The Neutral Corner, Volume 5—2008
Curveballs: Unexpected Situations that Arise During a Hearing
By Julie Jason*
Curveballs are intended to surprise. A batter does not have much time to adjust to a ball that loses trajectory after he begins to swing. In an arbitration hearing, parties’ representatives can sometimes pitch curveballs to the chairperson inadvertently—or purposefully—to gain tactical advantage over an opponent. The chairperson must be alert to curveballs and address them with strength and conviction, while balancing the goal of fairness. Parties have a right to a fair hearing, and the chairperson must not allow any behavior that distracts from that objective.
The secret is to be prepared for surprises and to know how to deal with them. They may be anything out of the ordinary, including a misstep by parties, parties’ representatives, witnesses or other panelists. This article will review some possible curveballs and provide suggestions for addressing them.
The Sidebar Discussion
Sometimes a party’s attorney and an associate engage in a private discussion during the testimony of a witness, which can be distracting to the witness, opposing counsel and panel. The chairperson should ask counsel to cease the conversation and if counsel does not comply, the chairperson should call a recess. The panel should excuse the parties and the witnesses and advise counsel that if such behavior continues, the panel may ask the associate to leave the hearing room.
The Unprepared Advocate
Occasionally, party representatives may be distracted or have difficulty organizing their cases at the hearing for any number of reasons; for example, a missed train or traffic delay. The chairperson should be alert to these types of situations and call a short recess to allow counsel to organize their presentations for the hearing to proceed.
If, however, a faltering presentation is due to lack of preparation, there is no perfect solution. This creates a significant problem for the other parties and is an imposition on the panel, as it tries to understand the elements of each party’s case. In such instances, it may help to have a conference with both counsel to discuss how they plan to present their case to determine the best way to proceed.
The Zealous Advocate
Zealous advocates may have their clients’ best interest at heart. However, an advocate who conducts hostile cross-examinations, interrupts witnesses with “speaking objections,” interrupts counsel or asks leading questions on direct examination, does little to advance a party’s case. The chairperson should control these situations before they escalate into an unproductive hearing. The chairperson should ask the parties to focus on the facts by presenting testimony and evidence without getting bogged down in histrionics.
Allegations of Arbitrator Bias
More serious curveballs may challenge the impartiality of the panel. For example:
- After the parties accept the panel and the hearing is underway, counsel questions the composition of the panel and suggests that one of the arbitrators has a conflict, but refuses to identify the arbitrator or the conflict. (Arbitrators will find it helpful to read “Practice Tips for Arbitrator Disclosure” published in the February 2005 issue of The Neutral Corner.)
- An attorney objects to an arbitrator’s questions, comments or demeanor and remarks that, “One of the panelists smiled from time to time on the first day of testimony.” The attorney may refer to this occurrence as evidence of arbitrator bias, showing that the arbitrator agreed with the testimony and ostensibly with the presenting party’s case at the outset of the hearing.
The chairperson should not try to guess which undisclosed panelist is the subject of the attorney’s objection. An effective chairperson will want to clear the air—by removing witnesses and parties from the hearing room—and direct counsel to state the objection with specificity, finding out if counsel is requesting that the particular panelist recuse himself/herself. If, instead, a party is challenging an arbitrator for failure to disclose a conflict at the time of appointment, counsel may file a request with the Director of FINRA Dispute Resolution to remove the panelist.1
If counsel is unable to clearly state how he/she would like to proceed, the panel should give counsel the opportunity to withdraw the objection, and move forward with the hearing. While it is important to note that a sole allegation of appearance of bias is probably insufficient to establish evident partiality, the panel should always take an objection seriously because it could result in the appearance of bias.
Allegations of Bias in the Arbitration Process
Another serious curveball is a challenge to the process itself, as in the following examples.
- Counsel states during closing statements that his client did not have a fair hearing. Counsel may have a valid ground for filing a motion to vacate the award; therefore, the panel should take this allegation seriously. The panel should ask counsel to place his/her objections on the record and seek details about why the party does not believe that he/she had a fair hearing.
Generally, it is difficult for a party to successfully overturn a panel’s award. The arbitration process is founded on a contract (opting out of the court system into a non-judicial forum); therefore, the courts do not “allow a disappointed party to bring his dispute into court by the back door, arguing that he is entitled to appellate review of the arbitrators’ decision.”2 - The courts may, however, vacate an award if a party presented clearly applicable law to the arbitrators and the arbitrators nevertheless chose to disregard it.3 Some lawyers may declare that it would be a manifest disregard of the law if the panel rules against their client.
