in September and October regarding Rogue Customers generated quite a
bit of interest, and a wide spread question â€“ what can be done about
customers who abuse the systems that are expressly designed for their
protection? There is no simple answer to the question. Just as a broker,
or any potential defendant, has a right to be protected from frivolous
or abusive claims by customers, a customer has the right to commence
an arbitration, or to file a complaint with a regulator. It is all part
of living in a free and democratic society.
That is not to say that nothing can
be done however, and there are some obvious solutions, such as prohibiting
customers from providing exhibits to the arbitrators without giving
the respondents the opportunity to object. Also, if the arbitration
forums adopted a rule that hearing situs decisions will be made on
a on a case by case basis, based on the same factors used by judges,
the incentive to file a case simply because the broker and firm will
have to travel to the hearing will be removed. There need to be provisions
to allow supervisors to be dismissed from arbitrations early in the
process, and discovery abuses need to be addressed.
It is equally obvious that brokers
must protect themselves, before a claim arises. My first column for
ResearchMagazine was titled For The Record,
and appeared in the June, 1996 issue. I described record keeping
procedures that every broker should use which might help if a claim
is filed against him by a customer. Those suggestions work particularly
well against the rogue customer, and can often establish the fabricated
nature of his claims before his formalizes them into an arbitration
or a regulatory complaint.
However, the real solution will come
when the industry learns to fight back. Pressure on the NASD and the
NYSE from the brokerage community, and the securities defense bar,
to change the unwritten and prejudicial practices in arbitrations
will cause some changes, but the rogue customer will go away when
his incentive â€“ money â€“ is removed.
How to remove the money incentive?
Sanctions and counterclaims. I am sure that the claimant's bar will
scream at the suggestion, just as they did when the federal courts
instituted its frivolous pleading sanction rule over 10 years ago,
but the only way to stop a rogue customer is to make him pay for his
actions. While sanctions for frivolous pleadings are a long way from
being a reality in securities arbitrations, the filing of a counterclaim
against a rogue customer who commences a frivolous arbitration, or
who files a false claim, is a remedy that is available now.
Unfortunately, brokers and firms are
reluctant to use that remedy. The â€œcommon wisdomâ€ is that brokers
and firms cannot sue their customers who sue them, since it will â€œlook
badâ€ at the arbitration, it will generate â€œbad publicityâ€, and the
counter-claim has little or no chance for success. After all, arbitrators
are not going to make a customer who has lost money in the market
pay even more money. These â€œtruthsâ€ are not self-evident.
While the filing of a counterclaim
against a customer is an important decision in the defense of a case,
the counterclaim should be employed where the facts scream for justice,
and where the rogue customer's claim can be proven to be false. The
legal theories underlying such counterclaims are not novel or new.
Most acts by rogue customers give rise to a number of legal claims
by his respondents â€“ including slander,libel, interference with business
relations, abuse of process, malicious prosecution, and even fraud.
While the elements of each of these causes of action vary from state
to state, each cause of action is available in every state.
It is imperative that the respondents,
the broker and his firm, be able to prove, by clear evidence, that
the customer's claim is false. Proving a customerâ€™s claim to be false
is not the same as successfully defending the claim. The respondent
must affirmatively prove that the customer is lying and that he intentionally
made up the claim in order to take advantage of the system. If the
respondent reasonably believes that he can meet this burden, nothing
should stand in the way of asserting the counterclaim against the
Arbitrators will award damages against
a customer if the broker can prove that the claim is a fabrication,
and have done so in the past. Over the years, there have been a number
of awards of significance against customers. Readers of this column
are aware of the case that I handled against a rogue customer, where
the broker was awarded $180,000 in damages against his customer
who started a fabricated arbitration for $1,200,000. Recently, an
arbitration panel in Chicago awarded a broker $100,000 in damages
for defamation for the customerâ€™s outrageous conduct before and during
the arbitration proceedings. Smaller sums have been awarded to brokers
and firms as compensatory damages, or for a return of their attorneyâ€™s
fees, in cases filed by rogue customers.
While these cases are not the norm,
they demonstrate that arbitrators will grant damages in favor of brokers
who are the victims of rogue customers, contrary to the â€œcommon wisdomâ€.
The â€œbad publicityâ€ argument is more difficult to prove wrong by evidence
of awards, but an examination of the argument demonstrates that it
too is misguided. All firms and brokers are concerned about the effect
of publicity on their future business and customer relations. Many
brokers and firms fear that filing a counterclaim for defamation or
other tortious conduct against the customer will make them look like
bullies, or someone who is attempting to take advantage of the system.
While there is some merit to the argument,
there is another side to this discussion. When a broker or firm successfully
defends the claim of a rogue customer, the public perception is often
that the firm â€œgot awayâ€ with something, that the process is biased
against customers, that the arbitrators weren't â€œfairâ€ or that somehow
the broker is still guilty, he just â€œcaught a breakâ€. The win
did not really remove the public perception that the broker or firm
is a bad broker.
However, the same set of facts, coupled
with an award in favor of the broker and against the customer, (regardless
of the dollar amount) puts an entirely different spin on the decision.
Even the most strident opponent of the arbitration process would have
to admit that a broker who not only successfully defended a customer
claim, but who was awarded money against the customer for a false
and malicious complaint, truly was innocent of the charges, and a
victim of a rogue customer. After all, given the pressure on the arbitration
process to be fair and open to public customers, a broker who is able
to walk out of an arbitration with an award in his favor, was undoubtedly
a victim the in process, and his vindication is that much more powerful.
The â€œbad publicityâ€ of having the claim filed against him is totally
negated by the impact of the award in his favor.
In the case of the San Francisco real
estate broker mentioned in my September column, the small $2,500 award
against the customer, in favor of the firm, spoke volumes about the
innocence of the broker and the firm, and had a much greater impact
on the perception of the award, than a simple denial of the customers
claim would have had.
Filing a counterclaim against a rogue
customer is not for the feint of heart. To successfully prosecute
such a claim, the broker and his counsel must prove that the customers
claim lacks any merit, and that the customer is truly a rogue customer.
A â€œwinâ€ is not enough, it must be an all out victory. Accomplishing
that task, in our current arbitration environment,requires a dedication
of resources by the broker, and an experience securities attorney
who is willing to go the distance. The goal in defending the customers
case is no longer simply to prevent him from proving his claim, but
is now to prove him a liar, and to expose him for the rogue that he
is. Such efforts require extensive factual research into the allegations
of the complaint and the presentation of evidence that examines every
nook and cranny of the customers claim, ultimately exposing the claim
for what it is â€“ the fabrication of rogue customer. Such claims can,
and do succeed.
Brokers and their supervisors must
stop being timid. Waiting for the NASD, or the NYSE, or Congress,
to stop the rogue customer is not enough. Victims of rogue customers
should fight back. Awards against rogue customers will stop other
rogue customers. Laying down and allowing the complaints to be filed,
without any attempt to strike back, not only encourages the rogue
customer to continue his abuse, but encourages others to do the same.