Every
General Counsel at every brokerage firm that has ever been named in
a securities arbitration, and every individual broker in the same situation,
is aware of the cost of defending a customer claim or an employment
claim against the firm or broker. While securities arbitration has proven
to be a cost-effective method of resolving disputes, the process is
still expensive and time consuming.
One of the problematic issues in defense of securities arbitration
claims is the unknown – the unknown costs of defense. The unknown
factor has always been a significant factor in litigation – there
are simply too many variables in litigation, and too many factors that
are out of control of the client, and its attorney. The problem of course,
is that the course of litigation is often dictated by the other client,
the other attorney, and to a large extent, the arbitrators themselves.
That truism does not help General Counsel with his core problem
– controlling litigation costs. Firms, and individual brokers,
need to know what a defense case is going to cost, and the fact that
there are variables that he cannot control does not change that issue.
With cost cutting, litigation budgets and pressure to control litigation
expense, defendants need to know what a case is going to cost, so those
costs can be budgeted and planned.
While defendants and potential defendants will complain about
those costs, and the variable nature of same, a key player in the quest
for predictability of litigation defense costs is often overlooked –
the selection of defense counsel.
Certainly GCs and individual brokers know that the choice of
counsel makes a difference, but too often the choice is made solely
on the basis of the lowest hourly rate. That method has been proven
to be the least effective way of controlling costs. If you select counsel
based on cost, you can easily end up with inexperienced counsel controlling
your litigation. His inexperience will ultimately cost multiples of
the savings from the lower hourly rate and perhaps a significant award
against the firm.
The way to control costs is to have outside counsel handle the
defense of the securities arbitration on a flat fee. Heresy! Flat fees
in litigation? Unheard of! Impossible! Suicide for the attorney!
Flat fees work for clients. They provide certainty in the budgeting
process, an order to cash flow for defense costs, and a base upon which
decisions can be made as to settlement.
But do flat fees work for defense counsel? They can, and do. The same
certainty of cash flow benefits defense counsel. Everyone knows at the
start of the case what the defense is going to cost. While factors need
to be built in to address unknown contingencies, the vast majority of
those cases do not involve those contingencies, and the flat fee is
the fee at the end of the day.
Think about it for a moment. Certainly an out of control claimant
or claimant’s counsel, can run up litigation costs significantly.
But in securities arbitrations, with limited discovery, and no depositions,
the ability of claimant’s counsel to run up costs is limited, He
cannot schedule multiple depositions of every corporate officer, he
cannot conduct unlimited third party discovery, and quite frankly, in
the overwhelming majority of securities arbitration cases, Claimant’s
counsel is limited in what documents he is entitled to demand in document
discovery.
Certainly there are exceptions, but the simple fact is that Claimant’s
counsel has no real interest in running up anyone’s costs. He is
typically on a contingency, and his interest is in obtaining the best
result for his client at the lowest cost. He is not going to go away,
and is not going to fold simply to save some time in discovery, but
he also has no interest in demanding, and thus reviewing and digesting,
enormous amounts of irrelevant discovery.
The reality is that experienced securities defense counsel knows
what a case is going to cost to defend, within certain parameters. Certainly
there are variables, but across cases, those variables even out. One
case might involve the review of 1,000 emails, and take more time, but
another is going to have 10 emails. Over a series of cases, across multiple
clients, the cost evens out.
The simple fact is that defense counsel is the one with the experience,
knowledge and background to make litigation decisions. He has handled
hundreds of cases. Individual brokers have no experience in making litigation
decisions, and the unknown cost of those decisions, and of the entire
litigation, is a significant concern. In house counsel, with more experience
with litigation costs has more knowledge, but is not involved in the
day to day decision making process.
We provide services on a flat fee basis all the time, even where
there are unknown costs, for exactly this reason. Take a 1017 application
for example. Having handled 1017 applications for new firms, and for
modifications for existing firms, our firm knows the cost of handling
the application. Some are simple, some are complex. Sometimes the details
of a particular application make the application more difficult. Some
of the factors are out of control of the client and counsel – a
FINRA examiner who is difficult or inexperienced, a member regulation
staffer who is a stickler on a particular aspect of an application that
most do not care about, an enforcement proceeding that is commenced
in the middle of the application process, and on and on and on. But
we do 1017 applications on a flat fee, with payment made in stages,
and we take the risk of the unexpected, not the client.
We can do that because of our experience and the number of 1017
applications that we handle. Set a fee, the client knows what it is
going to cost, and when that cost will arise and can plan for those
costs. One application will have a factor that raises the cost, and
thus reduces the profitability, another will go through faster than
expected, and most will be done exactly as expected. With proper planning,
the flat fee benefits everyone.
