the Award Information Sheet, the State of Florida Award Information Sheet, and the Simplified Case Checklist, which can all be found on our site. The revisions are intended to (1) help arbitrators identify when they may need to elicit additional information from parties in Rule 2130 cases in which expungement relief is requested (and arbitrators must make affirmative findings under the rule); and (2) ensure that such findings are clearly stated in the award.
We ask that you use the appropriate revised Award Information Sheet or Simplified Case Checklist for your cases.
Arbitrator Training Opportunity
NASD invites you to review Investor Alerts, which are available on our Web site at http://www.nasd.com/investoralerts.
The Investor Alerts are intended to give investors the information they need to avoid problems in today's complex world of investing. Although the Investor Alerts are designed for investors, they contain valuable information that would be useful to NASD neutrals seeking to learn about fraudulent schemes, complicated products and other investment topics.
Here are some Investor Alerts that might be useful:
- 529 Plans: College Savings Plans - School Yourself Before You Invest
- Think Twice Before Cashing Out Your 401(k)
- Mutual Fund Breakpoints: A Break Worth Taking
- Customer Advisory Centers: Not Your Typical Securities Firm Call Center
- Should You Exchange Your Variable Annuity?
NASD encourages you to take advantage of this free opportunity to increase your securities knowledge. Please visit our Web site at www.nasd.com and look for "Investor Alerts" under the heading "Investor Information."
Question and Answer: Understanding and Applying the Law in a Case
Question: What should an arbitrator do when additional information is needed to understand the law presented in a case?
Answer: Although most arbitration claims present questions of fact that the panel will be able to decide on the proffered evidence, some parties may rely on a specific law or statute. Generally, the party who raised a legal issue will offer the panel a brief that sets forth the law or statute along with an explanation of how it applies to the facts of the case. However, arbitrators may also encourage the party to present the issue orally. In addition, arbitrators may request that parties submit a brief on any issue if the arbitrators believe it would assist them in deciding the case. In any of these situations, the opposing party or parties should be allowed to respond.
Arbitrators are reminded that they are not to engage in any outside legal research, nor should they ask NASD staff to conduct legal research for them. The panel must rely on the parties to provide the research in support of their respective positions.
Arbitrators are not bound by case precedent or statutory law. Rather, they are guided in their analysis by the underlying policies of the law, and are given wide latitude in their interpretation of legal concepts. If, however, an arbitrator manifestly disregards the law, a court may vacate an award. (See The Arbitrator's Manual on our Web site).
SEC Rule Filing
Revision of Rule 10322 of NASD's Code of Arbitration Procedure Relating to Subpoenas and the Power to Direct Appearances
On March 29, 2006, NASD filed with the Securities and Exchange Commission (SEC) Amendment No. 1 to SR-NASD-2005-079. This Amendment proposes to revise Rule 10322 of NASD's Code of Arbitration Procedure (Code) pertaining to subpoenas and the power to direct appearances. Amendment No. 1 proposes to clarify that only arbitrators have the authority to issue subpoenas. The Amendment addresses letters the SEC received in response to the publication of the proposed rule change in the Federal Register, and proposes amendments to respond to the comments where appropriate.
Regional Updates
NOTE: Participants must successfully complete the online portion of basic arbitrator training before attending the onsite training program. For more information about online basic arbitrator training, please visit the Arbitrator Training page of our Web site.
Northeast Regional Update
During the next three months, the Northeast Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Newark, New Jersey July 12, 2006
- Providence, Rhode Island August 2, 2006
- New York, New York August 23, 2006
- Cincinnati, Ohio September 19, 2006
- Columbus, Ohio September 20, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Cheree White at (212) 858-4063 or by email.
Midwest Regional Update
During the next three months, the Midwest Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Minneapolis, Minnesota July 12, 2006
- Detroit, Michigan August 16, 2006
- Wichita, Kansas September 13, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Deborah Woods at (312) 889-4431 or by email.
Mid-Atlantic Regional Update
In an effort to recruit arbitrators, NASD attended the Pennsylvania Bar Association's Annual Meeting in Hershey, Pennsylvania, on June 7-9, 2006.
During the next three months, the Mid-Atlantic Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Nashville, Tennessee August 18, 2006
- Philadelphia, Pennsylvania September 14, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Karen Carter at (202) 728-8327 or by email.
