Well, I received word from my father that in the case of Bernstein v. Craig Hassel and H&R Block Financial Advisors, Inc., the arbitration case in which I represented my father, we lost. Not only that, but the arbitrators chose to award $4,500 in costs against him.
[CLARIFICATION: My father misunderstood the ruling. Each party was assessed his own costs. Both Claimaints and Respondents had to pay normal NASD fees.]
I haven't seen the decision yet, and I'm sure I'll have more to say when I do. But two things strike me as very odd about the decision: (a)there was one small claim for $360 which H & R Block conceded at the hearing, and that they truly had no defense to. Regardless of the other claims, I don't see how the arbitrators could have awarded nothing, or for that matter, costs to the other side, given that fact; and (b)our side consistently requested mediation, to save both sides time, money, and aggravation. The other side consistently refused it, obviously (and correctly) thinking that my father couldn't represent himself adequately in an arbitration, and that his claim wasn't large enough to get a securities attorney to represent him(think about that if you are currently or thinking in the future of becoming an H&R Block customer!--more on why you shouldn't be one in the future). How in God's name can you justify awarding costs against a party who consistently sought to be in a different and less expensive forum?
I'll be blogging a bit about the arbitration, partly to get it off my chest, and mostly because I think my experiences have some important public policy ramifications, given that the NASD is a huge forum for litigation at this point.
As several VC readers have pointed out in the comments section in response to previous posts, NASD arbitration awards are notoriously arbitrary. How arbitrary? I've already mentioned that the arbitrators' ruling managed to completely ignore a small claim that the other side essentially conceded, with no explanation for this omission. Consider also the following: It was undisputed (indeed, admitted by the respondent broker), and backed by documentary evidence, that my father called his H&R Block Financial Advisors broker and requested that he purchase for him a 7.625% Household Finance Corporation bond at par that he saw on the internet. His broker, after checking with the bond people at Block, informed him that "no such bond existed", and instead sold him a bond from the same company at par for 7.5%. A letter from Block in our possession stated that my father was sold the highest-yielding bond "in inventory." The evidence was ambiguous at the hearing as to whether the higher-yielding bond was available that day when my father called, or only became available later that same day. But note that my father was not told that the bond "is not available right now" but that it "didn't exist" (and that my father must have confused the APR with the yield).
At the hearing, Block denied that the the bond was in fact in inventory, despite the prior admission to the contrary. It's possible, given the letter noted, that Block in fact dumped a bond in inventory. It's also possible that that Block sold my father a 7.5 percent bond at par that they purchased below par just to sell it to him, knowing (or maybe not knowing) that higher-yielding bond at par was about to hit the market. But even if there is a much more innocent explanation for the confusion, Block was certainly negligent, and at the very least Block engaged in an "innocent misprepresentation," which, as I noted in a brief (which the arbitrators, so far as I can tell, completely ignored, as they cited no precedents in their ruling), is a valid cause of action under governing Michigan law and under the investors' agreement my father had with Block.
All the arbitrators say in their ruling is that my father could not succeed in this claim because they determined that the 7.625% bond was "unavailable" when he called (I'm pretty sure this isn't correct, but, as I said, the evidence was ambiguous). Given that the actual claim was that he was told not that the bond was not available yet, but that the bond actually didn't exist, and given the fact that he certainly would have waited a few hours to purchase a bond from the same company, also at par, at a higher yield if he had not been told this, I don't at all see how this settles the issue. Again, consider the innocent misrepresentation issue. The elements of innocent misrepresentation are: a transaction between the parties (yes); representations that are false in fact and actually deceive the other (yes); detrimental reliance (yes); and benefit obtained by misrepresenter from the deception (yes, a significant commission and perhaps more). Pretty simple.
I'm sure jury verdicts are at least as arbitrary, perhaps often more so, than are are arbitration awards. Indeed, the arbitrariness of jury awards is the major reason why I'm not a big fan of civil juries, especially when it comes to damages. But the jury system is able to survive, in part, because the juries do not provide explanations for their rulings, giving them a lot of immunity from criticism. Now that NASD arbitrators are providing rationales for their awards, but (at least in my case) making up facts, relying on documents not admitted into evidence, not ruling on claims raised in the Statement of Claim and at the hearing, ignoring briefing, and relying on nonsequitors as discussed above, I wonder how long the system will last. VC reader comments suggest that defendants often find arbitrator awards equally arbitrary--it all depends on the panel you get (more on that, perhaps, later).
BTW, if you are now, or are considering becoming, an H&R Block Financial Advisors customer, consider whether you want to deal with a company that gives you misinformation about a bond, then stubbornly insists that it's your fault for relying on their information!
UPDATE: In case you were wondering, NASD proceedings are not confidential: "Absent an agreement or order to the contrary, parties are generally free to disclose details of their own proceeding as they see fit."
Further UPDATE: Just looking at an article I wrote a long time ago expressing some of my concerns with the jury system. Remarkable how many of them apply to NASD arbitration.
First, the use of juries to decide civil cases undermines one of the most important values of civil law, certainty. A jury trial, as any trial lawyer will tell you, is a crapshoot; one can never predict what combination of principle and prejudice will motivate the jury. [This is what I hear from attorneys about NASD arbitration panels.]