We handle private placements, for an issuer and for the placement
agent, the same way. Our experience tells us what to expect, how much
it is going to cost, and we can make a reasonably accurate projection
of the legal fee for the project. There are certainly variables in transactional
work – difficult clients, difficult attorneys, unexpected documentation
issues, additional agreements that need to be drawn, and more. But once
again, with enough experience one can factor those variables into the
fee, and many of those variables can be controlled or eliminated.
The defense of a customer claim, and even an employee claim against
a firm, is similar. The key again, is experienced counsel. In my own
practice, I have defended hundreds of cases, probably over 500. We know
what the costs are going to be. We know how much time it will take to
defend that claim, and can charge a flat fee, payable in stages at specific
times in the litigation. We know the difference between the work involved
in the defense of a churning case, versus a
Certainly there is the occasional case where an arbitrator orders
a massive document production or review, and the costs increase. But
that contingency is built into the flat fee, because in the overwhelming
majority of cases, that contingency never occurs. If the firm has enough
experience, and enough cases, the one oddball case is not a significant
issue.
The key to all of this is experienced defense counsel, who has systematized
the process. Most attorneys understand that the days of hourly billing
are about to be a thing of the past. In order to properly represent clients, firms
need to work smarter, use the computer systems that exist for the benefit
of the client, and continue to systematize the process so that computer
systems are used to their best advantage, and that portions of the work
flow are assigned to the person with the lowest skill level required
to complete that portion of the work.
At our firm, the process starts with our computer database. All
information regarding a case is entered into the database. Contact information
for the client, the adversary, the FINRA staff (most of whom are already
in our database). Database entries are created for the type of case,
the type of claims, the amount demand, and other relevant information
regarding the case.
This may sound trite, but it is important, and updating the database
throughout the course of the proceedings is equally important. When
a document request needs to be generated, that database, along with
our document template, generates the document. A legal assistant can,
in a few mouse clicks, generate correspondence, a document request,
or any other document, as a template for an attorney’s review and
modification. Discovery requests, motions to compel, pre-hearing briefs,
even settlement agreements, are all connected to the database. For specific
series of cases, we have a template of answer, drafted once for that
series of cases, but used in multiple cases, with appropriate modifications.
This is of course, how most firms work. No client should be paying for
the preparation and review of a pre-hearing churning memorandum from
scratch. My firm has a brief bank that we maintain of hearing memorandums.
We have collections of memos on churning, suitability, fraud, misrepresentation,
fraudulent inducement, a broker’s fiduciary duty (or rather lack
thereof), negligence, breach of contract, and consumer protection statutes,
from a variety of states. When a new memorandum is needed, we do not
re-invent the wheel. One of the legal assistants reviews the brief bank,
pulls the memos and memo sections that are required for the new memo,
puts a template together for one of the associates. The associate reviews
the template, modifies the body to fit the case, updates the research
as needed, and prepares the brief.
The same is true for other stages of the litigation. In discovery
for example, our computer database has discovery requests that quite
naturally include all of the items in the FINRA discovery guide. That
list is updated as the discovery guide is changed, and is ready to be
used in the next arbitration, without the time or expense of creating
it from scratch. We also have a template for discovery requests in a
churning case, in a suitability case, another for a misrepresentation
case, and so on. Cases involving allegations revolving around market
making have a template, as do claims for defense of broker claims. Document
requests need to be tailored for each case, but they do not need to
be created from scratch every time.
We have even taken the process so far as to standardize the preparation
of an answer. In the instances where we have multiple defense cases
for the same firm, arising from similar facts, we prepare a model answer,
which includes all of the allegations and defenses that could be used
in that type of case. The system is set up to ask questions, and to
include certain paragraphs of responses and defenses, depending on the
allegations of that particular complaint. When a new answer needs to
be prepared, a legal assistant again uses that computerize form, creates
a template for the answer, which is then given to the associate.
Therefore, instead of an associate starting to prepare an answer
by typing on a blank piece of paper, she is starting to prepare the
answer with a template in front of her, that has previously been reviewed
by the partner handling that particular client’s matters, and vetted
by him. This simple step alone saves thousands of dollars in the pleading
stage of the matter, as well as the advantage of providing consistency
across cases so that a pleading in one case does not contradict the
same pleading in a similar case for the same client.
This is not to suggest that litigation defense is a commodity,
or computerized. It cannot be, and every case, every document, every
pleading, is reviewed, modified, and approved by a partner.
The reality is that segments of a litigation practice can be
systemized, to the benefit of the firm and the client, and the use of
computer systems, coupled with our vast experience in the defense of
securities arbitrations, enables our firm to offer flat fees to our
clients for those types of cases.
A revolution? Hardly. We think of it as an evolution of the attorney-client
relationship.
Mark J. Astarita, Esq. represents financial professionals and firms
across the country, in securities litigation, compliance and regulatory
matters. He can be contacted at or by email at astarita@beamlaw.com
