I recently had two clients, both respondents in pending matters – ask me the same question in the same day: should I mediate this case? The answers I gave them differed dramatically, not just because the facts of each case were very different, but because one case was a customer arbitration, where we are defending against claims of fraud brought by a sophisticated investor, and the other was an Enforcement action, where we were defending against allegations brought by FINRA. Someone who hasn’t been through both of these situations might not realize it, but the process – and usefulness – of mediation in these two situations is very, very different. In short, it often makes sense to mediate customer arbitrations, but it can be an unproductive waste of resources to mediate FINRA Enforcement cases. Here is why.
Mediation of a customer arbitration resembles traditional civil litigation style mediation, and it often provides the parties with a healthy dose of reality about the relative strengths and weaknesses of their respective cases, leading them to settle, most of the time. In these cases, which typically involve an investor who alleges he lost money as a result of a poor investment recommendation, the claimant often has an unrealistic view of the strength of his case. In the typical mediation, it starts with an opening session with the mediator where each side puts on an “opening statement” and tears apart the other side’s case. The benefit to mediating, then, is that you have the chance to explain the problems with the claimant’s case directly to his face – instead of just making your arguments to claimant’s attorney and hoping he passes along what you said to the client (which often does not happen). In the typical claimant’s case, where the attorney has convinced the claimant that his case is a winner, this may be the first time the claimant hears about all of the problems with his case.
Even if the claimant is already aware of his case’s weaknesses, an effective opening can really open these wounds. We recently had a highly regarded mediator tell us that our opening presentation was so well packaged that it really made the claimant – a highly sophisticated entity – re-think the claims it was bringing. After the openings, the mediator meets separately with each side to further emphasize the problems with their case, until both sides feel beat up enough that they settle on a certain dollar amount. The process alone can last all day, and if done right, will be grueling – which only aids in getting the parties to settle.
As a side note, one question inevitably comes up – couldn’t you just engage in settlement negotiations the old-fashioned way, by calling up the other side and making an offer? The answer is yes, but the typical claimant’s attorney will water down your arguments when he conveys them to his client, if he conveys them at all, so even your best arguments will do little to counteract the propaganda the claimant’s attorney has been feeding his client.
In the FINRA Enforcement context, you aren’t trying to beat up the other side at all – because there is nobody on the other side to beat up. Instead of a joint opening session, you simply engage in an individual session (usually telephonically) with a FINRA appointed mediator. You spend an hour or two telling him your sob story, and he tells you how bad your punishment is going to be if you take the case to a hearing. The entire goal of an Enforcement mediation is for the mediator to convince you, the respondent, that you are going to lose – and lose badly – if you go to a hearing, so you should take whatever deal he can convince Enforcement to offer.
It is possible, in theory at least, that you could persuade the mediator that you did nothing wrong, leading him to tell Enforcement they should cut you a sweetheart deal because their claims are weak. In reality, however, this rarely, if ever, happens. The reasons are simple: FINRA rarely brings cases that it does not think it will win. By the time a case makes it through the investigation process and culminates in a formal Complaint, FINRA has fully vetted the claims that it plans to bring on several levels. The Member Reg investigators find enough cause to make a referral to Enforcement, Enforcement finds enough evidence to draft a Complaint, the Litigation Group consultants agree that there is sufficient evidence to support the proposed charges, and finally the Office of Disciplinary Affairs (which must review and approve every Complaint before it is issued) believes the Complaint has such a strong chance of success that it authorizes the case to go forward. (See Regulatory Notice 09-17). FINRA has already evaluated any potential weaknesses with its case and accepted them as not consequential enough to impair its chances of success before a hearing panel.
So, while you can sob as much as you want in this mediation, unless you have some hidden facts that you have not already revealed to FINRA (which is a whole separate issue), you simply can’t beat up Enforcement’s case because they’ve already beaten it up themselves. The mediators, who are, or were, FINRA hearing officers, know this. They have years of experience in the securities industry and, on your best day, will tell you there are issues of fact that must be sorted out at a hearing in order to determine the strength of your defenses. They won’t tell you that your defenses are so strong that Enforcement will lose.
In the Enforcement context, then, mediation is often not worth the time and resources, unless you are opposed to taking the case to a hearing and simply want to use the mediation as a way of initiating settlement discussions. But, if that is your position, then you could probably fare just as well by skipping the mediation completely and making an old fashion inquiry to Enforcement about settlement. Conversely, in the customer arbitration context, mediation can be very useful in providing a harsh dose of reality to claimant about the weaknesses of his case.