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Securities Arbitration and Litigation

01

What is Securities Litigation?

A recent retiree sees her improperly diversified retirement nest-egg lose half its value in a few weeks. An elderly couple loses their life savings in an investment recommended by their accountant, who pocketed a secret commission. An investor incurs massive losses because his portfolio is tied to the oil markets. A financial advisor is wrongfully accused of fraud for recommending a diversified portfolio of bonds that declined in the financial crisis. A successful executive prematurely exercises all of his company stock options, costing him millions in lost profits, on the misleading advice of an investment advisor only interested in earning fees.

A brokerage firm is accused of violating regulations even though there was no evidence its customers were harmed. These are a few examples of the securities arbitration and litigation cases we investigate, litigate, and resolve through settlement, arbitration, or trial for our clients.

What is Securities Litigation?

“Securities Litigation” is a catch-all phrase that includes:
  1. Investor arbitrations and lawsuits filed against stockbrokers, registered investment advisors, and financial advisors;
  2. Enforcement investigations and lawsuits filed by the Securities and Exchange Commission, state regulator, or FINRA;
  3. Criminal prosecutions for insider trading;
  4. Shareholder class actions brought against public companies and investment funds for the alleged failure to disclose material information in mandatory SEC filings.

At Barr & Young, our securities arbitration and litigation attorneys focus on the first two areas of securities litigation: investor arbitrations and lawsuits, and enforcement actions. Whether you’re an aggrieved investor, registered investment advisor, licensed FINRA investment professional, or a broker-dealer, your litigation in the heavily regulated securities industry requires experience, careful planning, and dynamic trial skills. Private litigants, the Securities Exchange Commission, FINRA regulators, California’s Office of Business Oversight, and the Department of Insurance are foes we’ve battled before. Most cases resolve, but when they don’t, our lawyers are ready to vigorously represent you through trial or arbitration to protect your savings, retirement portfolio, license, or business.

Our opponents change from case to case, but the underlying legal claims do not. We litigate claims that involve:

  • Over concentration and portfolio mismanagement
  • Breach of Fiduciary Duty
  • Fraud
  • Unsuitability
  • Churning
  • Mismanagement of Mutual Funds and ETFs
  • Mismanagement of Managed Accounts
  • Employee Promissory Notes and EFL Loans
  • Raiding, Trade Secret, Unfair Competition Claims

In addition, our securities litigation lawyers have helped financial professionals expunge false and misleading marks from their publically available professional profiles. If you’re an investor who has been wronged, an investment professional being accused of wrongdoing, or a broker-dealer seeking to defend investor litigation, please contact us to find out how we can help.

02

Securities Arbitration

The vast majority of investor-filed financial litigation occurs in arbitration forums — most commonly before the Financial Industry Regulatory Authority, known as FINRA. FINRA runs a Dispute Resolution service that provides rules for arbitrations between its members and the members’ customers. FINRA conducts arbitrations in San Diego, Los Angeles, San Francisco and in other major cities around the United States. Most securities brokerage firms’ customer agreements require any dispute between the firm and its employees on the one hand, and the customer on the other, be submitted to arbitration before FINRA. Some registered investment advisors and private investment funds known as hedge funds require their investors to agree to submit any dispute to the American Arbitration Association (AAA) under its commercial arbitration rules. Unlike FINRA, AAA arbitrations can be conducted in places outside of large cities like San Francisco or Oakland, in places like Palm Springs, Sacramento, Fresno, San Jose, Walnut Creek or Danville (where we are located). These arbitration clauses were found to be enforceable by the U.S. Supreme Court approximately 30 years ago, and, since then, most investor claims against their brokers and advisors have been sent to arbitration.

There are pros and cons to arbitration for investors, advisors, and the securities brokerage firms that find themselves litigating disputes under FINRA’s or AAA’s rules. Arbitration cases are often heard and decided faster than lawsuits filed in State or Federal Court. Arbitration decisions are rarely overturned on appeal, which gives them a sense of finality, but can mean that errors in the decision making process are not corrected. Arbitration rules of discovery are restricted, which may prevent lawyers litigating these claims from fully investigating them due to restrictions on depositions. The rules of evidence are relaxed, which often means hearsay is presented to arbitrators during hearings. Finally, arbitrations are usually decided by a panel of three experienced business, legal, or accounting professionals instead of by a judge and jury. As a result, arbitrator selection is a crucial part of any case. For example, by knowing the arbitrators who are often assigned by FINRA to hear San Francisco arbitrations, we are better able to select the right arbitrators to hear our clients’ cases. All participants in arbitration claims should be represented by experienced securities litigation attorneys who are familiar with FINRA and AAA rules and arbitrators. Many investors, and even some investment professionals, mistakenly believe they can handle securities arbitrations on their own due to the less formal nature of the proceedings. This is an error because the other side will probably be represented by an experienced lawyer.

