Once again, I found myself gritting my teeth in frustration after reading yet another PIABA report complaining about some perceived inequity in the FINRA arbitration process that cuts against customers. This week, PIABA released its study demonstrating that sometimes when claimants prevail in arbitrations against broker-dealers, the BD that lost is unable to pay the award, and, as a result, the claimant collects nothing.  Since PIABA lawyers generally take their engagements on a contingency-fee basis – i.e., they get paid by taking a hefty percentage of the amount actually collected – a failure to collect anything means the lawyer, as well as the customer, gets nothing.

So, you can see why this is such a big deal to PIABA!

But, putting aside the transparent self-interest that is really underlying the PIABA study, let’s consider the situation.

I was taught in law school 35 years ago, and, believe me, it was reinforced when I actually started practicing law, that there are two issues that a lawyer must always address before taking on a plaintiff as a client: (1) do the law and the facts suggest that you will win the case, and (2) if you win, what are the chances of actually collecting on the judgment?  The point is, the second question exists in every case, in every forum, because there is never a guarantee that a defendant who loses, even deservedly so, will be able to pay whatever he has been ordered to pay.

I am not saying that is good or bad, but it is a fact. In the United States, neither companies nor individuals are required to maintain the ability to pay off any judgment that might be rendered against them.  State law mandates that drivers carry only a minimum amount of liability insurance, but, if there is an accident, and someone suffers damages in excess of the minimum, those damages may never be recovered if the insurance is not enough.  That is a fact of life.

Sometimes, when defendants just don’t have the money, or the assets, to be able to satisfy a judgment, they declare bankruptcy. When that happens, in most instances, the judgment is either discharged, or reduced.  Again, that is not necessarily good or bad, it just is a fact.

Corporations exist specifically as a means of limiting the potential personal liability of its shareholders. If a corporation goes belly up, its judgment creditors may be out of luck, despite the fact its shareholders own ample personal assets to satisfy the judgments.  Just a fact.

Brokers and broker-dealers are no different than anyone else in America. If they lose a case, well, sometimes they can pay it, but sometimes they cannot.  For PIABA to suggest that broker-dealers should be required to maintain enough insurance so that every claimant – and his attorney, of course – will get paid in the event of a successful arbitration is just absurd.  And, it is equally absurd to argue that some fund should be created so successful claimants – and their attorneys, of course – can collect if a broker-dealer simply goes out of business.  Why not create such a fund for dry cleaners?  Or gas stations?  Or candy stores?  Why are broker-dealers so special?  The answer is that they are not, unless you are a PIABA lawyer, who makes a living suing broker-dealers.

Finally, it is worth pointing out that brokers and broker-dealers already have greater pressure to satisfy arbitration awards than other members of society, and this is a result of existing FINRA rules. The Code of Arbitration Procedure requires that awards be paid in 30 days.  If they are not, then, unless the respondent can demonstrate that (1) the award was paid, (2) the award was settled, (3) he filed for bankruptcy, or (4) he filed a timely motion to modify or vacate the award, his FINRA registrations will be summarily revoked.[1]  In addition, under IM-12000, it is a violation of FINRA Conduct Rule 2010 not to honor an arbitration award.  Ordinary businesses, i.e., dry cleaners, gas stations, candy stores, have no such gun to their head.  Only broker-dealers. Yet, it is pretty easy to anticipate that FINRA will react in its usual fashion, and pass another new rule to appease PIABA, at the expense of its already burdened member firms.