The chairperson should ask counsel to explain his/her position and the reasoning behind such a conclusion—that the arbitrators knew the law and disregarded it. Opposing counsel should be given an opportunity to respond.
The chairperson may also request posthearing briefs on the issue. The panel should keep in mind that arbitration is a forum of equity in which arbitrators are committed to serve justice as they deem appropriate for particular factual situations. Their evaluation of the facts will not generally be second-guessed by the courts.
Conclusion
While a chairperson cannot be prepared for every surprise that comes up, he/she should expect the unexpected. Within this context, it is imperative to remember that there are two sides to every controversy, and that fairness is paramount during an arbitration proceeding. When faced with a curveball, the chairperson should exert dignified, but firm, leadership and ensure that all sides are treated fairly.
*Julie Jason, JD, LLM, serves on FINRA’s non-public arbitrator and mediator rosters. Ms. Jason is a money manager and principal of Jackson, Grant Investment Advisers, Inc. in Stamford, Connecticut. Ms. Jason previously served as President of PaineWebber Futures Management and Assistant General Counsel of PaineWebber, Inc. Ms. Jason writes a weekly investment column for three Connecticut newspapers and is the author of a number of investment books, including The AARP’s Crash Course on Creating Retirement Income (Sterling 2009).
Endnotes:
1 Code of Arbitration Procedure Rules 12410 and 13410 provide that, after the earlier of the first prehearing conference or the first hearing, the Director may remove an arbitrator based only on information not known to the parties when the arbitrator was selected. This provision is intended to prevent parties from raising challenges late in the process that could have been raised at the outset. Rules 12410 and 13410 also provide that the Director’s authority under this subparagraph may only be exercised by the Director or by the President of FINRA Dispute Resolution.
2 Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7th Cir. 1994).
3 This non-statutory, “common law” ground for judicial review is generally recognized in federal courts. There are four statutory grounds for review under §10 of the Federal Arbitration Act (FAA). See, “Seeking Consistency in Judicial Review of Securities Arbitration: An Analysis of the Manifest Disregard of the Law Standard,” 64 Fordham Law Review 1121, Dec. 1995. See also, Securities Arbitration Procedure Manual (5th Ed. 2007 Matthew Bender).
Dispute Resolution News
Case Filings*
Arbitration case filings from January through August 2008 reflect a 38 percent increase compared to cases filed during the same eight-month period in 2007 (from 2,164 cases in 2007 to 2,990 cases in 2008). In recent months, we have received numerous cases claiming that losses were incurred from investments holding subprime mortgages (typically claims that funds were overconcentrated in this investment vehicle without adequate disclosure) and “failed auctions” for auction rate securities. To date, parties have filed 451 subprime mortgage cases and 227 auction rate securities cases.
From January through August 2008, the average processing time from service of claim to issuance of award for arbitration cases (hearing and simplified) declined to 13.1 months (from 13.3 months in 2007).
*Case filing and processing time statistics are preliminary and subject to change.
Neutral Roster Call-in Workshop
September 23, 2008: Investor Education and Emerging Regulatory Issues
FINRA will host a call-in workshop on September 23, 2008, from 12:00 to 1:15 p.m. ET entitled “Investor Education and Emerging Regulatory Issues.” Linda Fienberg, President of FINRA Dispute Resolution, will host the conference and update neutrals on current events. John M. Gannon, Senior Vice President with FINRA’s Office of Investor Education will discuss FINRA’s investor education initiatives, including Investor Alerts, BrokerCheck and Investor Complaint Center. Laura Gansler, Associate Vice President with FINRA’s Office of Emerging Regulatory Issues will discuss new issues and products that arbitrators may encounter on future cases.
We encourage arbitrators to send us questions about FINRA’s investor education initiatives and emerging regulatory issues. Please send your questions in advance of the workshop via email.
How to Register for the Workshop
You must register in advance to participate in this workshop. Log into the online registration form and follow the instructions below to complete the form:
- Enter your first name, last name and email address, and then click "Proceed."
- Verizon ([email protected]) will email you an R.S.V.P. confirmation with the dial-in number, passcode and your personal PIN number.
- Keep your R.S.V.P. confirmation email, as it will include all of the information you will need on the day of the call.
SEC Rule Filings
Proposed Rule Change to Adopt NASD Rules in the New Consolidated FINRA Rulebook
On May 23, 2008, FINRA filed with the Securities and Exchange Commission (SEC) a proposed rule change to adopt the following NASD Rules in the new consolidated FINRA rulebook: the 4000 through 10000 Series and the 12000 through 14000 Series. This includes the revised and former Codes of Arbitration Procedure.