Most securities litigation cases focus on three interrelated claims: Fraud, Suitability, and Breach of Fiduciary Duty. Fraud generally falls into two categories: False statements about the nature of an investment or portfolio of investments, or material omissions of important information that, had an investor been told, would have caused them to never invest or sell. Suitability claims are based on a violation of securities industry rules that require investment professionals to only recommend investments and portfolios that are suitable in light of the investor’s age, income, net worth and investment objectives. Suitability responsibilities extend beyond the date of investment. A financial professional should review each investor’s portfolio and suggest rebalancing or other changes to ensure it remains suitable in light of the suitability factors. Breach of fiduciary duty claims are based on an investment advisor’s duty to place the interests of the customer/investor ahead of their own. When advisors place their own financial interests ahead of their clients’, such as when they sell a high commission fund or annuity solely for their own benefit, advisors can be held liable for breaching their fiduciary duty to their client.

All of these claims focus primarily on the written and verbal communications between advisors and their investor-customers. These communications become the focus of pre-arbitration or pre-trial discovery, and evidence of the communications is often the focus at trial. As a result, it’s important that all litigants retain experienced counsel who are adept at requesting, and locating, those communications.

Securities Arbitration Frequently Asked Questions

These questions and answers provide a broad overview of securities arbitration. They are not legal advice. All potential cases and circumstances are different, so please consult with a lawyer about your specific matter.

Can I bring a claim against my stockbroker or investment advisor for stock market losses?

Yes. Many people mistakenly believe that they cannot sue their stockbroker or investment advisor if their portfolios declined due to market declines. Investment advisors and stockbrokers must make sure that your portfolio is suitable for your needs and objectives. A portfolio that is not suitable is grounds for a legal claim. Investment advisors and stockbrokers also must tell you the truth about the risks associated with your investments. If they fail to be truthful, they can be liable for fraud and misrepresentation. However, not every portfolio or investment that losses money is grounds for suing an investment advisor. If your portfolio’s performance diverged from your expectations, or you feel you were misled by your stockbroker or investment advisor, consult with an attorney knowledgeable in this area of the law soon.

Will my case be heard in court or in arbitration?

Usually your matter will proceed in binding arbitration before a panel of 1 or 3 arbitrators (depending on the size of your claim) appointed by the Financial Industry Regulatory Association (FINRA). FINRA and its predecessors, the New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD), have been administering binding arbitrations for decades.

Why is arbitration mandatory for investor cases?

Nearly all investment firms and investment advisors require that their customers sign an agreement to submit their customer disputes to binding arbitration with FINRA. In 1987, the U.S. Supreme Court held that these customer arbitration clauses bind the customers. Since then, most cases filed by individual investors against their stockbrokers or investment advisors have proceeded through binding arbitration.

Do I need an attorney to represent me in arbitration?

It is not required, but we strongly advise it. The investment firm, stockbroker, and advisor against whom you file will probably be represented by an experienced attorney well-versed in the arbitration rules and legal arguments. Those attorneys’ sole job is to defend their clients, not to represent you. Even when they are in-house lawyers employed by the investment firm itself, their duty remains the same. You will be at a significant disadvantage if you are not represented by competent counsel.

How long does it take for my case to get decided?

If your case proceeds through a full arbitration hearing, it will take from 12 to 24 months for your case to be decided. If you are an older investor or in ill-health, FINRA arbitrators are instructed to give your case scheduling priority. Please remember that most cases settle before a final hearing, which means your case may be over sooner.

What’s the difference between arbitration and mediation?

Arbitration and mediation are often referred to together, but they are very different. Mediation is generally a voluntary and confidential process designed to settle a lawsuit or legal claim before or while the claim is pending. An individual mediator works with the parties to reach a negotiated settlement. The process is voluntary because the mediator has no power to force the participants to resolve the dispute. There are several well-respected mediators with whom we have settled a large number of FINRA arbitration claims in the past.

Arbitration is usually mandatory, not voluntary. Arbitration is an alternative to a court proceeding. The arbitrators are empowered under the law and arbitration rules to order witnesses to appear, control the proceedings, and decide the outcome of the dispute. Because of our experience with FINRA arbitration, we are familiar with many arbitrators who regularly serve in FINRA cases.

What are the chances that my case will settle?

Most securities arbitration cases settle before a final decision from the arbitration panel, so chances are that yours will too.

Who picks the arbitrators?

