Who Wins FINRA Cases and Why? An Empirical Analysis (Part 1)

Vol. 2, No. 12

Howard Prossnitz is a PIABA member admitted in California, Florida and Illinois with his offices located in Chicago, Illinois. The author can be reached at howard@prossnitzlaw.com.

 

  • In what ways can we test the validity of hypotheses in FINRA arbitrations?

 

Hypotheses and Results

In this section of the article, we test the validity of various hypotheses. Some of these hypotheses came from earlier studies, and some represent conventional wisdom about which factors count in the FINRA arbitration process.

 

Hypothesis

The smaller an amount that the Claimant asks for, the larger the percentage he is likely to recover.

 

There are multiple reasons for this hypothesis, not the least of which is that this was the conclusion of prior studies.1 Another reason is that cases seeking larger amounts are more likely to have inflated damage requests. Claimants can ask for large emotional or punitive damages in addition to out-of-pocket losses sustained. Some Claimants’ lawyers routinely ask for punitive damages in an amount equal to or greater than the compensatory damages. Another reason to expect a higher percentage recovery in smaller cases is that Claimants who ask for less money may have a simpler case to prove. Many of the cases seeking less than $25,000 ask only for compensatory damages and no soft damages. Further, an arbitration panel may be more hesitant to give out 100% of the request for a large award than to give 100% of the request for a small award.

 

Finding

The smaller an amount that the Claimant asks for, the larger the percentage of recovery that can be expected.

 

In Figure 1, there is a downward sloping trend on the graph that represents the percentage of relief awarded to the Claimant, meaning that the more that was requested, the less the Claimant recovered, as a percentage of the request. For example, Claimants who were asking for more than $250,000 received a substantially lower percent of relief than those who asked for under $25,000. This downward trend applies to every successive monetary range of relief requested. There are a few factors that could be at play here. As stated above, we believe that cases in the upper range of damages sought may be bolstered with emotional or punitive damages that are harder to recover than out-of-pocket losses. The greatest difference in percentage of relief received is between Claimants who were asking for less than $25,000 and received on average 74.6% of their request, whereas those asking for more than $500,000 received only 36.6% of their requests.

 

 

 

2011 Cases, Percent of Recovery Versus Amount Sought

 

This finding is also confirmed by the following table which compares the number of persons receiving 100% of the amount sought in simplified versus non-simplified cases.

 

 

 

 

Hypothesis

Claimants have the best chance of winning if the panelists are all-public.

 

The make-up of the panel is the main concern that investors have about arbitration before a case is filed. The most recent study on the matter, completed in 2008, showed that 33.6% of Claimants were concerned that the arbitrators would be biased and 25.0% of Claimants were concerned about the composition of the panel.2 At the end of 2008, FINRA started to test out a new program where investors could choose to have a panel that was seated with only public arbitrators.3 Prior to this point, it was necessary to have one industry member on the panel. The new all-public panel was supposed to help make FINRA more investor-friendly.

FINRA published data on the selection of arbitrators in the pilot program, which ran from October 6, 2008 through January 31, 2011.4 One of the not too surprising conclusions to come out of the pilot program was that brokerage firms do not want to have all-public panels, while Claimants want them. In 570 pilot program cases, not a single Respondent firm elected to have an all-public panel. In 96% of these cases, firms ranked four or more industry members to be on the panel. Claimants, however, chose not to rank any industry member 51% of the time.

 

Finding

Claimants have a better chance of winning if the panelists are all-public.

 

The data collected for this question was one of the more interesting points for the study because an all-public panel was not an option at the time of earlier studies. It turns out the concerns of customers detailed in When Perception Changes Reality,5 are well justified. We were able to collect data for 379 mixed panel cases as well as 29 all-public panel cases. The win rate for Claimants with all-public panels went up to 63.0% compared to 45.6% for 2011 cases.

After the pilot program, FINRA looked at this same issue and it also concluded that customers won 62% of the time with all public panels. FINRA, however, hedged its bets by stating:

Preliminary award outcomes show that all-public panels in Pilot Program awarded damages to investors slightly more often compared to awards issued by majority public panels in Pilot Program cases. Pilot Program cases – irrespective of panel composition – awarded damages to investors more often compared to awards issued by majority public panels in non-Pilot Program cases. There is not sufficient award data to draw meaningful conclusions. There have been 55 Pilot Program awards issued by allpublic panels. Investors were awarded damages in 26 of 42 contested cases (62 percent).6

A 62% success rate compared to a 44% rate is not “slightly more.” It is a 40% improvement for public investors. A 62% success rate puts FINRA awards much more in line with the overall results in state court bench and jury trials in non-securities cases. According to a U.S. Department of Justice study, plaintiffs won in almost 60% of trials overall.7 While the number of all public panel awards so far is too small to be conclusive, so far the all public option has made a big difference. This jump in the win rate suggests that customers should always choose the public option. Hopefully, the all public option will also change investors’ perception of the fairness of the process.

 

 

 

Percentage of 2011 Cases Won Based on Panel Type

 

Hypothesis

Claimants who represent themselves are less likely to win.

 

We assume that customers who represent themselves will have less of an understanding of FINRA's procedural rules, they are less likely to know how to make an effective presentation at hearing, and that they will be at a disadvantage compared with defense lawyers who are experienced in securities cases. Further, it can be difficult for Claimants to find lawyers who are willing to take on smaller cases on a contingent fee basis. Many of these Claimants will be forced into pro se representation. Pro se parties may also figure that they have little to lose in filing a riskier case. Weaker cases will not be screened out at the filing stage by attorneys who are knowledgeable in the process and do not believe the case is worth filing.