Please visit our website for more information about this rule proposal.
Proposed Rule Change to Amend the Discovery Guide
On June 11, 2008, FINRA filed with the SEC a proposed rule change to amend the Discovery Guide to update and make changes to the Document Production Lists.
Please visit our website for more information about this rule proposal.
Proposed Rule to Amend the Uniform Submission Agreement
On June 19, 2008, FINRA filed with the SEC a proposed rule change to amend the Uniform Submission Agreement, which parties must sign prior to entering into arbitration, and other related rules of the Code of Arbitration Procedure for Customer Disputes (Customer Code) and the Code of Arbitration Procedure for Industry Disputes (Industry Code) that refer to the submission agreement.
Please visit our website for more information about this rule proposal.
SEC Rule Approvals
Amendment to the Definition of Public Arbitrator
The SEC recently approved SR-NASD-2007-021, which amends the definition of public arbitrator to add an annual revenue limitation. The SEC published the Approval Order in the Federal Register on March 13, 2008. FINRA published a Regulatory Notice on May 9, 2008, that describes the proposal and how it will be applied. The rule became effective on June 9, 2008.
FINRA sent a survey to the available public arbitrators on its roster to ensure that they were correctly classified when the rule went into effect. Public arbitrators who did not return the survey by June 9 were made inactive on the roster, and will not receive any new assignments until they submit a completed survey. If you have not yet responded to the survey, please email the office of Neutral Management for information about completing the survey and possibly being reinstated to the active roster.
To review the Approval Order or for more information about the new rule, please visit our website.
Amendment of the Chairperson Eligibility Requirements
On June 23, 2008, the SEC approved the proposal to amend the chairperson eligibility requirements under Rules 12400(c) and 13400(c) of the Customer and Industry Codes, respectively. Previously, arbitrators were eligible for the chair roster if they completed chair training provided by FINRA or had substantially equivalent training or experience, and satisfied one of two remaining requirements of the rule. As approved, the “substantially equivalent training or experience” criterion will be removed from the rule. The approved rule goes into effect on September 22, 2008.
For more information about this proposal, you may visit our website.
Web Site Updates
Public Arbitrator Pilot Program
FINRA will launch a two-year pilot program this fall. It will allow some investors making arbitration claims to choose a panel of three public arbitrators instead of the current option of two public arbitrators and one non-public arbitrator.
Please visit our website for more information about this program.
Process for Arbitrations Involving Auction Rate Securities
FINRA has established a special process for resolving auction rate securities-based claims. Qualifying investors will have the option of having their claims heard by a three-person panel of arbitrators, none of whom would be affiliated with a firm that recently sold auction rate securities.
Please visit our website for more information about this special process.
Discovery Arbitrator Pilot Available Nationwide
Overview
On August 1, 2005, FINRA Dispute Resolution launched a discovery arbitrator pilot program (pilot) in its Southeast and West Regional offices to address discovery concerns in arbitration. Dispute Resolution recently expanded the arbitrator pilot to make it available nationwide. FINRA has also added non-public arbitrators who would be eligible to serve as discovery arbitrators under the pilot for certain intra-industry cases.
Parties who wish to participate in the pilot must sign a stipulation and be represented by counsel. The Director of Arbitration then appoints a single discovery arbitrator to resolve all discovery disputes before the hearing. Discovery arbitrators do not serve on the panels that decide the cases on the merits; they only decide the parties' discovery disputes.
Parties who have participated in the pilot enthusiastically described it as cost effective and fair, as the discovery arbitrator provides consistent decisions on discovery issues.
Discovery Arbitrators
Under the pilot, discovery arbitrators must be lawyers with experience in deciding discovery disputes. They are pre-selected from FINRA's roster of arbitrators, unless the parties agree to select their own discovery arbitrator from a list of eligible arbitrators. Once the discovery arbitrator is appointed, the parties may only file a Challenge for Cause or a Director's Authority to Remove in order to challenge the arbitrator's appointment.1
Discovery Arbitrator's Authority
Under the pilot, the discovery arbitrator has the authority to issue monetary and evidentiary sanctions against any party for failing to comply with discovery rulings or for conducting discovery in an abusive manner. However, the discovery arbitrator does not have an arbitrator's powers to dismiss a claim, defense or proceeding pursuant to Rules 12212(c) and 13212(c) of the Code of Arbitration Procedure.
Once the hearing begins, the discovery arbitrator's authority ends. The panel appointed to decide the merits of the case will decide any new discovery issues.