Juries, moreover, do not and cannot officially explain the reasons for their decisions, so their verdicts have no precedential value. Nor are juries bound by judicial opinions rejecting prior claims based on the same evidence. [same with arbitration panels]
Judges, however, face certain constraints that juries do not. First, as noted previously, judges, unlike juries, must justify their rulings in writing. A judge motivated by political or other illegitimate considerations will nonetheless need to issue an opinion justifying his result on legal and logical grounds. [NASD arbitrators now write brief opinions, but they don't seem to need to justify rulings on anything in particular.]
If the judge cannot do so, a higher court will overrule him. Juries, however, can base their rulings purely on whims, and their verdicts are upheld if the victor can point to any evidence supporting its position. [NASD arbitrators are not even subject to that constraint.]
Judges are also constrained by the fact that their written opinions are publicly available. Even the least-principled judges are usually constrained by concern about their professional reputations. Lawyers generally take a big salary cut when they become judges, but gain the nonpecuniary benefit of the respect and prestige that attends judicial office. It is therefore a rare judge indeed who desires to be the subject of negative commentary. [When is the last time you saw public criticism of an NASD arbitrator, who, in any event, have other careers?]
There is, of course, a big difference between juries and arbitration panels, which is that the parties to an arbitration contractually agreed to it. But I haven't argued that my father should not have been required to go to arbitration, and I don't see any inconsistency between thinking arbitration can be a good thing, thinking arbitration contracts should be enforced, and suggesting that the current system of arbitration could be vastly improved. Indeed, when even many defense attorneys state that they would rather litigate in federal court then go through arbitration, you know something is amiss.
If I were NASD, I would either make arbitration a wholly equitable forum, thus explicitly warning parties in advance that arbitrators are free to do whatever their gut tells them is right, or provide a forum that more closely follows the law.
Higher Punishment, Lower Conviction Rate (Another Arbitration Post):
It's well-known that if punishments are too harsh, triers of fact will be less willing to convict, so long as they are aware of the punishment. [Almost] no one would want a burglar to face the death penalty.
An analogous problem can come up in NASD arbitration. If a brokerage employee is named in an arbitration, and the defendants lose on any count, this goes on the employee's public record. Apparently, this is a big deal, because folks go to a lot of trouble to get arbitration records expunged when they win on all counts.
At my arbitration, the defendants' attorney emphasized in her closing argument that the defendant broker had not previously been subject to an arbitration, and that unless the arbitrators ruled for her side on all counts, he would have a black mark on his record.
In my dad's case, this may or may not account for the arbitrators' failure to even rule on the very small claim that was obviously legitimate, and may also account for the funny ruling on the bond issue, each discussed in previous posts. My father, at least, got the distinct impression that this issue weighed heavily on the arbitrators' conscience. Certainly, defendants' in-house counsel, very experienced in these matters, thought this would influence the arbitrators.
Regardless of what effect it had on my father's claim, the system I've described puts a lot of pressure on arbitrators to rule against Claimants on small claims. Why harm someone's career, I'm sure they say to themselves, over a few hundred or a few thousand dollars (easy for them to say, it's not they that were harmed)? Of course, if brokerage houses know that this is arbitrators' attitudes, they have
no less incentive [Update: well they do have the incentive to avoid the costs of arbitration, counterbalanced against the desire for a reputation for fighting each claim to the death] to settle small but legitimate claims.
I can think of a several ways around this problem, but none of them seem satisfactory.
Related Posts (on one page):
- "Public" Arbitrator:
- Higher Punishment, Lower Conviction Rate (Another Arbitration Post):
- Arbitration Arbitrariness:
- Arbitration Lost:
A good friend of mine, a plaintiff's lawyer, tells me that he thinks one of the biggest problems with NASD arbitration is that the "public arbitrators" rarely represent the public, and, indded, they often have ties of various sorts to the securities industry. Putting intentional bias aside, such associations can certainly skew one's perspective. (E.g., I've met several individuals over time who are very liberal on just about every issue except employment law, because they represented defendants in employment law cases and gradually adopted their clients' perspectives on these cases. It's hard not to; I've seen respected attorneys sincerely spout absolute drivel, because they became mentally so attached to their clients' position.)
NASD panels are supposed to be composed of one "non-public" industry representative and two public arbitrators. The NASD has new rules trying to decrease the public arbitrators industry ties. The rules, among other things, "Exclude from the public arbitrator roster attorneys, accountants, and other professionals whose firms have derived 10 percent or more of their annual revenue in the previous two years from clients involved in the securities-related activities."
However, there is no requirement that the "public arbitrators" individually not receive all or most of their own business from such clients. Thus, the law firm bio for the ["public arbitrator"] chairperson of my arbitration panel states that his assignments "have included representation of a defendant in civil, criminal and administrative proceedings arising from The Wall Street Journal insider trading case, a major utility in securities class actions arising from the Three Mile Island incident, issuers and underwriters in securities class actions arising from public offering or trading of securities, banks in letter of credit litigation and other matters and insurance companies in construction of policies."
So, under NASD rules, a "public arbitrator" can, for example, spend his entire career representing defendant corporations in securities law cases, so long as his firm does a lot of other things. But a plaintiffs' employment attorney whose firm happens to do ten percent of its business in municipal bond underwriting could not be a public arbitrator. Bizarre, no?
In my father's case, he did not get any of the individuals he requested as arbitrators, so the arbitrators were chosen by NASD. A reform suggestion: the NASD should train individuals, some lawyers, some not, with no ties to plaintiff's or defendants, in securities law, and have these neutral individuals serve as arbitrators, picked randomly from a pool.