FINRA Mediation: A Close to 'No Lose' Situation

If you and/or your firm find yourselves named as respondents in a FINRA arbitration, you will most likely at be asked at some point to participate in FINRA’s voluntary, non-binding mediation program. Mediation, which FINRA initiated in 1995, is a process whereby an impartial mediator, jointly selected by the parties, meets with the parties in an effort to reach a settlement of the arbitration claim prior to an arbitration hearing. According to FINRA, 1,532 mediations were conducted from 2014 to 2016 and close to 80% resulted in a settlement. This article will describe the procedural requirements of conducting mediation before FINRA and then delve into several practical considerations involved in successful mediations. Most mediations involve customer cases but disputes between registered persons and their employers can also be mediated.

I. PROCEDURAL OVERVIEW

  • Mediation can be initiated with FINRA prior to the filing of an arbitration claim or during the pendency of a claim. If initiated while a claim is pending, the arbitration process and the mediation process run separately. The parties can choose to have FINRA suspend the arbitration while mediating the case. Alternatively, the parties can adjourn a scheduled hearing without incurring adjournment fees.
  • The parties select a mediator from a roster of mediators maintained by FINRA. Alternatively, the parties may select a mediator not on FINRA’s approved list, subject to FINRA’s approval. Lastly, parties can simply tell FINRA that they have agreed upon a mediator to conduct the mediation.
  • The parties must sign a mediation submission agreement in which they agree to follow FINRA’s Mediation Ground Rules (discussed below) and pay applicable fees.
  • Mediations can be conducted in person, by telephone or by videoconference, as chosen by the parties (most participants in FINRA mediations would agree that in person mediations are by far the most effective).
  • Mediation Ground Rules :
    • Participation is completely voluntary;
    • The mediator is to act as an impartial facilitator;
    • The mediation is private and confidential. Offers, admissions, statements made by the parties in the course of the mediation, etc., are not admissible in any future proceedings;
    • The mediator will not convey any confidential information from one party to another without the permission of the disclosing party.

II.PRACTICAL CONSIDERATIONS

There are several factors that play into a decision as whether it is advantageous for you to submit to mediation:

  • Is the case worth settling? Certainly, most cases are worth at least exploring settlement. Early settlement will reduce legal fees/costs for all parties. The prospect of having a mediator point out to your adversary the weak points in her case and the strengths in your case can help reduce the settlement costs. Conversely, having the mediator demonstrate to you and your attorney the strength of the client’s case and the weaknesses in your own case can assist you in obtaining an appropriate level of settlement authority.
  • At the very least, you will get to actually observe the other parties in the mediation. You and your attorney can see for yourselves whether the claimants are as elderly and infirm as the claim alleges. The mediator will also share with you his/her impression of the potential witnesses. While your attorney will not be able to directly question the parties as to the disputed portions of the claim, your attorney may ask the mediator to do so. The mediator will convey to you and your attorney your adversary’s position as to various issues raised in the arbitration claim and provide you with his/her assessment of the veracity (or not) of the parties. The mediator may ask to speak directly with you, and/or the branch manager (in the presence of your attorney), to ask questions about the disputed facts. The mediator may also speak to your attorney without you present so as to candidly discuss with her the strengths and weakness the mediator sees in your case.
  • In short, there is very little downside to participation in a mediation. At the very least, you will get to observe your adversary parties and have a third party (the mediator) highlight to you the strengths and weakness of your case, some of which you and/or your attorney may have previously not considered very significant.

The selection of the mediator

While participation in mediation is voluntary and non-binding, you and your attorney do not want to find yourselves in a situation involving a biased and/or inexperienced mediator. Such a situation could result in being locked into an untenable settlement posture unacceptable to you and your attorney. Fortunately, as stated previously, there are a number of experienced, full-time mediators available to conduct mediations. FINRA’s roster of mediators numbers more than 300 and anyone desirous of arranging the mediation of a claim should be able to find a mediator with whom all parties involved can work. Lubiner and Schmidt have participated in numerous mediations and are well aware of who the best FINRA mediators are.

When FINRA initiated its mediation program, the mediators would frequently describe their backgrounds and their personal mediation philosophy in an opening statement to the parties in an initial joint session. Mediators would often discuss the two types of mediation “styles” – “evaluative” (the mediator evaluates the claims of the individual parties and makes settlement recommendations based on the mediator’s judgment as to who has a stronger case) and “facilitative” (the mediator does not evaluate the strengths and weaknesses of the claims but rather leads the parties to a common ground that will result in a resolution). Most mediators currently do not describe themselves in this fashion but rather point to their success rate as the reason to utilize their services.

Preparation for mediation

Prior to the mediation session, the mediator will expect to receive written materials from all parties. This can include pleadings, a profit and loss analysis and possibly emails, phone records, etc. If such documents have been provided in discovery, and not discussed in the pleadings, a separate mediation statement may be in order.