The parties and their lawyers. After an arbitration case is filed and all the parties have appeared, FINRA or another administrator will send a list of potential arbitrators. Lawyers for the parties then evaluate the lists, strike certain arbitrators they do not want, and rank the others. The lists are then submitted to the administrator who compares the lists and appoints the highest-ranking remaining arbitrators to serve on the panel. Most cases either have 1 or 3 arbitrators depending on the size of the case.

How does arbitration differ from court cases?

In arbitration, your case is decided by arbitrators instead of a judge or jury. Discovery is more limited in arbitration. For example, there are no depositions in FINRA arbitrations except in rare circumstances. Because of this, FINRA arbitration rules limit the use of dispositive motions in arbitration. Arbitration awards are also harder to overturn, with fewer grounds for appeal than court decisions.

Is an arbitration hearing like a trial?

Yes, but there are important differences. An arbitration is decided by arbitrators instead of by a judge or jury. Arbitration hearings do not take place in a courtroom. Instead, they occur in an office or hotel conference room. Arbitrations are less formal than trials, and the rules of evidence are relaxed. But because the grounds for appealing or setting aside an arbitration decision are limited, arbitration awards are harder to overturn than jury verdicts. Despite their relative informality, securities arbitrations should be treated seriously.

Can I recover my attorney’s fees or punitive damages in arbitration?

Yes, if you have a legal basis to do so. Arbitrators have the power to award a party all forms of compensatory damages, including attorney’s fees and punitive damages. Generally, arbitrators follow the law, so they only award attorney’s fees or punitive damages if the law supports them.

My investment advisor is in another state, will I have to go there for my arbitration case?

No. FINRA procedures require that the case will be heard in the large city closest to where the Claimant (the party filing the arbitration claim) resides. FINRA’s procedures essentially allow the Claimant to choose the city where the arbitration will occur. The responding party can request that the matter be moved to another forum, but generally the Claimant’s choice of location prevails. For example, if you live in Palm Springs and your advisor is in Sacramento, FINRA will set the hearing location for Los Angeles or San Diego (your choice) because those are the cities closest to you where FINRA conducts arbitrations.

Will I have to travel for the case?

The only travel you will need to do is for the arbitration hearing itself. All preliminary hearings are conducted by telephone and all filings are handled electronically. One benefit of FINRA arbitration is that you and your lawyer need not appear in person until the arbitration hearing.

My portfolio has declined consistent with the market, does that mean I don’t have a claim?

No. While broad market performance may be a good measure of how your portfolio has performed, it is not an accurate judge of whether you have a legal claim. For example, if your portfolio declined 30% when the S&P 500 declined a similar amount, you may still have a legal claim. It is possible that your portfolio is overly concentrated in stocks for your age and investment objectives. That would mean your portfolio was not suitable. Another example: if your investment advisor represented to you that your investments would never decline as much as the broader market and yet that occurred, you may have a claim for fraud or misrepresentation.

My investment advisor set up my portfolio years ago and we haven’t talked about it since. Does that mean I have no case?

No. Stockbrokers and Investment Advisors must communicate with you regularly to make sure that the investments in your portfolio remain suitable. Their failure to speak with you and update your portfolio, if it resulted in losses, could be the basis for a claim for breach of fiduciary duty, negligence, and unsuitability.

My investment advisor is also my CPA, will my case still proceed in arbitration?

Maybe. It depends on your retention agreement with your CPA/Investment Advisor. If it calls for arbitration, then the answer is likely yes. But even if the retention agreement is silent, there may be other agreements you or your CPA signed that require the dispute be submitted to arbitration. For example, the power of attorney that authorizes the CPA to execute trades in your securities account may require that you submit to arbitration any disputes arising from the account.

Do arbitration awards get appealed?

Yes, but the grounds are very limited. Unless you can show that the arbitrators were manifestly biased against you, acted unethically, or failed to disclose an important fact about their backgrounds, it is very difficult to overturn arbitration awards.

If my case isn’t going to arbitration, will you still be able to represent me?

Yes. Barr & Young litigates cases in court all the time. Our practice is not limited to arbitration. If your case may not be heard in arbitration, we are still interested in speaking with you.

Do you handle cases on a contingency fee?

Yes, but it depends on the case. Not every case is appropriate for a contingency fee. Sometimes, it is better for the litigant to pay hourly if they are able. Please call us and we will be happy to discuss your case and various fee structures. There is no charge for an initial consultation with one of our attorneys about cases in our practice areas.

Why choose Barr & Young to represent me in my securities dispute?

We have nearly three decades of experience representing investors, advisors, stockbrokers, and investment firms of all sizes. Many lawyers who handle securities arbitrations limit their representation to individual investors, or to defending investment advisors and investment firms. We represent both. We believe our breadth of experience gives us a unique perspective that allows us to effectively advocate for our client’s cases zealously and persuasively.

Are there any geographic limitations on your representation?

