I recently had the extremely unhappy experience of losing a FINRA arbitration following a week-long hearing. Fortunately, this tends to be a rare occurrence around here, but that’s not really a surprise, since we tend to go to hearing only in those cases with strong facts, while we work hard to settle those with difficult facts. This particular case did not have overtly troublesome facts, and was eminently defensible. Moreover, and to the point of this article, my client, a broker-dealer, had no insurance coverage for the claim (as selling away claims are often expressly excluded from any coverage). Given that, and the fact that the pre-hearing settlement demand was outrageous, there was no reason, or financial ability, to settle it.

In any event, as noted at the outset, contrary to our expectations, we lost. Sadly, the award was so big that my client was unable to afford to pay it. With no alternative, after decades in the business without incident, my client was forced to abruptly close its doors, terminate its reps, and transfer away all of its customer accounts. Its owners – both named individually as respondents and found liable by the panel along with their firm – were forced to file for personal bankruptcy and sell their home. Their personal and professional lives were forever altered.

Claimants’ counsel has publicly complained about the fact that my client had no insurance to cover the loss, and that his clients will never collect on their award. He has also argued that FINRA rules ought to be changed, to require that broker-dealers carry sufficient insurance coverage to ensure that successful claimants will always collect. Is there a business anywhere in America, in any segment of society, that is required to have enough money, or enough insurance, to guarantee that anyone who files suit against it, for anything, will absolutely, positively collect if they manage to prevail? If there is, I am unaware of it. And I am unsure why broker-dealers should be treated any differently than any other business.

As consumers, we elect to do business with companies and individuals whom we trust, whether it is a dry-cleaner, a car repair shop, a deli, an airline, or a broker-dealer. We naturally hope that things will go smoothly, but, if things go badly, that we will be treated fairly. But, “fairly” does not necessarily mean that we can blithely act with the expectation that we will be “made whole” in the event of a big problem. That is why “losses” are included among the items that may be deductible on tax returns, because sometimes we are not made whole. It is a risk we assume every day, in many aspects of our life. Even SIPC has dollar limits on what it will pay when a bank fails. I cannot understand why broker-dealers should be treated differently than everyone else, and be mandated by rule to carry outrageous amounts of insurance, for ridiculous premiums, covering every imaginable claim, just to ensure that claimants can collect arbitration awards, and that their attorneys can collect their contingency fees.