FINRA has extended the pilot to December 31, 2009. FINRA will then decide whether to make it a permanent program. Parties who are interested in the pilot should contact the FINRA staff member assigned to their case for information.
Endnote:
1 Code of Arbitration Procedure Rules 12410 and 13410.
Did You Know…?
- Arbitrators have an obligation to consult the FINRA Dispute Resolution website to ensure they have the most current version of the Code of Arbitration Procedure and Arbitrator's Reference Guide, which includes the recently updated Hearing Script, as well as other procedural materials. FINRA updates these documents frequently, and your knowledge of this information is imperative to the efficiency and fairness of the process.
- Arbitrators have a duty to disclose any circumstances that might prevent them from making an impartial determination or that might create an appearance of bias. The duty to disclose relates to the subject matter in dispute and to any existing or past, direct or indirect, financial, business, professional, family, social or other relationships or circumstances with any of the parties, representatives, witnesses or co-panelists. The duty to disclose requires arbitrators to make a reasonable effort to inform themselves of these relationships or circumstances. Arbitrators must carefully review the pleadings and the witness lists when considering possible disclosures.
- Arbitrator disclosure obligations include immediate notification of an arbitrator's change in employment, job functions or clients. These facts can affect the arbitrator's classification as a public or non-public arbitrator. Public arbitrators must also disclose changes in their immediate family relationships since these relationships may affect their continued eligibility to serve on FINRA’s roster. Please see Rule 12100(u) for more information about relationships with family members who have ties to the securities industry.
- In addition to their FINRA Dispute Resolution Arbitrator Disclosure Report (Disclosure Report), non-public arbitrators must keep current the information contained in their Central Registration Depository (CRD) record.
- Arbitrators who have a professional license (i.e., J.D., C.P.A., etc.), must update their Disclosure Report if any of their professional licenses expire, or if they are suspended or become inactive. For example, an arbitrator who is an attorney may choose a new career path and allow his/her law license to expire or to become inactive. While this would not prohibit an arbitrator from remaining on our roster, such information must be accurately noted on the arbitrator's Disclosure Report.
- Arbitrators can quickly and easily update their Disclosure Reports on our Web site or by sending an email.
Question and Answer: Confidentiality After a Settlement or Award
Question:
What is the extent of confidentiality of FINRA arbitration proceedings after the settlement of a matter or the publication of an award?
Answer:
Awards issued in FINRA Dispute Resolution’s arbitration forum are posted on FINRA’s Web site and are accessible to the public. Arbitration proceedings, however, remain confidential, and information about each case is restricted to the parties and arbitrators involved in the particular proceeding. In some instances, parties may wish to use documents from one case in another case. In order to preserve each case’s confidentiality, FINRA will not provide documents to a party from another case without a panel-issued subpoena. A panel will exercise its discretion to decide whether such a subpoena should be issued.
FINRA reminds arbitrators that Canon VI of the Code of Ethics for Arbitrators in Commercial Disputes provides that "an arbitrator should be faithful to the relationship of trust and confidentiality inherent in that office." To that end, the arbitrator's duty to maintain confidentiality encompasses all aspects of the arbitration process and continues after the arbitration matter is closed, whether the case closed by settlement or award. Arbitrators are not required to retain case-related documents after an evidentiary hearing is concluded or a case settles. However, FINRA Dispute Resolution recommends that arbitrators retain files for a short period after the conclusion of a case to address any post-closing motions. Arbitrators who do not wish to retain case-related documents should discard them in a manner that is consistent with preserving the confidentiality of the proceedings.
Mediation and Business Strategies Update
Mediator Disclosures
FINRA mediators are reminded to periodically update their mediator disclosure reports. Parties rely on these reports for current and accurate information when selecting a mediator for their case. If you need a current copy of your disclosure report, you can visit our website. Navigate to Mediator Update Form and click “yes” in item 13 to receive an electronic version.
Mediation Outreach Efforts
On June 19, 2008, Julie Crotty, Assistant Director of Mediation, participated in a panel entitled “Managing Conflict and Removing the Barriers to Collaborative Decision Making” at the Center for Alternative Dispute Resolution’s Annual Conference in Greenbelt, Maryland.
On June 26, 2008, Kenneth Andrichik, Director of Mediation, represented FINRA Dispute Resolution at the Association for Conflict Resolution of Greater New York Sixth Annual Conference.
Business Strategy Developments
On April 23, 2008, William Kimme, Assistant Director of Business Strategies, and Mr. Andrichik worked in conjunction with FINRA International, and met with the acting Head of the Securities Commission of Malaysia’s Regulatory Services Department to discuss FINRA’s dispute resolution services.
