WealthManagement Magazine

Second-Class Justice?

On Jan. 17, 1998, the Saturday before the Monica Lewinsky scandal broke, President Bill Clinton arrived grim-faced, by black limousine to his lawyers downtown Washington, D.C., office. Once inside, attorneys representing Paula Jones in her now-defunct sexual harassment suit proceeded to grill the nations chief executive for six hours in a legal process known as a deposition, or sworn testimony in

On Jan. 17, 1998, the Saturday before the Monica Lewinsky scandal broke, President Bill Clinton arrived grim-faced, by black limousine to his lawyers downtown Washington, D.C., office. Once inside, attorneys representing Paula Jones in her now-defunct sexual harassment suit proceeded to grill the nations chief executive for six hours in a legal process known as a deposition, or sworn testimony in advance of a hearing. The situation proved that even presidents are subject to the oft-unpleasant procedures of civil law.

But if Paula Jones were a broker, things would be different. If her branch manager were accused of the same alleged harassment as Clinton, he might escape a deposition altogether and other embarrassments of traditional litigation in favor of a less formal, deposition-free, industry-run arbitration forum.

Defendants in securities industry employment claims are insulated from responsibility unlike any others, says Cliff Palefsky, an employment law attorney in San Francisco who has argued that all employment claims should be allowed to proceed to court rather than arbitration. The president of the United States has to sit before a deposition in the Paula Jones case. A Smith Barney manager doesnt have to do the same thing in a discrimination case in securities arbitration.

Is this fair?

So far, the securities industry has deemed it so. In 1993, the SEC made registration with the NASD mandatory for all registered representatives. The NASD, in turn, clarified its rules in October 1993 to state explicitly that when brokers registered with the association by signing a U-4 form, they agreed to arbitrate all future disputes. The disputes include civil rights claims of age, race, or gender discrimination, and sexual harassment as well as all claims of a public policy nature such as defamation. The rule provided that these claims would be heard by a panel comprised of a majority of public arbitrators. The NYSE long-since had a rule for arbitrating employment claims.

This clarification of NASD policy seemed in harmony with the 1991 Supreme Court decision in Gilmer v. Interstate/Johnson Lane, which had upheld a mandatory arbitration agreement in compelling arbitration of an age discrimination claim.

But Gilmer shouldnt have signaled the high courts stamp of approval for all employment claims to be compelled to arbitration, according to David Hankey, a Baltimore attorney specializing in employment law who represents mainly employers outside the securities industry.

My legal view is that the Gilmer case [should be interpreted] narrowly, Hankey says. The Supreme Court in that case looked at the extensive use of arbitration in the securities industry--arbitration that has been used in securities cases since the end of World War II, and reasoned that if consumers legally are bound by arbitration provisions, employees should be likewise. The Supreme Court did not examine whether arbitration was an altogether suitable forum for employment claims, Hankey adds.

But civil rights legislation in 1991 did seem to address that issue. Congress stipulated that employment discrimination cases brought under the Civil Rights Act or Americans with Disabilities Act had the right to a jury trial because of the important public ramifications of the cases, and that alternative dispute resolution or arbitration only should be used where appropriate or allowed by law.

Inappropriate Forums? Following the congressional lead, employee advocates argue that compulsory securities industry arbitration forums are inappropriate for resolving major discrimination claims. They also contend that constitutional guarantees of due process and the right to a jury trial should apply to other employment claims as well, including defamation and violations of contract law. The availability of court-ordered depositions can be critical in proving thesetypes of claims, attorneys say. Securities industry arbitration rules, however, unlike those of some independent forums such as the American Arbitration Association, do not provide for the use of depositions or for extensive discovery of documents.

Brokerage customers are informed of these limitations in their new account forms: Pre-arbitration discovery is generally more limited than and different from court proceedings, reads one such warning. But brokers U-4 forms contain no such heads-up.

