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Protecting The Integrity Of The Arbitration Process, Finra Fines Oppenheimer For Discovery Abuse

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  • Posted on: Dec 2 2016

Arbitration is an alternative form of dispute resolution, meaning it is an alternative to a court proceeding. In arbitration, the parties have their dispute resolved by neutral persons (known as arbitrators) knowledgeable in the areas in dispute, rather than by a judge or jury.

Arbitration has been a form of dispute resolution within the securities industry for many years, primarily because it is generally considered to be faster, inexpensive and less complex than litigation.  Since 1987, investors with claims against their stockbroker or financial advisor have been required to assert them in an arbitration before the Financial Industry Regulatory Authority (“FINRA”) and its predecessors, the National Association of Securities Dealers and the New York Stock Exchange Regulation, Inc., the regulatory arm of the New York Stock Exchange.  Thanks to the Supreme Court, investors who sign customer agreements containing an arbitration clause must bring their claims against their broker or financial advisor in an arbitration proceeding instead of a state or federal court. Shearson/American Express v. McMahon, 482 U.S. 220, 226 (1987). By agreeing to arbitrate, “a party does not forgo [his/her] substantive rights …; [he/she] only submits to their resolution in an arbitral, rather than a judicial, forum.” Id. at 229-230, 238 (citation omitted).

For years after Shearson/American Express, investors and commentators criticized the securities arbitral process as unfair to individual investors, primarily because of a perceived bias towards broker/dealers. See, e.g., Susanne Craig, New York Times, Investors Opt for Arbitration Panels Without Ties to Wall Street (Oct. 27, 2011). This perceived bias was based, in part, on the fact that arbitral panels were comprised of members of the securities industry – that is, members of FINRA and its predecessors.

Over the past several years, FINRA has tried to address the perception of unfairness by improving the efficiency and fairness in its arbitration program, from revising its rules on who is eligible to serve as a public arbitrator to expanding the number of potential arbitrators provided to parties during the panel selection process. Recently, FINRA took another step in its efforts to preserve the integrity and fairness of the arbitration process.

FINRA Fines Oppenheimer for Discovery Abuse

On November 17, 2016, FINRA announced that it had “fined Oppenheimer & Co. Inc. $1.575 million and ordered the firm to pay $1.85 million to customers for failing to report required information to FINRA, failing to produce documents in discovery to customers who filed arbitrations, and for not applying applicable sales charge waivers to customers.”

In addition to identifying various sales practices, supervisory lapses, and CRD reporting violations, the release and the underlying Acceptance, Waiver & Consent (“AWC”) identified various discovery abuses engaged in by the firm in arbitrations involving a former Oppenheimer broker, Mark Hotton (“Hotton”).

FINRA found that between 2010 and 2013, Oppenheimer failed to produce documents during discovery to seven sets of claimants who asserted claims against Oppenheimer for failing to supervise Hotton. In this regard, Oppenheimer failed to provide spreadsheets showing that Hotton had excessively traded multiple customer accounts. The spreadsheets also showed that in four accounts Hotton had churned the accounts – that is, the commissions charged exceeded the total account value – and in two accounts there were insufficient funds to execute trades causing Oppenheimer to place the accounts on ninety-day restrictions. According to the AWC, these spreadsheets were prepared in 2007 and 2008.

In the seven arbitration proceedings, the claimants resolved their disputes through settlement or awards without the receipt of those documents.

Incredibly, in March 2015, FINRA announced that it had fined Oppenheimer $2.5 million and ordered the firm to pay restitution of $1.25 million for failing to supervise Hotton, who stole money from his customers and excessively traded their brokerage accounts during the period 2005 through 2009. FINRA permanently barred Hotton from the securities industry in August 2013.

In the recent AWC, FINRA censured Oppenheimer, fined the firm $1,575,000, and ordered remediation payments totaling $703,122 to be paid to the seven sets of claimants affected by the firm’s failure to supervise.  Oppenheimer accepted and consented to FINRA’s findings, though it did so without admitting or denying them.


Failure to comply with FINRA’s discovery rules hinders the efficient and cost-effective resolution of disputes and undermines the integrity and fairness of FINRA’s arbitral forum. FINRA’s action against Oppenheimer is an important step in ensuring those purposes are realized.


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