Regional Updates
NOTE: Participants must successfully complete the online portion of the Basic Arbitrator Training Program before attending an onsite training program. Please visit the Arbitrator Training page for more information. FINRA generally requires a minimum of nine attendees to conduct an onsite session.
Northeast Regional Update
On August 6, 2008, George Friedman, FINRA’s Director of Arbitration, Kenneth Andrichik, Mignon McLemore, Assistant Chief Counsel in Dispute Resolution’s Office of Chief Counsel, and Katherine Bayer, Deputy Director of the Northeast Regional Office, participated in the Practising Law Institute’s program entitled “Securities Arbitration Program 2008: Evolving and Improving.” Among other topics, staff discussed the Discovery Arbitrator Pilot Program, expungement and sanctions.
During the next three months, the Northeast Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| New York, NY | September 18, 2008 |
| Boston, MA | October 7, 2008 |
| Philadelphia, PA | November 6, 2008 |
| New York, NY | November 20, 2008 |
If you are interested in attending a Basic Arbitrator Training program, please contact Cicely Moise at (212) 858-3963.
Midwest Regional Update
During the next three months, the Midwest Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| Wichita, KS | September 17, 2008 |
| Detroit, MI | October 8, 2008 |
| Des Moines, IA | November 5, 2008 |
| Kansas City, KS | November 19, 2008 |
If you are interested in attending a Basic Arbitrator Training program, please contact Deborah Woods at (312) 899-4431.
West Regional Update
Recruitment Initiative
On August 22, 2008, Judith Norris, Vice President and Director of the West Regional Office, spoke at the Utah State Bar Association in Salt Lake City. She met with prospective arbitrators and mediators and provided information about FINRA’s dispute resolution program.
Arbitrator Training
During the next three months, the West Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| Dallas, TX | September 16, 2008 |
| Los Angeles, CA | October 21, 2008 |
| Las Vegas, NV | November 12, 2008 |
If you are interested in attending a Basic Arbitrator Training program, please contact David Newson at (213) 613-2693.
Southeast Regional Update
In June, Rose Schindler, Vice President and Director of the Southeast Regional Office, and Kevin D. Rosen, Case Administrator Manager, accompanied by Scott Borchert, FINRA’s State Liaison, attended a meeting hosted by the Division of Securities of the Florida Office of Financial Regulation. Ms. Schindler and Mr. Rosen gave a presentation regarding the current state of FINRA's Arbitration and Mediation Programs and provided a detailed overview of prehearing, hearing and posthearing case administration procedures.
Recruitment Initiative
In a continuing effort to attract neutrals in the Southeast Region, Deputy Regional Director Jill A. Wile attended the Louisiana State Bar Association Meeting in June in Destin, Florida. Ms. Wile spoke to potential neutrals and provided information about FINRA's arbitration and mediation programs.
Arbitrator Training
During the next three months, the Southeast Regional Office will conduct the following in-person Basic Arbitrator Training programs:
| Raleigh, NC | September 23, 2008 |
| Orlando, FL | October 14, 2008 |
| Richmond, VA | October 21, 2008 |
| Fort Lauderdale, FL | November 4, 2008 |
| Wilmington, DE | November 16, 2008 |
If you are interested in attending a Basic Arbitrator Training program, please contact Lanette Cajigas at (561) 447-4911.
Message from the Editor
In addition to comments, feedback and questions regarding the material in this publication, we invite you to submit suggestions for articles and topics you would like addressed. We reserve the right to determine which articles to publish.
Please send your comments to:
Jisook Lee, Editor
The Neutral Corner
FINRA Dispute Resolution
One Liberty Plaza
165 Broadway, 27th Floor
New York, New York 10006
You may also email Jisook.
Directory
|
Linda D. Fienberg George H. Friedman Kenneth L. Andrichik Jean I. Feeney Dorothy Popp Richard W. Berry Barbara L. Brady Elizabeth R. Clancy |
Judith Hale Norris Rose Schindler Southeast Region James Schroder Associate Vice President MATRICS DR Business Scott Carfello Midwest Region Jisook Lee Associate Director of Neutral Management Editor of The Neutral Corner Julie Crotty - Mediation Mignon McLemore - Office of Chief Counsel Nene Ndem - Southeast Region Rina Spiewak - West Region Patrick Walsh - Midwest Region |
FINRA Dispute Resolution Offices
|
Northeast Region 5200 Town Center Circle Suite 200 Boca Raton, FL 33486 Tele: (561) 416-0277 |
West Region Suite 2600 Chicago, IL 60603 Tele: (312) 899-4440 |