For the first five months of 2009, the number of stockbroker investment fraud claims filed in FINRA securities arbitrations which allege that money managers and financial firms defrauded investors or mishandled investor money, increased by 85% over the same period of time last year, from 1,711 to 3,163.
Through May 2009, FINRA arbitration panels ruled in favor of awarding investors 47% of the time, as opposed to 42% during the same period last year. The most common complaint has been breach of fiduciary duty, which accounted for 1,718 cases through May. A breach of fiduciary duty means that the representative did not act in the best interests of a client.
Because, typically, arbitration panels do not explain their awards, and generally only provide the amount of any Award, or "claim is denied", it is exceedingly difficult for a court to examine these awards, or for a party to understand the underlying rationality of both favorable and unfavorable Awards, sometimes rendered against the great weight of the evidence that the parties saw presented at the hearing. The basis of these FINRA awards remains a mystery.
Again, Professor Lipner's observations with respect to unexplained awards is insightful.
As Judge Posner observed, the review of arbitration awards is so narrow it ought to be called "no review at all". Short of authorizing "trial by ordeal or, more doubtfully by a panel of three monkeys, parties can stipulate to whatever procedures they want to govern the arbitration of their disputes".
In any event, arbitration awards are virtually, unappealable, at least successfully unappealable. There are only very limited circumstances under which a court will disturb an Arbitration award, Under federal law, Section 10 of Title 9 of the United States Code provides that:
a). In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration
- (1) Where the award was procured by corruption, fraud, or undue means.
- (2) Where there was evident partiality or corruption in the arbitrators, or either of them.
- (3)Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.
9 U.S.C. 10(a)
If every party aggrieved by what they believe to be an unfair arbitration award could petition a federal court to vacate or overturn an award, the entire process, and all the economies associated therewith, would evaporate. Accordingly, to prevent becoming the appeals court for all arbitration awards, even in outrageous circumstances, Courts will not disturb arbitration awards.
The perceived unfairness of arbitration, and particularly, the "unwillingness" of the judiciary to earnestly examine "egregious" arbitration awards, has motivated Congress to seek to make these arbitrations "voluntary". On July 12, 2008, Congress introduced Senate Bill 1782, entitled the "Arbitration Fairness Act", based upon a Congressional finding that:
Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators' decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.
Senate Bill 1872 at Section 2 (July 12, 2008, 110th Congress, First Session).