No. We are California lawyers. Our office is based in Northern California, east of San Francisco, so the bulk of our cases are throughout California. FINRA arbitrations are conducted by the same set of rules and procedures anywhere in the United States. Besides California, we have arbitrated cases to conclusion in Arizona, Nevada, Colorado, Florida, New York, and Washington D.C.

03

Regulatory Investigations and Litigation

Securities professionals work within a highly structured set of rules, regulations and laws. FINRA, the SEC, and state regulators all play a part in the licensing and oversight of the securities industry. These regulatory entities investigate and litigate against companies and licensed individuals they supervise. For example, FINRA Rule 8210 allows FINRA enforcement investigators and lawyers to gather documents, take testimony under oath, and request information from member firms and their employees. These requests often come with short deadlines for responses. It is crucial that the responses are truthful, because lying to regulators is a common basis for criminal prosecutions, as we’ve previously written. Regulatory investigations are often handled geographically, though there are exceptions. For example, we are located in Danville, California, near Walnut Creek, so most of the regulatory investigations in which we have represented clients have arisen from regulatory offices in San Francisco. We have also assisted with investigations emanating from New York and Los Angeles.

Regulatory Investigations and Litigation

Regulatory investigations sometimes result in regulatory litigation. Before the litigation is filed, regulators often inquire whether there is an opportunity for settlement. If the case does not settle, the regulators typically send out a “Wells Notice,” which is often a letter, outlining the claim the regulators intend to bring against the advisor, broker-dealer, or affiliate. Even after the Wells Notice is sent, most cases settle before they go to trial before a FINRA tribunal or SEC Administrative Law Judge.

Regulatory Litigation differs from civil litigation because the regulatory enforcement lawyers have conducted their investigation, including gathering their testimony, before they file. This places a burden on the defendants to undertake their own investigation using discovery tools to attack the regulator’s evidence.

Our team has experience in regulatory investigations and litigation in the San Francisco Bay Area.

04

Unfair Competition, Trade Secrets, and Employee Raiding Litigation

Employees generally owe their employers a duty of loyalty. The scope of that duty increases as the employee rises in the organization. Employees breach their duty of loyalty when a high ranking employee assists a competitor while remaining on the payroll of their current employer. Employees also have a responsibility to maintain the confidentiality of their employer’s trade secrets. California has adopted the Uniform Trade Secrets Act (UTSA), which provides specific remedies for employers who have had their trade secrets taken by former employees. Under some circumstances, an employer’s customer and client lists can constitute trade secrets. Key employee compensation packages can also constitute the confidential trade secrets of an employer. Congress recently passed the Defense of Trade Secrets Act which mirrors many of the provisions in the UTSA, and grants federal court jurisdiction over claims filed based on the DTSA.

California Business and Professions Code section 16600

California Business and Professions Code section 16600 voids any contract that prevents an employee from practicing their trade, business, or profession. There are a few exceptions, such as when a business owner sells their company, but generally B&P Code section 16600 precludes the enforcement of noncompetition provisions against California employees that might be enforceable in other states. Some courts have held that forcing California employees to sign non-competition agreements that violate section 16600 is an unfair business practice.

Unfair Competition, Trade Secrets, and Employee Raiding Litigation

Employee raiding refers to efforts by one competitor to target individual or groups of employees who work for a specific competitor. Employee raiding can be considered an anticompetitive business practice because it is designed to injure a competing business by crippling its ability to compete in the market place. Often, raiding claims and claims of UTSA violations are filed at the same time.

We have experience litigating employee raiding, unfair competition, and trade secret cases in the securities, insurance, business valuation, banking, and consulting fields. Trade secret and employee raiding claims occur with some regularity in the securities industry because of the nature of client-advisor relationships and the mobility of brokers among firms. Raiding cases in the securities industry are often subject to the broker protocol, which is an agreement among various securities firms about the acceptable manner in which investment professionals can move between firms and notify their customers. Recently, some of the largest brokerage firms and founding signatories of the broker protocol have withdrawn their names, concluding that the protocol is not in their shareholders’ best interest.

The first stage in trade secret and raiding litigation is often a hearing on a Temporary Restraining Order (TRO) or Preliminary Injunction. These remedies are specifically authorized in UTSA claims. In the securities industry, once the injunction request has been ruled on by a court, the cases often proceed to arbitration before FINRA. For cases outside the securities industry, the cases usually continue in state or federal court.

Unfair Competition, Trade Secrets, and Employee Raiding Litigation

We have more than two decades of experience litigating and advising employers and employees on both sides of these cases. We have counseled departing employees and their new employees about the best ways to mitigate litigation risks. We have also advised employers about the business considerations involved in this unique area of litigation.

 

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