While neither the attorneys and nor the mediator take testimony during mediation sessions, the mediator will frequently ask permission to question the client or broker and/or the branch manager in the presence of their attorney (adversaries are not present). Therefore, it is necessary to be prepared to truthfully, accurately and concisely answer any questions which might be posed by the mediator. You should attempt to “sell” yourself to the mediator. Rest assured, late in the afternoon when the mediator is pushing parties to raise or lower their settlement figures, his impression of your probable performance as a witness at arbitration, if settlement is not reached, may go a long way towards helping him convince the other side to reach a settlement (or conversely, convincing you and your lawyer that you may want to settle the case).

Lastly, it is advisable for your attorney to consult with your adversary prior to the mediation on the issue of damages. If the parties go into the mediation without an agreement as to the damage figure, much time and energy can be wasted at the outset agreeing on that number – and without such an agreement settlement is highly unlikely. That “number” is the net out of pocket loss, which, in most cases, is a simple mathematical calculation. Claimants can also calculate additional damages such as “lost opportunity” or “well managed account” losses to present at the mediation, together with an attorneys’ fees statement. Nevertheless, most mediators will insist to claimants’ counsel that if the case is to be settled it will settle at some percentage of the net out of pocket loss.

The conduct of the mediation

When FINRA’s mediation program began, the initial practice was for the parties and their counsel to meet in a large conference room. The mediator would begin the session by describing his background and objectivity and the mediation process, primarily directed at the claimants. He emphasized the uncertainty of arbitration outcomes and the ability to control the outcome of the case via mediation. The claimants’ attorney then gave an opening statement, accusing the broker of various and sundry offenses against the claimants in violation of numerous state, federal and industry regulations. He linked in the brokerage firm, pointing to the hapless and inept supervision efforts of the manager seated across the table. It was then the defense attorney’s turn. Statements of Claim were full of inconsistencies, inaccuracies and outright fallacies. The husband and wife clients sitting in the room were actually quite sophisticated investors, evidenced by their past investment experience, and well aware of the activity ongoing in their account. Lastly, any damages were caused by market forces which no human could control or foresee.

Then the mediator would say “Ok folks, let’s get to work and settle this case!”

It always seems counterintuitive that while the purpose of the mediation was to bring parties together to amicably settle the claim, the mediation began with attorneys for the parties casting aspersions on each other’s clients and their motivations for either filing a claim or being in the business of generating commissions. Presently, it is not unusual for the parties to meet together at the outset so the arbitrator can briefly describe the process, forego opening statements and meet separately with the mediator. Indeed, there is one mediator, popular with both claimants and respondents, who starts mediations at 9 am and tells respondent’s counsel to not show up until 11 am. However, in instances in which counsel feels an opening statement is warranted, perhaps a better practice is to not attack an adversary party to the degree that it might instill some antagonism in that party, resulting in bitter feelings and intransience during the course of the mediation.

As the mediator conducts “shuttle diplomacy” throughout the course of the day, you and your attorney should be prepared to provide him with factual support for the arguments supporting your case. It is wholly appropriate to show the mediator notes, correspondence, exception reports, etc., that you feel bolster your case. A good mediator will use such evidence to present your position to your adversary (that is, with your permission). If there is evidence that rebuts the claims of your adversary, your attorney should have that at the mediation to share and discuss with the mediator.

A. Settlement negotiations

Respondents should always have a person at the mediation with settlement authority – or at least have that settlement authority one phone call away. At some point in the mediation, the claimants and respondents will tell the mediator the least they will accept and the most they will pay, respectively. But is that really the final number?

The mediator may tell you to give him your final settlement figure and let him get the other side to accept that number (if the respondents’ final settlement offer is higher than the claimants’ final settlement demand, the mediator has an easy day; the question is, will the mediator tell anyone?). Presumably, the practice of most attorneys is to never give anyone your final number in case you have to sweeten the deal by some amount. We all engage in negotiations and know that when an adversary says $ xxx is the last dollar they will accept or pay, there probably is a little more out there. Presumably, in conveying that last dollar amount to the mediator, the mediator understands that there may be a little more in the kitty to close the deal. Therefore, be guided accordingly in talking final dollars with the mediator.

CONCLUSION

As a firm, Lubiner and Schmidt believes in the utility of securities mediation in FINRA arbitrations. We are aware of very few cases that did not result in a settlement. The cases that don’t settle were multimillion dollar cases with questionable liability. For most cases under $1 million in exposure, mediation can be a short cut to the successful resolution of disputes. The key for you is to have as your attorneys experienced securities litigators who can defend you in an arbitration but also represent you in mediations that can limit your exposure, reduce your legal costs and remove the cloud of litigation from hanging over you.