The first, and in many respects the most important, question for any investor is: Do I have a case? Not only does this keep you from wasting your time on a meritless claim, it also helps avoid having costs awarded against you for frivolous prosecution.
Although arbitration is based more on equity than law, there are basic legal necessities that every claim must satisfy before it is considered valid. To present a claim, you must have a “cause of action,” and “damages.” In other words, someone has to have done something wrong (or negligent), and the complainant must have lost money as a result. As a general rule, if you didn’t lose money, you have no case.
Even before the above determination, you need someone to go after, you need to be able to establish the arbitration’s jurisdiction over them, and you need to make sure the case is not too old. The simplest way to determine the latter is to ascertain if the firm and/or broker is a member of one of the exchanges or FINRA. Each of these bodies requires arbitration by its members upon the demand of a public customer. No written arbitration agreement is required. If they are a member of FINRA, they must arbitrate. If they are a FINRA member, it will be noted on your monthly statements and other documents that you received from your brokerage firm.
Is the case too old? There are two hurdles to cover on this question. The first, and easiest, is FINRA’s six-year eligibility requirement. This is not a statute of limitations, but simply a test to determine whether or not FINRA will allow you to arbitrate this case. A FINRA arbitration Rule states that you may only bring a claim if it is within “six (6) years” of the event or occurrence giving rise to the claim.
If the case is less than six years old, FINRA will allow it to file a claim, but the arbitrator may dismiss it based on the relevant statute of limitations. These vary from state to state, and for different causes of action. They may be as short as a year, or as long as ten years. As a general rule of thumb, any cause of action over four years old may well have problems unless “discovery” is a triggering event.
An exception may be carved out of this body of law in the case of “fraudulent concealment.” If you can show that the Respondent deliberately withheld or concealed vital information from you, which prevented you from finding out what was going on, then you may be able to have the statute of limitations tolled for some length of time. Caution: This is not easy.
Assuming FINRA can assert jurisdiction, your brokerage firm is still a viable entity, and you haven’t waited too long, you can turn your attention to the claim itself. First, ask yourself what happened. Then ask yourself why it was wrong. Remember that a cause of action is the first requirement for a claim–just because you lost money in the stock market is not necessarily a reason for you to recover damages.
The most common causes of action involve unsuitable investments (too risky), churning (excessive trading), fraud (the broker didn’t tell you something, or outright lied), negligence (the broker was simply careless), or failure to follow instructions (failure to tender, or forgetting to put on a stop loss, for example).
In summary, when you evaluate your securities law case, ask yourself these questions:
- Is there a viable someone to go after?
- Can I force this person/firm to arbitrate?
- Do I have a valid claim?
- Do I have a valid loss?
- Can I prove all of this to a neutral party?