The following is a very poignant article by Suzanne Barlyn of Reuters. The article shows how Wall Street views mandatory arbitration when the decisions don’t go their way. It should also be pointed out that the Morgan Keegan award discussed in the article is only one of many the brokerage firm has requested be vacated. Clearly, they like mandatory arbitration as long as it goes their way. The article in it’s entirely may be found here and the full text is below.
Wall Street has long promoted securities arbitration as a fair process for resolving disputes with investors. But when brokerages lose big, they sometimes take a different view.
That contradiction was apparent to a federal appeals court judge in New Orleans last Thursday, in a case that has been winding through the courts since a group of investors was awarded $9.2 million in an arbitration ruling against Morgan Keegan & Co in 2010.
While arbitration is meant to be binding, brokerages have become more aggressive in recent years about using the courts to attempt reversing the results of arbitration.
In 2010, Morgan Keegan went to federal court to have the $9.2 million award to investors – the largest involving risky bond funds that lost nearly all their value – thrown out.
The brokerage won, in a controversial ruling that questioned what Morgan Keegan agreed to have arbitrated and in which testimony by a prominent expert witness for investors was described as “fraudulent.”
The investors appealed, leading to last week’s date at the United States Court of Appeals for the Fifth Circuit. There, Judge Catharina Haynes noted that Morgan Keegan had agreed to the binding arbitration process at the onset.
“Now you’re trying to come back and second guess” the outcome, Haynes said.
She also questioned the firm’s ability to use the courts to undo arbitration decisions.
Indeed, that also puzzles many investors, who have no choice but to submit cases to arbitrators because of agreements signed when they opened brokerage accounts, lawyers say.
Morgan Keegan, now a unit of Raymond James Financial Inc, faced more than 1,000 customer arbitration! cases tied to losses in the firm’s failed bond funds in 2007 and 2008. The brokerage paid a $200 million civil regulatory fine, but is fighting to overturn some awards to investors.
A decision by Haynes and the two other judges on the court is likely months away.
But Haynes’s comments may reve! al the reticence of many judges to change t he outcome of arbitration, a proceeding both parties agree in advance must end with the arbitrator’s decision.
Paul Dobrowski, a lawyer for the investors who argued the appeal in New Orleans, told the judges that U.S. District Court Judge Lynn Hughes in Houston was wrong to throw out the award.
Hughes was mistaken in concluding that the arbitration panel “acted outside its scope of power” by hearing claims – mainly allegations of fund mismanagement – that industry rules required be heard in court, Dobrowski said. Morgan Keegan, however, agreed to arbitration in its customer account agreement and another document, Dobrowski said.
Morgan Keegan’s lawyer, Terry Weiss of Greenberg Traurig LLP in Atlanta, a rgued a distinction: FINRA rules did not allow arbitrators to hear some claims in the case and the brokerage agreed to arbitrate only claims allowed by the rules.
Haynes appeared skeptical. The “big boys” at Morgan Keegan “weren’t under duress” when they agreed to arbitrate, she said.
“The problem you have here is there’s been a policy decision here that arbitration is a great thing,” she said, adding that it was not up to her to debate the policy whil! e deciding a case. Dobrowski declined to comment to Reuters about the proceeding. A Morgan Keegan spokesman did not respond to a request for comment.
The federal New Orleans appeals court decision also will have a significant impact on an expert witness in the case. In throwing out the award, Hughes, the lower court judge, also branded testimony by former U.S. Securities and Exchange Commission economist, http://www.slcg.com/resumes.php?c=1b&i;=10, as “fraudulent” without a hearing or reading extensive arbitration transcripts, argued Dobrowski, lawyer for investors in the case.
For years, McCann’s testimony for investors has helped them recoup millions of dollars.
McCann, who attended last week’s hearing, has said his reputation and business have suffered. Indeed, the alleged “fraud” finding has been used to question his credibility in other cases. Haynes, the most vocal of the three judges, honed in on a discrepancy in figures McCann had provided in two separate arbitration cases against the brokerage. McCann has said any revision in figures was minor and came after he discovered Morgan Keegan priced more securities on its own than he had initially thought, instead of through an independent company. The change to his calculations would have bolstered arguments about the brokerage’s liability to investors who relied on Morgan Keegan’s word about the risks and value of the securities in question.
Weiss, responding to Haynes’s questioning, said it did not matter since, regardless, the award was based on the “fraudulent testimony.” Morgan Keegan learned about the math discrepancy via another case – which Weiss argued was proof that McCann withheld the information to protect his credibility as an expert witness.
McCann’s lawyer, Houston-based John Clay – who did not argue in the case between Morgan Keegan and the investors – believes the judges’ comments show that “what the district court called ‘fraud’ was, at most, a mathematical error that effective cross-examination routinely uncovers,” he told Reuters. Clay is optimistic the lower court’s decision to vacate the arbitration award will be overturned and, hopefully, that McCann’s reputation will be restored.