SAINT-AUBIN MEDIATION

The Viewpoint of a Neutral

Robert F. Saint-Aubin

Saint-Aubin Mediation

Monarch Beach, California

 

© April 2004

Saint-Aubin, an MIT and Penn Law educated attorney now focuses his practice on dispute resolution.  He serves as a mediator and arbitrator for the NASD, the NYSE and the Nevada and California courts.  He recently relocated to Monarch Beach, California, after practicing law (and solving problems) as in-house counsel for FMC Corporation for 18 years in Philadelphia and as a private attorney in Reno, Nevada, for 18 years. Saint-Aubin is admitted to the practice of law in California and Nevada and inactive in Pennsylvania.

DISPUTE RESOLUTION: THE VIEWPOINT OF A NEUTRAL

Saint-Aubin shares his thoughts with counsel for claimants and respondents as to his perceptions of matters and methods of importance to the arbitrators and to the process.  He addresses responses to concerns about the process raised by counsel. He encourages preservation of securities arbitration as a process more efficient than litigation.

DISPUTE RESOLUTION:

THE VIEWPOINT OF A NEUTRAL

Note:                                                        

This article was prepared in response to a PLI solicitation for contributions to Securities Arbitration 2004:  A Rapidly Evolving Process, presented and published on August 11, 2004.  The solicitation requested views and viewpoints on investor securities disputes to aid advocates in better presentation of their cases.  This article focuse on the viewpoint of an NASD arbitrator (with an occasional pitch for or endorsement of mediation), responding to a series of questions about what Neutrals like to see or hear – and what they do not like – in connection with the entire NASD arbitration process.  The thoughts are my own; they do not represent an official position or the position of any agency or organization or their staff. As a Neutral (and also as an investor), I am interested in the integrity of the financial markets and of the dispute resolution process.

 

What Neutrals Like

 

The dispute resolution process generally, and the NASD process in particular, incorporates a sense of collegiality between counsel, a sense of right and wrong and a belief in integrity of the process of dispute resolution and of integrity of the financial markets.  Counsel and the parties tend to be fundamentally and exceptionally well prepared.  They know the process and their cases, they know the facts and the law and the applicable rules.

 

What Neutrals Don’t Like

 

            Neutrals, both industry and public, share two aversions: Too frequently counsel for both sides present pompous “experts” to opine on the facts and on the law, both of which are the province of parties, witnesses and attorneys. Second, some attorneys forget that the two advantages of and justifications for arbitration are speed of resolution and efficiency of non-judicial hearings.  By the time the claim has been filed, counsel knows all of the facts and law of Claimants case; similarly with the response, Respondent counsel knows its facts and its law.  The Claimant’s account has been well documented.  Let’s have the case set for hearing weeks after the Initial Pre-Hearing Conference, not years later.  Arbitrators have been requested to commit a significant block of time months in advance.  We recognize that most hearings take less time than we have committed.  Please adhere to the agreed upon schedule.

 

            Claimants should not expect the neutrals to indemnify them for their losses in the market. We all know the litany of valid claims, focused upon churning, portfolio diversification and unsuitability.  Lack of supervision/ break-down of supervision, failure to follow the house’s own rules and guidelines all make for good elements in good cases. Yes, there are sins and sinners in most industries.  Similarly, big name houses should expect that statements of their responsible officials to the press will be presented to the panels and have credibility with the neutrals, and that not all of their employees maintain their own high standards.

 

            Neutrals do not like discovery games. (More on this later.)

 

            Much has been said and written about attorneys arbitrating in forums located outside of their home jurisdictions.  If the attorneys behave as though they are making a one-time sortie into a foreign forum, following scorched-earth litigation strategies, they and their clients are likely to get burned.

 

Pleadings

 

            A number of years ago,¹in one of the rare moments of regulatory brilliance,  the SEC promulgated Plain English Guidelines.²As an advocate, you should follow them³and their formatting suggestions. Use single spaced, short sentences and paragraphs with large margins so I can speed-read the material. Send double-spaced, legal-sized paper with numbered lines back to the scriveners in the bowels of the Vatican.  Clearly and concisely tell me who the parties are and what happened.  Tell me who was injured; tell me who did the injury and what the damages are.  It’s a story.  Tell me the story.  Your client is hurting.  Why?  How do I, as a neutral, fix it?  Why should I fix it? Why should this group of Respondents be made to pay for the hurt?

 

            Respondents, all of the preceding applies to you also.  Answer the complaint.  Tell me what happened and why it happened.  You do not understand the complaint?  Well, it was your client, so tell me what happened.  We would not be here if the client consistently and recently made a whole lot of money.  We know the client lost money.  How did he lose it?  What did he tell you he wanted to do?  What did you tell him? Did you take the time to complete an interview and have the client complete all the disclosure forms?  Did you test their veracity and accuracy?  How did you assure suitability and diversity? Did the Claimant understand the types of investments and markets in which he was engaged?  Could he have?  Could anyone? How did you know your customer?  You do not even need to see the complaint to start a very good answer.

