As several VC readers have pointed out in the comments section in response to previous posts, NASD arbitration awards are notoriously arbitrary. How arbitrary? I’ve already mentioned that the arbitrators’ ruling managed to completely ignore a small claim that the other side essentially conceded, with no explanation for this omission. Consider also the following: It was undisputed (indeed, admitted by the respondent broker), and backed by documentary evidence, that my father called his H&R Block Financial Advisors broker and requested that he purchase for him a 7.625% Household Finance Corporation bond at par that he saw on the internet. His broker, after checking with the bond people at Block, informed him that “no such bond existed”, and instead sold him a bond from the same company at par for 7.5%. A letter from Block in our possession stated that my father was sold the highest-yielding bond “in inventory.” The evidence was ambiguous at the hearing as to whether the higher-yielding bond was available that day when my father called, or only became available later that same day. But note that my father was not told that the bond “is not available right now” but that it “didn’t exist” (and that my father must have confused the APR with the yield).
At the hearing, Block denied that the the bond was in fact in inventory, despite the prior admission to the contrary. It’s possible, given the letter noted, that Block in fact dumped a bond in inventory. It’s also possible that that Block sold my father a 7.5 percent bond at par that they purchased below par just to sell it to him, knowing (or maybe not knowing) that higher-yielding bond at par was about to hit the market. But even if there is a much more innocent explanation for the confusion, Block was certainly negligent, and at the very least Block engaged in an “innocent misprepresentation,” which, as I noted in a brief (which the arbitrators, so far as I can tell, completely ignored, as they cited no precedents in their ruling), is a valid cause of action under governing Michigan law and under the investors’ agreement my father had with Block.
All the arbitrators say in their ruling is that my father could not succeed in this claim because they determined that the 7.625% bond was “unavailable” when he called (I’m pretty sure this isn’t correct, but, as I said, the evidence was ambiguous). Given that the actual claim was that he was told not that the bond was not available yet, but that the bond actually didn’t exist, and given the fact that he certainly would have waited a few hours to purchase a bond from the same company, also at par, at a higher yield if he had not been told this, I don’t at all see how this settles the issue. Again, consider the innocent misrepresentation issue. The elements of innocent misrepresentation are: a transaction between the parties (yes); representations that are false in fact and actually deceive the other (yes); detrimental reliance (yes); and benefit obtained by misrepresenter from the deception (yes, a significant commission and perhaps more). Pretty simple.
I’m sure jury verdicts are at least as arbitrary, perhaps often more so, than are are arbitration awards. Indeed, the arbitrariness of jury awards is the major reason why I’m not a big fan of civil juries, especially when it comes to damages. But the jury system is able to survive, in part, because the juries do not provide explanations for their rulings, giving them a lot of immunity from criticism. Now that NASD arbitrators are providing rationales for their awards, but (at least in my case) making up facts, relying on documents not admitted into evidence, not ruling on claims raised in the Statement of Claim and at the hearing, ignoring briefing, and relying on nonsequitors as discussed above, I wonder how long the system will last. VC reader comments suggest that defendants often find arbitrator awards equally arbitrary–it all depends on the panel you get (more on that, perhaps, later).
BTW, if you are now, or are considering becoming, an H&R Block Financial Advisors customer, consider whether you want to deal with a company that gives you misinformation about a bond, then stubbornly insists that it’s your fault for relying on their information!
UPDATE: In case you were wondering, NASD proceedings are not confidential: “Absent an agreement or order to the contrary, parties are generally free to disclose details of their own proceeding as they see fit.”
Further UPDATE: Just looking at an article I wrote a long time ago expressing some of my concerns with the jury system. Remarkable how many of them apply to NASD arbitration.
First, the use of juries to decide civil cases undermines one of the most important values of civil law, certainty. A jury trial, as any trial lawyer will tell you, is a crapshoot; one can never predict what combination of principle and prejudice will motivate the jury. [This is what I hear from attorneys about NASD arbitration panels.]
Juries, moreover, do not and cannot officially explain the reasons for their decisions, so their verdicts have no precedential value. Nor are juries bound by judicial opinions rejecting prior claims based on the same evidence. [same with arbitration panels]
Judges, however, face certain constraints that juries do not. First, as noted previously, judges, unlike juries, must justify their rulings in writing. A judge motivated by political or other illegitimate considerations will nonetheless need to issue an opinion justifying his result on legal and logical grounds. [NASD arbitrators now write brief opinions, but they don’t seem to need to justify rulings on anything in particular.]
If the judge cannot do so, a higher court will overrule him. Juries, however, can base their rulings purely on whims, and their verdicts are upheld if the victor can point to any evidence supporting its position. [NASD arbitrators are not even subject to that constraint.]
Judges are also constrained by the fact that their written opinions are publicly available. Even the least-principled judges are usually constrained by concern about their professional reputations. Lawyers generally take a big salary cut when they become judges, but gain the nonpecuniary benefit of the respect and prestige that attends judicial office. It is therefore a rare judge indeed who desires to be the subject of negative commentary. [When is the last time you saw public criticism of an NASD arbitrator, who, in any event, have other careers?]
There is, of course, a big difference between juries and arbitration panels, which is that the parties to an arbitration contractually agreed to it. But I haven’t argued that my father should not have been required to go to arbitration, and I don’t see any inconsistency between thinking arbitration can be a good thing, thinking arbitration contracts should be enforced, and suggesting that the current system of arbitration could be vastly improved. Indeed, when even many defense attorneys state that they would rather litigate in federal court then go through arbitration, you know something is amiss.
If I were NASD, I would either make arbitration a wholly equitable forum, thus explicitly warning parties in advance that arbitrators are free to do whatever their gut tells them is right, or provide a forum that more closely follows the law.
Comments are closed.