WealthManagement Magazine

The High Price of Foot Dragging

Contesting arbitrations is often a smart move especially for reps who believe they were unjustly accused or that the settlement demanded by the customer is excessive. At the same time, the case doesn't necessarily end with the issuance of an award. The regulators might decide to investigate the underlying facts, or the arbitration panel may have forwarded the matter for such consideration. Additionally,

Contesting arbitrations is often a smart move — especially for reps who believe they were unjustly accused or that the settlement demanded by the customer is excessive.

At the same time, the case doesn't necessarily end with the issuance of an award. The regulators might decide to investigate the underlying facts, or the arbitration panel may have forwarded the matter for such consideration. Additionally, a rep (through counsel) can appeal a decision by moving, in a timely manner, to have an award vacated, but this action needs to be undertaken with the understanding that until the award is overturned, the rep remains on the hook for any sums awarded against him or her personally.

And don't think that you can necessarily gain an advantage by foot dragging and delay…the consequences of such a strategy of attrition might surprise you. All too often that ticking clock you're hearing is a time bomb.

A Case in Point

Ten years ago (it sounds like ancient history, but stay with me) claimants Tom Hough and Danny Harsh filed a NYSE arbitration claim against Michael Einersen, a floor broker. The claim sought $16,950 in damages arising from a dispute concerning the covering of a short position. Following a hearing at which all parties were represented by counsel, a NYSE arbitration panel in August 1997 awarded Hough and Harsh $16,000 with simple interest of 5 percent per annum from Sept. 1, 1995 to Aug. 6, 1997. The award also assessed $1,200 in forum fees. Unhappy with the outcome, Einersen moved in October 1997 to vacate it, only to be denied that relief by the New York State Supreme Court in February 1998.

Six months after that Supreme Court ruling, the NYSE asked for proof that Einersen had paid his fine. Einersen's attorney responded that subsequent settlement discussions had resulted in the claimants abandoning their claim. Einersen's attorney also said his client had not exhausted his remedies to vacate the award and would appeal the judgment when it was filed.

Five years of silence from the NYSE ensued. It's at this point that the story comes into a modern-day timeframe. In September 2003 and January 2004, the NYSE sends letters to Einersen demanding that he submit proof of payment of the award since Einersen had not had any success in legally overturning the arbitration decision.

Einersen's attorney responds that his client believed that the claimants had abandoned their claim to the award, since he had not heard from either of them for over five years. Einersen eventually would pay the award on April 22, 2005.

At this point, the case had dragged on for eight years, but it wasn't over for Einersen yet. NYSE Rule 627(g) requires that all monetary arbitration awards “shall be paid within thirty (30) days of receipt unless a motion to vacate has been filed …” (The NASD has a similar rule in Rule 10330). After he paid his award, NYSE charged Einersen with violating this rule, and he consented to NYSE sanctions (a censure and 10-week bar in all capacities) without admitting or denying the NYSE's allegation.

Parting Thoughts

Einersen's is a parable of wishful thinking. He can be excused for hoping that the five years of silence from regulators and claimants would continue indefinitely. Nonetheless, the lesson from this case is clear: Whether you lose an intra-industry arbitration over clearing a trade or a more public case involving churning a customer's account, you must make sure that one of two things happens: 1. You have paid the award in a timely manner, or 2. your lawyer has filed to overturn it in a timely manner. If you lose your appeals, the responsibility for resolving the matter no longer resides with the claimant; “I'm waiting for him to ask for a check,” will not fly as an excuse for not paying the award.

Writer's BIO: Bill Singer is a practicing regulatory lawyer and the publisher of RRBDLAW.com

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