A VIEW FROM THE OTHER SIDE

After contemplating your perception of what took place, consider what the Respondents will say and how they will defend the arbitration action. The following are common defenses in securities arbitration cases:

Lack of Jurisdiction

Are the Respondents members of the SRO in which the claim was brought? Check with the SRO during your initial evaluation to make sure that the potential Respondents were, at the time the events transpired or are now, members of the SRO with which you will be filing the claim. Refer to the Code of Arbitration Procedure for guidance as to matters which are eligible for submission.

Section 15 - Time Eligibility

Section 15 of the Code of Arbitration Procedure states:

"No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed from the occurrence or event giving rise to the act or dispute, claim, or controversy.This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction."

Even though the events leading to the claim may be within the general SRO six year eligibility rule, there may be applicable statutes of limitation which set forth shorter periods of time for bringing an action. Fraud statutes, for example, in some jurisdictions, run from the date of discovery (when the client knew or should have known) -- in other jurisdictions, they run a stated number of years from the transaction (purchase) date.

There are a number of arguments which may be set forth to toll statutes of limitation, including fraudulent concealment. However, this may be difficult to prove, particularly in a simplified arbitration where almost all decisions are based solely upon the papers filed since there is rarely a hearing.

Market Losses

If you complained in writing to the brokerage firm where the losses occurred, you have probably received a response from their compliance or legal department, stating that, while they regret that there were losses in the account, they are not an insurance company, they do not guarantee investments, that the losses occurred as a result of ordinary swings in the market and that the losses were, in no way, attributable to any wrongdoing on the part of the broker or the firm. If you are unhappy because of losses which occurred in the ordinary course of the market, don't subject yourself to the potential liability that may result from filing a frivolous claim. The losses must be attributable to the wrongdoing of the broker and/or the firm.

Client Sophistication

In cases involving suitability issues, the investor's level of sophistication will be examined. Educated or successful individuals or those with significant investment experience will be perceived as sophisticated. It will be difficult to convince an arbitrator that someone who has an advanced degree, runs a successful business or has been actively investing for several years was incapable of evaluating the underlying risks associated with an investment.

There are other factors, which may appear less determinative, but will definitely influence an arbitrator's assessment of an investor's level of sophistication. For example, a husband and wife complain that they lost money in a real estate limited partnership.

The facts show they have limited investment experience; neither has a college degree. The husband manages a grocery store and the wife works part-time as a real estate agent. Respondents will argue that because the wife is a licensed real estate agent, she must have been aware of the fact that the real estate market could be volatile and, therefore, must have realized that an investment in the partnership carried certain risks.

Loss of Profits

A client buys a stock at $10.00 per share from a firm which makes a market in the stock; it goes to $15.00 and the broker recommends selling. Shortly after the sale, the stock hits $25.00. Does the client have a claim for loss of profits? Not unless it can be demonstrated that the recommendation to sell was made for the purpose of defrauding the client and resulted in profit to the broker and broker-dealer.

MORE