 

            Answer the complaints.  Don’t give the legal profession a bad name by filing a non-answering pleading. Don’t file a motion to dismiss or for summary judgment or a motion for a more definite statement.

 

            Think about starting mediation as soon as the Claimant receives your answer.  Its not a sign of weakness – tell the Claimant you know you have the strongest case ever but Saint-Aubin says to mediate first and ask questions later so that’s what you are doing.  You are not weak; blame it on me.

 

            If you do not resolve the case in mediation, the parties are entitled to a hearing.  PERIOD

 

            Most motions (except motions to produce and for sanctions and attorney’s fees) should be summarily denied (obviously after a hearing).

 

            Note and remember that the arbitrators are never compensated for reading and studying reams of paper. Keep your writings short.  Appendices and redundant exhibits do not help, do not advance your cause.  If there is a ten-page limit, use less than ten pages – no sneaky two- inch thick attachments to subvert the page limit.  Remember to use the SEC Plain English Guide.  Single space, large margins.

 

            Footnotes break the document’s flow.⁴

Discovery

 

            Discovery problems do not usually exist in cases in which the Claimant and Respondent counsel talk to each other from the beginning of the case.  As Claimant, you should automatically give the other side lots of stuff.  Then call and ask for the stuff you want.  The test is relevance of the evidence and likelihood to lead to relevant evidence.  But you have to know a little about your case before filing your complaint. Make sure your client has given you everything, not just the important stuff. Counsel, not clients, should decide what is important.

 

            The fact that we may not like discovery does not give us the right or the power to rewrite the rules.  It’s part of the grand plan and design.  Manipulation of discovery inevitably means manipulation of the integrity of the process and the stock market.

 

            Read the rules and guides.  If the rules and guides suggest production, produce it.  If you think part is relevant and the rest not, produce the part you agree to, so I don’t have to listen to a schoolyard brawl about what you agree you should have produced.  I identify evidence that you are not producing.  Produce it before it’s asked for.  Even in the Dark Ages of the middle of the last century of the previous millennium when I was in law school, trial by ambush was no longer viable.

 

            All of the operating rules and programs for the house are fair game as discovery requests by the Claimants.  The broker’s record and course of dealing with all of his customers are relevant.  Management, supervision, guidance, training and compensation are relevant.  Everything in the NASD Discovery Guidelines should be provided by the clients and exchanged by counsel instantly. Similarly, the financial, economic or professional status of the Claimants is relevant, although most of the things the broker/dealers ask for should have been part of the customer file when the account was opened.

 

            I once had a broker/dealer attorney suggest he would produce the agent’s personal file to me for in camera review and determination of relevance.  The review took a lot of time for which the arbitrators were not compensated.  The attorney was correct, nothing in the file had the slightest bearing on or relevance to the case.  Yet I, the arbitrator, saw it all any way.  Then, after I ruled that none of the file was relevant, the parties/counsel settled the case.

 

            Frequently, arbitrators (parties) see:

To almost each and every Discovery Guide List item [Respondent counsel] provided the following: “vague and ambiguous, overly broad, unduly burdensome, improperly requires Respondents to speculate as to which documents are being sought and seeks information not related to the matter in controversy.

The preceding is not a proper response to a discovery request  – the Respondent must provide every document related to the Claimant, the registered representative, supervision, suitability, training, commissions, gifts, compensation, and any other word in the complaint.  By the time the case gets to the Initial Pre-Hearing Conference, the discovery demands should have been made. When given the above anti-production argument, I ask whether the Respondent was required by the SEC or the Self-Regulatory Organization to keep the information.  If the Respondents are required to make or keep the record, the documents or information must be turned over to the Claimant.  Burdensome? Speculative? Note the initial letters of those two objections.  No need for speculation on which documents are being sought – if you don’t know, produce them all.

Pre-Hearing Conferences

            Pre-Hearing Conferences are a necessary evil.  They should be face to face, but no one wants to pay the additional costs to have everyone in the same place at the same time.  The parties should be present at every hearing. If you have issues that you believe should be addressed, call for a Pre-Hearing Conference.  Use the Pre-Hearing Conferences to attempt to narrow and resolve issues.  Remember that the arbitrators get paid for sitting in the Pre-Hearing Conferences.  They do not get paid for reading briefs and writing opinions.

