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Fight Back

Brokers and firms should consider filing claims against Rogue Customers

By Mark J. Astarita, Esq.  

Regulatory News

My columns in September and October regarding Rogue Customers generated quite a bit of interest, and a wide spread question – 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 – money – 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 “common wisdom” is that brokers and firms cannot sue their customers who sue them, since it will “look bad” at the arbitration, it will generate “bad publicity”, 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 “truths” 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 – 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 customer’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 customer  

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 customer’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 attorney’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 “common wisdom”.  The “bad publicity” 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 “got away” with something, that the process is biased against customers, that the arbitrators weren't “fair” or that somehow the broker is still guilty, he just “caught a break”.  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 “bad publicity” 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 “win” 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 – 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.  





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Beam & Astarita, LLC

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.SECLaw.com was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Sallah Astarita & Cox, LLC, who represents all participants in the financial markets. Mr. Astarita can be contacted by email at mja@sallahlaw.com.

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