 

Finding

As demonstrated by Figure 3 below, pro se Claimants are a lot less likely to get an award than those represented by counsel.

 

Hypothesis

Claimants who are represented by a PIABA member are more likely to win.

 

PIABA is an organization of lawyers who specialize in securities arbitration proceedings. These lawyers should have a better understanding of the system and securities law than other lawyers. PIABA members should also do a better job in screening cases.

 

Finding

Claimants who are represented by a PIABA member are more likely to win.

In 2011, the win rate for PIABA members was 54.2% versus 40.9% for non-PIABA attorneys. This means that a Claimant who was represented by a PIABA member was 32.5% more likely to receive money from the hearing. Also, the win rate for Claimants who represented themselves was 26.9% which means that PIABA members have a win rate that is double that of pro se Claimants. However, Figure 3 shows that the estimated percent recovery rate for PIABA members once an award is achieved is not that much higher than non-PIABA members or pro se Claimants. This would suggest that PIABA members do a good job of screening cases, but do not have a magic touch over other lawyers when it comes to average percentage recovery.

 

 

 

Anticipated Recovery Rate Based on Form of Representation

 

The fact that pro se Claimants have a high estimated recovery rate that almost matches the recovery rate of lawyers can be explained by the fact that the vast majority of pro se cases involve less $25,000 and are thus expected to yield a 74.6% recovery. Another reason PIABA lawyers saw only a slight edge in their estimated recovery rate may be because their median relief requested was over $100,000, which was more than the 2011 median request.

 

Hypothesis

Claimants who are represented by a lawyer in a large firm are more likely to win a case and are more likely to recover a higher percentage of what they seek.

 

This hypothesis tests the assumption that larger firms have will allow Claimants to win more often since they have greater resources to devote to a case, can afford more expensive experts and can staff a case with more lawyers and paralegals. Since many Claimants’ firms are either solo practitioners or firms with five or less lawyers, a “large firm” is defined to be ten or more lawyers. As indicated by the following pie chart, 78% of Claimants were represented by smaller firms.

 

 

 

Cases Distributed by Size of Claimant’s Law Firm

 

Finding

It makes very little difference whether a Claimant is represented by a firm with ten or more lawyers versus ten or less lawyers.

 

Figure 5 shows that the size of the Claimants’ law firm is inconsequential to win rates. Even with their extra resources, law firms with ten or more lawyers do not end up with improved winning percentages or recovery rates. Our sample pool ended up with 108 cases where Claimants were represented by large firms, or 21.7% of our total sample.8 The large firms won 49.0% of cases, while small firms won 47.8% of cases. This is an insignificant advantage in the win rate for the larger firms. We also hypothesized that large firms would be able to recover a higher percentage of money than the lawyers working at small firms. This turned out to be a minor difference as well. The median percentage of relief recovered by small law firms was 35.8% versus 38.5% for large firms. Multiplying the win rate and the percentage of relief recovered to get the estimated recovery rate made the large law firms look slightly more attractive than either of the variables previously discussed, but considering that a case handled by a large firm often costs more (in out of pocket expenses if nothing else), choosing a larger firm is not a good decision for most investors.

 

 

 

Win Rate According to Size of Claimant’s Law Firm

 

Note

This article is adapted from a portion of an article that was previously published by the Public Investors Arbitration Bar Association. "Who Wins FINRA Cases and Why? An Empirical Analysis," by Howard B. Prossnitz, PIABA Bar Journal, Vol. 19, No. 2 (2012). Reprinted by permission.

 

Endnotes

1. See, e.g., Edward S. O’ Neal & Daniel R. Solin, Mandatory Arbitration of Securities Disputes—A Statistical Analysis of How Claimants Fare, SECS. LITIG. & CONSULTING GROUP 17 (June 2007), at 11.

2. Jill I. Gross & Barbara Black, When Perception Changes Reality: An Empirical Study of Investors’ Views of the Fairness of Securities Arbitration, 2 J. DISP. RESOL. 349, 370, 392 (2008).

3. News Release, Financial Industry Regulatory Authority, FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels, FIN. INDUSTRY REG.AUTHORITY (July 24, 2008), http://www.finra.org/Newsroom/NewsReleases/2008/P038958.

4. Notice to Parties, Financial Industry Regulatory Authority, Public Arbitrator Pilot Program Summary Sheet With Interim Results, FIN. INDUSTRY REG.AUTHORITY, ../../../../Downloads/http:/www.finra.org/ArbitrationAndMediation/Arbitration/Rules/RuleGuidance/NoticestoParties/P124054http://www.finra.org/ArbitrationAndMediation/Arbitration/Rules/RuleGuidance/NoticestoParties/P124054.

5. Supra note 2.

6. Notice to Parties, supra note 4 (emphasis added).

7. Lynn Langton & Thomas H. Cohen, Ph.D., Civil Bench and Jury Trials in State Courts, 2005 (Bureau of Justice Statistics Special Report), U.S. DEPT. OF JUST. 1 (Oct. 2008), http://bjs.ojp.usdoj.gov/content/pub/pdf/cbjtsc05.pdf.

8. Pro se cases are not included in this sample.

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