            Starting at the Initial Pre-Hearing Conference, Claimants should assert that since they are in the industries play-ground by virtue of an industry-created contract of adhesion buried on page 65 in 77 pages of 6-point type, the arbitrators should assess all forum charges to the Respondents. The NASD default position is for a 50-50 split between Claimants and Respondents.  Claimants should argue that point early and convincingly. Most arbitrators accept the NASD default position that forum fees should be assessed evenly between Claimants and Respondents. 

The Other Arbitrators on Your Panels

            We are all neutrals.

            Every arbitrator I have worked with, and especially the industry arbitrators, wants the system and markets to work efficiently and fairly.  Bad apples should be penalized.  But arbitrators are not there to guarantee that every investor has millennium-ending dot.com returns.

            If the arbitrators are not attorneys, what did they do before they became arbitrators?  They should have legal training (meaning a current valid license to practice), a background in the industry, or success as investors.  The cry for recreating the pool of arbitrators as a duplicate of a lowest common denominator jury pool of people too dumb to get off jury duty affronts most neutrals.  The parties and their counsel need the benefit of our education, training, skill and experience.  Most non-attorney arbitrators waste time and are incapable of making reasoned decisions. Retired postal workers and second grade teachers are not good indicia of a fair and efficient process.

            Do you want the arbitrators to be familiar with investments, markets, securities and the securities industry or not?

            Do you want the arbitrators  to have an understanding of capital markets?

            As an advocate you should know backwards and forwards the Code of Arbitration Procedure and all of the other materials available on the NASD web site.  The arbitrators may have studied the rules to qualify but are not likely to have them memorized; so it’s the advocate’s job to keep the arbitrators informed and re-educated.

Hearing Locations

            NASD will not provide coffee.  NASD thinks the advocate attorneys want arbitrators assigned to only one location.  Consider, will you not find less bias if none of the arbitrators ever heard of any of the attorneys? The tape recorders provided to NASD frequently do not work.  Bring your own extension cords. If a party intends to have a court-recorder present, copies of the transcript should be provided to the panel and to the opposing party.

Opening Statements

            Counsel for all parties should make an opening statement. Tell a story.  Make the characters living people. Lay out the facts and the law and their interrelation.  What do you want us to decide?  Why? What is the factual and legal basis for each element of your claim and defense?  It’s your opportunity to introduce yourself and your client, to familiarize the panel with why we are here and what you expect us to do.  What are the damages, costs, attorneys fees, forum costs?  Why?  How was the Respondent responsible in fact and in law.

            Why was the investor invested in the investments at issue?  If the arbitrators were in the market (and why would anyone want arbitrators who don’t use the facilities that provide the forum?), the arbitrators know that they and everyone else with a diversified portfolio lost money.  You do a lot of damage to your case and your credibility by asserting that if we all sold out everything on March 15, 2000, we would all be wealthier.  Tell a story that makes sense.  Then proving the story with witness testimony and documentary evidence is easy.

Presentation of a Party's Case

            The single most important thing you can do to present your client’s case is, upon receipt of the answer, to pick up the phone to call the opposing attorney.  Jointly pick the panel.  If you can not jointly pick the panel, at least jointly pick the chair-person.  You want a chair who understands the problem and the process; one who can lead the case to presentation and resolution; one who can quickly, with due deliberation, decide issues presented.

            There better not be any evidentiary surprises.

            Testifying by phone is dumb, particularly if it’s a paid for-hire expert. Think about it.  You are paying the expert  hundreds or thousands of dollars to convince the panel of something, but you will not pay the cost of having the expert appear before the panel.  What is important to you?  What is important to your case?  What do you think may be important to the panel? Credibility.

            Consider not using experts.  The attorneys are experts on the law of the case.  The documents establish transactions in the account and related accounts.  Brokerage manuals establish best practices. The parties establish the fact (or not) of the injury and the amount of the damages.

            Opening your case-in-chief by putting the opposition on the stand as on cross-examination will generally be a disaster.  Your story will not be straightforward but argumentative and convoluted. Few attorneys, few good attorneys, successfully pull off successful case presentation through cross-examination of the adversary.

            Don’t just tell the arbitrators that because your client lost money he should be made whole.  How did the Claimant get into the securities market?  Was the portfolio diversified?  Was there churning? Suitability? Bad management?  The rest of the litany?

            What is the age, net worth, education, risk-taking ability and experience of the investor? Convince me that someone else dragged him to this sacrificial financial altar.

            Presenting undisclosed evidence and witnesses as rebuttal does not fly.  Gaming the system contravenes integrity in the process.

            Repetitious evidence is counter-productive.

