Navigating the Uncertain Waters of Securities Arbitration In Order to Effectively Represent Your Client

Posted on October 14th, 2011 at 9:35 AM

Lawyers confronted with the task of representing an investor or a financial adviser in securities arbitration quickly will realize that arbitration neither is like litigation nor an administrative hearing.  In the most basic sense, securities arbitration is a hybrid of the two.  Let’s explore what lawyers need to appreciate to effectively represent their clients in securities arbitration, both in terms of the process, strategies to employ, and evaluating an investor’s case.

                First, in terms of the process, the role of an arbitrator essentially boils down to three things.  He or she must determine what happened.  He or she must determine who is at fault.  Finally, he or she must determine who owes money to whom (and how much).  Consistent with that role, the pleadings (known as a “Claim” and an “Answer”) should be styled differently than in litigation.  While there are exceptions, typically pleadings are written in a narrative fashion, more akin to writing a long letter that includes a request for relief.  And typically that long letter is accompanied by citations to legal authorities.

                Second, in terms of the process, there is limited motion practice and limited discovery.  Discovery is limited essentially to core documents and interrogatories are discouraged.  Indeed, the arbitration code refers to interrogatories as “Information Requests”, and usually they are employed to ascertain the identities of witnesses.  Depositions are permitted only under extremely limited circumstances and only pursuant to an order by the arbitrator.  As a practical matter, there is scant e-discovery.  Finally, motions to compel often are necessary but seldom are effective.

                Third, in terms of the process, while arbitrators may appear to apply the rules of evidence, they seldom do so thoroughly or consistently.  That is, arbitrators tend to apply the rules of evidence in a relaxed fashion.  They may choose to apply fundamental concepts but not technical rules.  Once an arbitration decision is reached, it almost certainly is final.  There is an extremely limited right to appeal.

                In terms of strategies to employ, lawyers need to be aware of several dynamics taking place in the arbitration hearing.  Most important is the battle for sympathy; can one party move the arbitrators to feel positively towards them and their side of the story?  In securities arbitration, the sympathy battle involves at least three factors arbitrators consider to arrive at the “right” decision.  They are: the parties’ circumstances; who controlled the account; and the relative sophistication of the parties.  A related strategy (which litigation lawyers often overlook) is to develop and argue basic themes, as one commentator put it, “simplifying complexity.”  This strategy plays well with the arbitrators’ disposition to render “raw justice.”

                Likewise, too often litigation lawyers fail to bring their “best game” to arbitration – thinking that “it’s just arbitration”, or that it is more akin to a deposition.  Instead, lawyers need to realize that they should be aggressive in prosecuting or defending their clients in arbitration, and that they should prepare for and act as though they are “on trial.”  That means several things.  First, don’t question witnesses like they are in a deposition.  That bores the arbitrators and takes far too long.  Instead, develop a real “trial lawyer” approach and establish only the more salient points that you wish to make.  Second, make objections.  While lawyers sometimes object too much, the more common deficiency is objecting too little.  Even if the arbitrator ultimately decides to overrule the objection, the lawyer has made his or her point and hopefully that will cause the arbitrator to give the testimony little weight. 

                In terms of evaluating an investor’s case, let’s consider liability, damages and some investment products that are on our radar screen.

                First, liability traditionally has been analyzed differently depending upon whether the financial adviser was a “broker” (a registered representative of a broker-dealer with more limited duties) or whether he or she was an investment adviser (a fiduciary).  In modern times, and without regard to the current legislative effort to deem all individuals providing investment advice to be fiduciaries, that distinction has blurred for several reasons, including the advent of fee-based accounts, providing comprehensive financial advice, and the effect of carrying other professional designations that impose additional duties.  Whatever duties exist, the bases for liability normally are: unsuitability of the investment (considering, for example, the investor’s investment objectives, risk tolerance and time horizon); misrepresentations and omissions in connection with the sale of securities; and operational / back-office negligence cases.  Recently, base-line duties have been extended to include recommendations to hold a particular security as well as recommendations as to a portfolio strategy.

                Second, the damages analysis in securities arbitration incorporates creativity and self-responsibility.  Regarding creativity, asking the question, “How much money did the investor lose?” really leads to several additional questions.  Those questions include how much was lost “out of pocket”, how much was lost compared to “well-managed account” analysis, how much was lost during a given time period (not necessarily the life of the account), and how much was lost compared to the market (stock market, bond market, etc.) as a whole?  As to self-responsibility, lawyers may need to address whether and when an investor acted to “stop the bleeding”, though the impact of that analysis depends heavily upon the relative sophistication of the parties, as well as the representations (and omissions) made at the time of the investment and thereafter.  Finally, some remedies, such as state securities laws affording rescission as a remedy, do not recognize that as a defense.

                Third, the cases on our radar screen historically have included overconcentration in equities or in a particular sector (technology, for instance), variable or equity-indexed annuities, or strategies and portfolios that, for whatever reason, carry more risk than the investor is willing or able to bear.  Additionally, and more recently, we have brought cases involving non-traded REITs (real estate investment trusts), private placements (real estate, oil and gas, equipment leasing and other areas), and non-traditional products (such as leveraged and inverse exchange traded funds known as ETFs, reverse convertible securities, and structured products such as “principal protected notes”). 

To be successful, securities arbitration lawyers need to be as acquainted with theories of finance, investment strategies, and financial planning as they are with the law and the arbitration process!


About the Author:  James J. Eccleston leads the Securities group at the Chicago law firm of Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., where he represents investors in recovering investment losses and financial services professionals in disciplinary, employment, and compliance matters.  He has held numerous securities licenses and Chicago Bar Association leadership positions and serves as an arbitrator and mediator.  He is a recipient of Martindale-Hubbell’s highest rating (AV) for legal ability and ethics and is named to the Illinois Super Lawyer and Leading Lawyer lists., 312.621.4400,,


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I want to thank you for your excellent professional representation. It was greatly appreciated.

Michael M.


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