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If a Customer Arbitration Goes Badly, Advisors and Firms Must Work Together to Salvage the Situation

By Scott C Matasar

In FINRA arbitrations brought by disgruntled customers, Claimants routinely sue both the rep and the firm.  If the arbitration Panel issues a severe Award against you that makes no sense, your only recourse may be to bring a civil lawsuit demanding the Award be vacated pursuant to the Federal Arbitration Act.  The question arises however: what happens if you want to sue to vacate, but your firm just wants to pay up and move on–can you move forward alone?

Recently, a Federal Court in Michigan issued a decision that bears directly on this issue.  In Intervest International Equities Corporation v. Aberlich, (12-CV-13750, E.D. Mich.) Defendant Aberlich was an investor who obtained a large damage Award against several parties in an underlying FINRA arbitration.  After the decision was issued, Intervest filed a civil lawsuit to have the decision vacated.  Aberlich sought to have Intervest’s case thrown out, arguing that because not all of the Respondents in the underlying FINRA case had joined the lawsuit, the judge did not have the authority to take up Intervest’s action to have the Award thrown out.

The judge agreed with Aberlich, finding that it was essential that all the same parties to the FINRA case also be parties to the lawsuit challenging the Award, and that the court could not provide complete relief without all the same parties being in the new case.  The court reasoned that, because Claimants and all the Respondents agreed to be bound by the Award by virtue of their Arbitration Agreement, it could not consider whether the Award should be vacated or confirmed without all the Respondents from the arbitration participating in the challenge, and that to rule otherwise would be prejudicial to both the Claimants and the non-participating Respondent.

This decision has important implications for your professional reputation in the event you are sued in a FINRA customer arbitration.  In the event the Award does not go your way, and you want to file a lawsuit to get the decision overturned, your firm will have to agree to participate in the separate lawsuit.  Absent that participation, you may be stuck without a remedy, much like Intervest was in this case.  Having a frank discussion early on with your firm’s legal department about its willingness to challenge a negative Award in the event the arbitration goes badly will help inform your litigation strategy, and whether you have a need to retain separate counsel to represent your interests.

Scott Matasar, a partner at Cleveland, Ohio-based Calfee, Halter, & Griswold LLP, regularly counsels brokers on the regulations and other legal issues surrounding a change of employment. He also represents both corporate clients and individuals in all forms of securities litigation and regulatory matters, including customer arbitrations and enforcement/disciplinary proceedings brought by the SEC, FINRA and/or state securities regulators. To learn more about Scott, please visit http://www.calfee.com/Scott_C__Matasar.bio

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