Southeast Regional Update
In August 2005, NASD launched a voluntary discovery arbitrator pilot program (discovery pilot), in which NASD appoints a single arbitrator during an arbitration case to resolve all discovery disputes prior to the hearing. NASD continues to encourage arbitrators to remind parties during the Initial Prehearing Conference of the option to participate in the discovery pilot. More information about the discovery pilot is available on NASD's Web site at www.nasd.com. You may also email questions to JoAnne Sorrentino, the discovery pilot administrator.
On May 6, 2006, Rose M. Schindler, Vice President and Regional Director of the Southeast Region, spoke at the Public Investors Arbitration Bar Association (PIABA) Mid-Year Meeting in Dania Beach, Florida. Ms. Schindler provided guests with an update on several of NASD Dispute Resolution's initiatives, including pending changes to the Code of Arbitration Procedure. Four NASD arbitrators from the Boca Raton roster, Arnold Levine, Esq., Steven N. Ainbinder, Esq., Nancy J. Cliff, Esq., and Alan B. Goldstein, Esq., participated as panelists during this meeting.
During the next three months, the Southeast Regional Office will conduct the following in-person Basic Arbitrator Training program:
- Boca Raton, Florida September 7, 2006
If you are interested in attending this Basic Arbitrator Training program, please contact Lanette Cajigas at (561) 447-4911 or by email.
West Regional Update
In an ongoing effort to enhance customer service, NASD is in the process of implementing a new strategy to administer arbitration cases more efficiently. On May 22, 2006, the West Regional Office introduced this new business model. The Northeast, Mid-Atlantic and Southeast Regions have already implemented the new business process, and the Midwest Region will follow later this year.
Audrey Philips, Case Administrator for the West Region, will attend the American Bar Association's Annual Meeting in Honolulu, Hawaii, on August 3-8, 2006 and meet with potential arbitrators. Ms. Philips will also conduct a Basic Arbitrator Training program before eligible arbitrator candidates.
During the next three months, the West Regional Office will conduct in-person Basic Arbitrator Training programs in these locations on the following dates:
- Salt Lake City, Utah July 11, 2006
- Honolulu, Hawaii August 8, 2006
- Seattle, Washington September 12, 2006
If you are interested in attending a Basic Arbitrator Training program in any of these locations, please contact Tiffany Hansmann at (213) 613-2684 or by email.
Arbitrator Tip: Reviewing Witness Lists and Reporting Additional Disclosures
NASD's Code of Arbitration Procedure (Code) requires parties to exchange witness and exhibit lists at least 20 calendar days prior to the first scheduled hearing date. Parties must file these lists simultaneously with NASD. Upon receipt, NASD distributes the parties' witness lists to the arbitrators so they can identify conflicts and make additional disclosures. If arbitrators do not receive witness lists within this time period, they should notify NASD staff.
Arbitrators should promptly and carefully review witness lists to identify conflicts and disclose any circumstance that might prevent an impartial determination or create an appearance of bias. Arbitrators should consider any circumstance that relates to the subject matter in dispute, as well as to existing or past, direct or indirect, financial, personal, business and professional relationships with any of the parties, representatives, witnesses or co-panelists. The duty to disclose requires arbitrators to make a reasonable effort to become aware of these relationships or interests.
The Arbitrator's Manual agrees with this direction and advises arbitrators to immediately ascertain whether potential conflicts exist after they receive the names of the witnesses. After a thorough review of the witness lists, arbitrators should disclose associations with witnesses, even if they do not believe that a conflict exists. Additionally, Canon II of the Code of Ethics for Arbitrators in Commercial Disputes sets forth the arbitrators' ethical obligation for continued disclosure of interests or relationships at any stage in arbitration proceedings, and requires arbitrators to disclose any interest or relationship that might affect impartiality or create an appearance of bias.
Arbitrators should report conflicts and additional disclosures in writing. If arbitrators make disclosures just prior to commencement of evidentiary hearings, they should notify NASD both orally and in writing to expedite disclosure to the parties. At the hearing, arbitrators should restate to the parties any disclosures previously made, as well as any new or additional disclosures.
In summary, arbitrators should remember to promptly and carefully review witness lists, and to identify and immediately report conflicts and additional disclosures to NASD. If arbitrators do not receive witness lists from all participating parties, they should immediately notify NASD staff.
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.
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