Attorneys say the inability to depose potential witnesses is especially harmful in employment claims, perhaps more than in customers routine securities disputes that represent the vast majority of cases heard in industry arbitration. Depositions allow attorneys to hear defendants answers before they are heard by the jury, judge or arbitration panel.

The purpose is to find out what documents might exist and to punch holes in [the defenses] testimony, Palefsky explains. The first rule of cross examination is you never ask a question in front of a judge or jury [or panel] that you dont know the answer to.

For example, if a branch manager in a prehearing deposition is asked, Why did you fire her? and responds, I fired her because she had the lowest production, and I had complaints that people didnt like her, there is still sufficient time for the attorney representing the broker to investigate the veracity of this claim and procure the necessary supporting or contradicting evidence, Palefsky says. Lacking this kind of access to witnesses before a hearing presents daunting challenges when the hearing does come around.

Its like shooting darts in the dark, says veteran employee attorney Ted Eppenstein in New York City. You dont know what [defense witnesses] are going to say. ... Arbitrators dont like to order depositions. They can, but it goes against the [simplified] philosophy of arbitration and makes it seem a lot more like court.

Another concern for employees and their counsel is reduced access to employer documents. Courts traditionally enforce broad discovery requests. But in arbitration, failing to comply with discovery requests and orders from the panel is common on both sides of a dispute, attorneys say. And panelists may not go along with requests for detailed discovery in an effort to keep the process streamlined.

Weve been told documents dont exist, Eppenstein says. Later at a hearing, a witness will say the information is in a computer and could easily have been printed out.

In general, punishment for rampant discovery abuse in securities industry arbitration is rare, Eppenstein says. While this sort of stonewalling occurs in court litigation as well, he believes parties respond more quickly in litigation because they are more afraid of a judge than an arbitrator.

All this might seem like a break for brokerage managers or others who find themselves on the wrong side of a harassment or wrongful termination suit in securities industry arbitration. But the defense team can be hurt by the vagaries of arbitration as well.

Often, evidence allowed in an arbitration might not have been admissible in court. Its all discretionary on the part of arbitrators, Hankey says. Its easy to imagine the arbitration of a sex harassment case where evidence not relevant to a claim is admitted, such as testimony about what goes on in other offices. The evidence may not be material to the case at hand, Hankey says, but because of its inflammatory nature, arbitrators have a hard time not being swayed by it.

These types of arguments and pressure from employee advocates such as the Equal Employment Opportunity Commission, forced the NASD in late 97 to propose dropping mandatory arbitration of discrimination claims--a rule change approved by the SEC in June. And in response to litigation, Merrill Lynch has amended its employment application to allow employees to choose among a variety of options in arbitrating or litigating their employment disputes (see Forced Arbitration Under Attack).

Die-Hard Support Staunch supporters of mandatory arbitration of discrimination claims still exist within the industry. The Securities Industry Association defends the status quo, arguing in a 1997 lobbying letter, an employee who brings a discrimination claim in arbitration before a NYSE [or NASD] panel is more than twice as likely to prevail before that forum than would that same employee before a jury. These results put to rest the mistaken belief that employees cannot get a fair hearing before an SRO panel.

Fair hearing or not, employee advocates say the real issue is having the choice of forums, rather than being forced into industry-run arbitration.

I think arbitration can be effective and appropriate for some discrimination cases where you want a private hearing and want it over quickly, Palefsky says. [But] ... the purpose of the civil rights law was to give people the right [to choose] to go to federal courts to have laws enforced. Giving people a choice of forums will open the market to competition and ensure fairness, he says.

Employers and defendants actually might find the court system to their liking. After all, Paula Jones case against the president was dismissed by a judge before ever getting to trial. Such is the fate of a large number of harassment claims filed in court.

Arbitrators, on the other hand, may have heard the Jones case, admitted the Lewinsky evidence, and given Jones an indecently large award.

Thats a thought-provoking possibility that could temper some of the die-hard industry opposition to offering alternative dispute forums for employees.

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