WealthManagement Magazine

Firms Mount Late-Inning Rally on Punitive Damage Cap

It looked to be a rout last February when the NASDRs controversial proposal to limit investors punitive damages had received little support. Opponents of the idea led supporters by a score of 21 to 3 in comment letters to the SEC. Plaintiffs attorneys and investor advocates hoped the commission might, in fact, kill the punitive cap idea in light of such overwhelming objection.But cap proponents staged

It looked to be a rout last February when the NASDRs controversial proposal to limit investors punitive damages had received little support. Opponents of the idea led supporters by a score of 21 to 3 in comment letters to the SEC. Plaintiffs attorneys and investor advocates hoped the commission might, in fact, kill the punitive cap idea in light of such overwhelming objection.

But cap proponents staged an extra-inning comeback. In March, more than two months after the comment period officially expired, securities industry members rallied with 33 comment letters in favor of the proposed rule, making the unofficial total: 36 for and 25 against. Nineteen of the industry letters were written in a four-day span, March 10-13. Ten of them were sent to the SEC secretarys office on March 12.

(Raymond James Financial, together with its subsidiaries Robert Thomas and IM&R, copied the same letter and submitted it three times on different letterhead in support of the proposal. Another letter in favor of the proposal was mistakenly counted twice.)

NASDR adjudication chief Linda Fienberg told this magazine in April that comment letters routinely come in past deadline. Opponents of the damage cap, however, most of whom got their letters in on time during the busy holiday season last December, feel the playing field was tilted unfairly against them.

It has all the earmarks of being arranged, says James Beckley, a plaintiffs attorney in Wheaton, Ill., and a vocal opponent of the proposal. Apparently, The SEC gave the NASD another opportunity to pad the file without letting the public in on it.

Some feel that at a Feb. 11 meeting of the NASDRs arbitration advisory committee, industry members on the committee learned how far behind they were in the letter count and began efforts to drum up more support.

The securities industry realized it fell asleep at the switch, says one non-industry committee member. They were concerned about losing by default.

The SEC is still considering the rule. The NASDR denies soliciting supportive letters and says only that the SEC has forwarded all the comment letters as theyve trickled in and that the NASDR staff is currently reviewing them. The regulator says it will write a response soon to the letters deciding whether to make changes to the proposal.

The proposed rule would limit punitive damages in investor cases to two times compensatory damages or $750,000--whichever is less, unlike several state caps that allow for whichever figure is higher.

Merrill Lynch: It is imperative that there be reasonable restraints on such power so as not to endanger the viability of the vast majority of the membership of the NASD. ... Without a cap on punitive damages, an even greater number of [small] firms would face the real possibility of being put out of business by a panel of arbitrators.

PaineWebber: The absence of a cap creates a substantial economic risk for the smaller NASD member firms.

Smith Barney: It is particularly devastating to smaller firms which could very well see their capital base impacted by one unrestricted punitive award.

To bolster their claims, supporters of a punitive damage cap likely will point to a recent study showing the number and size of punitive damages awards is on the rise.

The total dollar amount of punitive damage awards to customers was reported at $6 million in 1995, $8 million in 1996 and a relatively whopping $22.6 million in 1997, according to the Securities Arbitration Commentator newsletter (SAC) in Maplewood, N.J.

However, the 1997 amount was skewed by a $10 million award in just one case against a group associated with the defunct brokerage firm Stratton Oakmont.

Nonetheless, SACs award database counted eight punitive damage awards of $1 million or more in 1997, compared to only two that size the year before. Furthermore, the percentage of arbitration cases resulting in a punitive award is up from 2.9% of all cases in 1996 to 4.3% in 1997, according to the newsletter.

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