Who Wins FINRA Cases and Why? An Empirical Analysis (Part 3)

Vol. 3, No. 1

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 more hypotheses. Some of these hypotheses came from earlier studies, and some represent conventional wisdom about which factors count in the FINRA arbitration process.



Respondents are more likely to win and Claimants will recover less money if the Respondent is represented by a large firm.

For the same reasons that we tested whether Claimants represented by large law firms will win more often, we test whether Claimants facing large law firms will win less often. The pie chart showing the number of Respondents that use large law firms is the reverse of the chart showing how many Claimants use large law firms. Close to 90% of Respondents are represented by large law firms or in-house lawyers.




Figure 1. Cases Distributed by Who Represents Respondent



In terms of whether Claimants achieve a win, it does not matter much whether a Respondent is represented by a small law firm, large firm, or in-house counsel. In terms of containing damages, however, large firms do better.

In-house lawyers defended 30.7 % of the cases we examined. Not surprisingly, in-house lawyers were used to defend smaller cases, small law firms were used for mid-sized cases and large law firms defended large cases. In-house lawyers faced median relief requests of $98,881.76, small law firms defended cases with median relief requests of $371,103.85, and large law firms defended cases with median relief requests of $501,844.37.




Figure 2. Claimant Success Rates by Who Represents Respondents



The larger the brokerage firm, the more likely it is that the Claimant will lose.

This hypothesis suggests that smaller brokerage firms will lose more often than the larger brokerage firms. There are a few assumptions behind this hypothesis. Prior studies have shown that larger respondents do better.1 Larger respondents have more resources and can pay for more expensive lawyers. Larger brokerage firms should know the arbitration system better than smaller brokers because of how many cases they have to defend each year and should settle the cases they are more likely to lose. The flip side of this assumption is that effective Claimants’ lawyers should take their good cases to hearing and settle the weaker cases. Large brokerage firms have more money to spend on compliance and this should translate into better supervision of brokers. For instance, selling away cases are more likely to occur at smaller firms with widely disbursed smaller branch offices where it is harder to supervise brokers in remote locations.2 Another possibility is that FINRA panels are less likely to hit large firms with big awards for fear of not being selected for future panels.



The larger the brokerage firm, the more likely it is that the Claimant will lose.

It is true that larger brokerage firms will win more often than the smaller brokerage firms. Figure 3 shows that Claimants fare better against the small Respondents by a huge margin. Claimants won 51.9% more often when disputing cases against the smallest firms compared to when they faced firms in the top 12 category.

Not only was the win rate different depending on the size of the brokerage firm, but there was a difference in the percentage of relief recovered depending on who the respondent was. And, following our hypothesis that larger brokerage firms are more successful in arbitration, they were also more successful in limiting recovery rates. The top 12 firms on average paid 34.5% of the relief requested to winners,3 while the smallest firms paid only 40.6% of the request. Using the estimated recovery rate equation that we set forth earlier, the difference between the top 12 firms and the smallest firms becomes even greater. The estimated recovery rate against large firms was only 12.4% versus 22.1% against smaller brokerage firms. This 12.4% statistic is the most discouraging one for Claimants.




Figure 3. Success Rates According to Size of Respondent FINRA Member



Claimants will win simplified cases more often and they will receive a higher percentage of their relief back.

Simplified cases are decided by a sole public arbitrator and the relief requested can be only up to $25,000.4 Since the arbitrator is public and because the amount requested is low, these two factors should translate into a higher recovery rate. However, a factor militating in the other direction is that many Claimants in simplified cases represent themselves pro se and pro se Claimants do not do as well.



Claimants will win simplified cases less often than the overall average and they will receive a higher percentage of their relief back.

Figure 4 shows that the win rate for simplified cases was lower than the overall rate for cases in 2011. Only 33 awards were given out in 83 simplified disputes equating to a 39.8% win rate for simplified cases which is lower than the overall 45.6% win rate for 2011. Without simplified cases in the 2011 case pool, the win rate would have been slightly higher, i.e., 46.7% for the year. But, simplified cases serve an important purpose to investors. Investors recovered a high percentage of their claimed relief and simplified cases have very low costs and fees compared to a full arbitration hearing process.

The low win rate is caused by self-represented Claimants. Pro se customers in simplified proceedings represented 42 disputes and only won 13 awards. This means that without the pro se representation factored into simplified cases, customers won a much more respectable 48.8% of the time.




Figure 4. Percentage of Amount Sought Recovered in Simplified Cases Versus All of 2011



Despite difference in laws between states, the results over the four regions should not vary.



Win rates were somewhat higher in the South.

This disparity can be explained by the number of Morgan Keegan cases in the South. Win rates were higher in Morgan Keegan cases than the overall sample.




Figure 5. Win Rates by Region


Morgan Keegan cases were analyzed separately and more in depth information was recovered.



Retired investors and investors who lose more than 50% of their net worth do better than working investors and those who lose less than 50% of their net worth.



In Morgan Keegan cases, retired investors had a higher win rate. This was also true for people who lost more than 50% of their net worth.




Figure 6. Morgan Keegan Claimants—Win Rates 2008–2012


The win rate for a retired Morgan Keegan Claimant was higher than the win rate for a working Claimant, but the difference was not as large as we expected. When Claimants were in privity with Morgan Keegan, they were more likely to be able to recover their money than when a separate brokerage sold the RMK funds to them. When Claimants had a large percentage of their money at stake, it swayed the arbitrators into awarding them money more often than investors who had lots of money besides that which was lost.




Figure 7. Win Rates and Recovery Rates

Morgan Keegan Cases Versus Non-Morgan Keegan Cases


Summary and Conclusions

The key points we found are that:

  • It makes a difference to have a PIABA member represent you;
  • All public panels make a significant difference so far;
  • Larger Respondents do better;
  • More sophisticated investors have a harder time on average;
  • Effective recovery rates remain low;
  • Percentage recovery rates remain higher in smaller cases;
  • Size of law firm does not matter much; and,
  • Retired Claimants do better.

The need for more hard data remains critical. The best way to refine the results of this study would be access to information such as trading losses, net out of pocket losses, age of Claimants, education level, retirement status, percentage of portfolio at stake, primary theories advanced in each case, and size of Respondent. At this point, the general statistics published by FINRA do not provide sufficient information for additional analyses.



1. 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), http://www.slcg.com/pdf/news/Mandatory%20Arbitration%20Study.pdf (last visited Sept. 2, 2012), at 10.

2. See NASD Notice to Members 98-38, NASD Reminds Members Of Supervisory And Inspection Obligations (May 1998), available at http://www.finra.org/web/ groups/industry/@ip/@reg/@notice/documents/notices/p004792.pdf; see also In re Royal Alliance Assoc., Inc., Exchange Act Rel. No. 38,174 (Jan. 15, 1997).

3. The top 12 firms were not statistically different from the top 50 firms in terms of the percentage of relief awarded to the Claimants.

4. Effective July 23, 2012 the limit for Simplified Arbitrations was increased to $50,000. See FINRA Regulatory Notice 12-30, Simplified Arbitration, (June 2012), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p127156.pdf. Data in this article, however, is based on cases decided prior to the r


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