            NEVER attack your opposing counsel.  Period.  If the other counsel appears to be incompetent, the panel is excruciatingly aware of the incompetence.  The party, represented by incompetent counsel, is entitled to have its case presented.  Each party will be asked to affirm on the record that they have had a full and fair opportunity to present their case on the record, that they have had an opportunity to be heard.  Without repetition and excess redundancy we will do our best to allow each party to present their case in the manner they desire.

            I will frequently respond to objections “Over-ruled, but do not be afraid to raise the same objection again.”  I mean that; close calls will be over-ruled in the first instance.  Objections to repeated objectionable behavior will likely be sustained.  Consider it an admonishment.

            If you want attorney’s fees, address the legal basis for fees in your case on the facts and on the law.

            Arbitration is a forum of practicality and equity. Too many Claimant’s attorneys at the close of the case, instead of making a closing argument, save their entire closing for rebuttal.  That’s dumb – dumber than relying on experts to know what the advocate should know. Why leave the arbitrators with the last view of you as someone who is overtly, intentionally trying to hide the ball.  State your case, let the other side respond and then rebut.  At that point in the day, if you need a little more time, most neutrals will give it to you.

Cross-Examination in Arbitration -- When it Sounds More Like Depositions in Litigation

            Unlike on television, few cases are won by cross-examination traps.  If you think the witness is a liar, use cross to establish that, not to make out your case-in-chief.  The examination sounds like a deposition because it is the first time you have had an opportunity to talk to or examine the witness.  It sounds like a deposition because the attorney acts like it’s a deposition.  It sounds like a deposition because the attorney does not listen to the answers to the questions.  It sounds like a deposition because the attorney does not know what the witness will say.  It sounds like a deposition because the attorney is attempting to make his case through the lips of an adverse witness. As arbitrators and attorneys, we know that.  It will not adversely impact the outcome.  Substance does have an impact.

            Now, if you had listened to the party witnesses at the mediation early in the case, you would know what areas might be productive in cross-examinations.  While mediation is and should be confidential, you can not say “At the mediation which took place last year did you not say >>>>?” You can ask about “>>>>.”

Discussions You Have with Arbitrators as the Hearings are In Progress

            During the course of the hearings, breaks, and executive sessions, discussions are usually limited to clarification of what has been heard, understood or misunderstood, and the usual school-yard chatter about the good and bad of NASD and other forums.  Arbitrators  want to keep an open mind about the case until they have heard all of the case(s).  We all know that a good opening can be persuasive if the case just stopped at the end of that opening; we all know that after we have heard the counter-argument or case, we may reach a different conclusion.  As most cases develop, the outcome becomes fairly obvious.  I have not seen a case, NASD or otherwise, in which the outcome is subject to a lot of soul-searching. Once all of the conduct, all of the transactions, are understood by the panel, the outcome is fairly clear. The precise measure of damages may be subject to some soul-searching, but not the outcome.  The broker, the supervisor or the client did something wrong, something determinative of the outcome. If there was no wrongdoing by the Respondent, Claimant loses. Both Claimant counsel and Respondent counsel must establish who did something wrong,  what that something was, why it was wrong, the impact of the wrong,and what damage was caused by the wrong.  If it takes an expert to establish that someone did something wrong, then the wrong-doer, without the benefit of the expert, probably was innocent and not liable.

            Many experts waste time and receive undue scrutiny.

How You Determine Liability -- Does the Law Really Matter?

            If the party attorneys properly articulate the law, we use the law to determine liability.  Non-attorneys sometimes do not want to be bound by the law but we attorneys usually shout them down.  If the arbitrators are clearly told what the rules are, from the law and from the various codes, the arbitrators will follow the rules.  Arbitrators and Claimants seem to have more faith in the integrity of the process and the arbitrator’s sacred duty than do the attorneys for either side. Generally, equity trumps the law; the law provides guideposts to finding equity.

            Following 9-11, I had a small case – the Claimant submitted a check to cover a margin call. The records show the check arrived in New York minutes before the first terrorist plane hit the first World Trade Center Tower.  When the processing of the transaction resumed after the markets reopened, the house said the margin call had not been met on 9-12 as required, so sold out the Claimant’s position to cover the call, at a tremendous loss to Claimant.  The hearing took 20 minutes.  The arbitrator ruled that the procedure (law) followed by the broker must have an exception to be made by the arbitrator for delays caused by acts of terrorism. Obviously, there was no statement of reasons in the award.  The broker representative who came from New York to Los Angeles just for the hearing, after confirming that Claimant timely mailed his payment, said that under Respondent’s view of the SEC rules, he could not make an exception.  The arbitrator made the exception.

            We determine liability and damages by looking at what happened, the why and how, the respective knowledge and objectives, the legal requirements, then apply  the law or rules to the facts, determine if the outcome makes sense, and award accordingly.  It is a reasoned outcome.  Usually it’s a unanimous outcome.