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Class Action vs. Securities Arbitration

Securities arbitration is frequently a better option than a class action for investors because the recovery is frequently greater and the arbitrators are better able to focus on the unique claims of an individual or institutional investor. The current Supreme Court has rendered multiple recent decisions making class actions more difficult to pursue. Many retail and institutional investors choose to pursue a securities arbitration claim with the Financial Industry Regulatory Authority (FINRA) which provides that all investment losses can be claimed for damages. Ultimately, a FINRA securities arbitration will proceed faster than a class action and will have limited costs for an appeal.

According to a recent study, there were 74 federal securities class action filings lawsuits for the first half of 2013, which resulted in the second lowest level on an annualized basis since 1997. Federal class action filings for the first-half of 2013, is below the historical average of 95 filings per six-month period. There were increased filings over 2012 levels for the Consumer Discretionary, Health Care and Telecommunications sectors, and against companies listed on the Over-the-Counter Bulletin Board (OTCBB) and Pink Sheets which are typically smaller firms with lower market capitalizations. According to the study conducted by the Stanford Law School and Cornerstone Research concerning the outcomes of class actions, “We observe that the filings with an institutional investor as the lead or co-lead plaintiff were less likely to be dismissed and more likely to reach a ruling on summary judgment than those that did not have an institutional investor as the lead or co-lead plaintiff.”


Securities Arbitration and Class Action

An investor who is already part of a class action against a company may also pursue a FINRA arbitration claim against the brokerage firm or investment bank which acted as the client’s advisor. The investor has potentially different claims against each of these parties and can have multiple avenues of recovery. In certain circumstances, it may make sense to not participate in a class action. However, our lawyers will assist you in pursuing all potential avenues of recovery.


Class Actions Can Result in Lower Recovery Amount Than
FINRA Arbitration

Class action lawsuits are designed to recover damages for a group or “class” of investors who sustained losses from the same situation or investment. Many individual investors participate in class action lawsuits because the size of the loss is too small or the securities at issue were not held with a full-service brokerage firm. In another study published in 2013, Cornerstone Research found in the 1325 class action filing after the passage of the Class Action Reform Act of 1995 for settlements between 1996 and 2012, the average class action settlement resulted in recovery of approximately 3.2% of estimated damages. The Cornerstone Research study also found that class action cases typically reached settlements three years to three and one-half years after the cases were filed.


Are Securities Arbitration Claims a Better Choice for Me?

FINRA is the regulatory organization responsible for the resolution of disputes between investors and their broker-dealer. FINRA has established sales practice rules and regulations which govern duties and responsibilities for financial advisors and brokerage firms concerning the handling of investor brokerage accounts. FINRA arbitration claims can be filed when there is a sales practice violation or other misconduct. A FINRA securities arbitration claim may consider a period of time longer than the class period for the class action lawsuit which may result in a greater alleged damages in the handling of an investor account. The securities arbitration process is generally more expeditious than a class action lawsuit.


Considerations for Opting Out of Class Action Lawsuit

Securities arbitration may be more advantageous for investors for multiple reasons including greater damages, the facts specific to the individual investor, longer claim period, and the resources available to pursue an FINRA arbitration claim. Some of these factors are considered in greater detail below:


Why Should Investment Loss Size Matter?

Research studies have concluded that investors can expect to recover only a small fraction of their estimated damages through participation in a class action lawsuit. As the size of the investment loss increases, the viability of an individual securities arbitration claim becomes a more cost-effective method to recover investment losses. An individual arbitration claim filed with FINRA increases the likelihood of a larger recovery of your investment loss.


Individual Case Facts May Be More Favorable

An individual securities arbitration claim for sales practice violations is based on facts specific to the handling of an individual investor’s entire brokerage account. The merits of the securities arbitration claim are evaluated based on the investor’s investment objectives, time horizon and risk tolerance. These investor-specific considerations provide the basis for recovery of losses from all of the securities held, in addition to the particular security at issue in the class action. This is another distinct advantage of a securities arbitration claim when compared to participation in a class action lawsuit.


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