Securities Litigation

FINRA reported that, for 2015, Claimants won about half of private securities arbitrations: 47% for all-public panel decisions; 45% for majority-public panels. A colleague and securities mediator, Dana Pescosolido, recently studied FINRA's 2015 private securities arbitrations to see just what the results are when Claimants "win." The study can illuminate mediation (and other risk-assessment) expectations. FINRA Securities Arbitrations Of the 3,435 securities arbitrations filed in 2015, 2,341 (68%) were customer cases and 1,094 (32%) were intra-industry disputes. FINRA closed 3,489 cases during 2015, but of those: 50% were settled by the parties, 9% settled after mediation, 9% were withdrawn and 8% closed otherwise. That left only 24% (828) resolved by arbitrators and 5% (182) were simplified arbitrations decided on the papers. So only 247 customer cases went to Award after hearing, and just under half of those resulted in damage awards to customers. After excluding Awards that weren't contested, didn't specify the damages sought, or didn't break out damage components, Pescosolido studied the remaining 103 awards. Take-Aways on Customer "Wins"

1. Bias or Self-Selection? Investor advocates, like PIABA, often argue that the ~47% win rate for Claimants demonstrates industry bias. But industry lawyers counter that most cases are settled before award and that the industry only takes its "good" cases to hearing. Indeed, FINRA statistics show that 76% of cases filed are resolved before award. And as discussed below, a closer look shows that the cases that "try" either are extreme cases where risk/reward ratios may frustrate settlement - or toss-ups that just didn't settle. So, I'd argue the correlations reflect participant self-selection rather than outcome-bias.
2. No Bell Curve: Contrary to what you might expect, the outcomes clustered at the extremes without standard "Bell-curve" distribution. Claimants were awarded 10% or less of the damages sought in 17 cases, and won 90% or more in 21 cases, among the 103 studied. So, "average" cases seem to settle (on average) and parties roll the dice on the cases clustered at the extremes.
3. One of Six Home Runs. About one in six times, Panels awarded a Claimant everything they sought. But a third of the time, Panels give Claimants less than 25% of what they sought. That reflects that extreme cases try: Are your facts the "good" case or the "bad" one?
4. Split the (Average) Baby. Overall, on a non-weighted basis, the awards average out to just over 50%, thus bearing out the adage that arbitrators are likely to "split the baby." But in light of the unusual award distribution, it reveals a 60/40 chance: The "average" cases get split-baby awards and extreme cases yield extreme awards.
5. Attorneys Fees. Attorneys fee awards aren't the norm, but All-Public panels award them more often (28%) than Majority-Public panels (16%).
6. Punitives Remain Rare. Punitive damages aren't awarded often (11 of 103 awards), but when they are, they can reflect anger at bad facts: Four of the eleven were for 200% or more of the compensatory damages awarded.
7. Costs. Panels awarded non-forum costs about a third of the time.

So, when assessing risks in arbitrations, avoid "averages" unless your facts make it a true toss-up; if so, you're more likely to get a "split-the-baby" award. Otherwise, you're looking at rolling the dice on extreme outcomes on extreme facts. You'll want to be sure your disinterested assessment of the facts leads you to right side of that leveraged bet. You can request a copy of the study from Dana Pescosolido at www.pescomediation.com. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2016 by Thomas K. Potter, III (all rights reserved).