The Fourth Circuit Court of Appeals has sided with investors and Better Markets, which filed an amicus brief in support of a reversal of a lower court’s decision in Interactive Brokers LLC v. Saroop.
The Fourth Circuit Court upheld an award to an investor whose broker had violated FINRA rules.
Steve Hall, Legal Director and Securities Specialist for Better Markets, says the decision removes technical legal barriers that stand in the way of recovery by investors already facing an uphill battle in arbitration.
“Reflecting a core argument that we advanced in our amicus brief, the court held that where an arbitration agreement clearly incorporates a set of rules governing broker conduct (in this case, the FINRA rulebook), an arbitration panel may award damages based on violations of those rules and breach of contract principles,” Hall says.
Forced arbitration clauses are common in agreements that individuals sign with financial services providers, such as brokers. These clauses compel individuals who have been the victims of wrongdoing to resolve those claims in a forum that is severely flawed for a number of reasons. However, one of the benefits of the process is that it’s supposed to be informal and therefore less expensive. Arbitration agreements almost always provide that investors can assert any type of claim against the broker, without the need to craft technical legal theories or be wary of legal traps.
The lower court’s decision in this case threw even that basic benefit into doubt. The claimants lost a significant amount of money after their brokers executed their trades through an account that clearly violated the rules of FINRA. A FINRA arbitration panel found for the investors and issued a substantial award in their favor, including attorneys’ fees. However, the lower court vacated the award based on the erroneous principle that violations of rules written by an industry self-regulatory organization cannot support a private claim for damages in federal court or in arbitration
Better Markets, in its amicus brief, demonstrated the legal flaws in the lower court’s reasoning and also pointed out that the lower court’s decision would make a bad arbitration system even worse, setting legal traps that exist in court litigation and erasing one of the few benefits arbitration offers to investors.
The Fourth Circuit correctly reversed the lower court and reinstated the arbitration award. Ultimately, the Fourth Circuit echoed the legal reasoning and the policy arguments advanced by Better Markets in its amicus brief. The court explained that the technical standard the lower court would have imposed on arbitral awards would cause “the costs of vindicating rights (to) drastically increase, threatening to foreclose yet another avenue of relief for ordinary consumers who routinely enter contracts with mandatory arbitration provisions.”