By KRISHNAN S. CHITTUR

INDIA ABROAD (New York, Chicago, Los Angeles), JUNE 8, 2001

ECONOMY
JUNE 08, 2001
Arbitration

Claimants in arbitration proceedings often wonder about an arbitration award. Arbitrators give no reasons, do not explain why someone prevailed, or what was lacking in the evidence presented. Instead, they simply announce the result: Claim dismissed, or claimant awarded a certain sum (usually less than what is sought).

Ever wonder what transpired behind closed doors that led to this award? What swayed the arbitrators to rule this way?

Almost by definition, arbitration awards are not likely to be based on legal issues. True, most arbitrators pay some attention to the law -- provided it is explained properly, because the arbitrators may not be lawyers at all. Most arbitrators also have a genuine desire to be fair, although concepts of "fairness" differ considerably.

However, equally important (and often ignored) are the critical roles played by the group dynamics of the arbitrators in the panel, the individual personalities of the arbitrators involved, and the overall picture presented by the evidence. Having been an arbitrator on several occasions, it is crystal clear to me that you ignore these factors -- in essence, the composition of the panel -- at your risk. Let me illustrate this with a case study.

Case study: M, a retiree, brought a claim against a brokerage house, H, and its broker, B, for securities fraud. At B's instance, M invested in a stock, ABC. Thereafter, B never informed M, even while ABC Company reported financial problems; instead, as the stock price kept going down, B recommended additional investment in ABC as a "bargain buy."

Over time, B repeatedly displayed an unwavering enthusiasm about ABC's future, convincing M that ABC would be the next Microsoft. Eventually, ABC tanked, and M sought to recover his losses through an arbitration proceeding.

The evidence showed that M had been a tax accountant, and a partner in a major accounting firm. He had since retired, and was obviously well off financially. He had been involved in some charitable activities, and appointed to some international trade committees. The relationship with B began with a cold call from B (are you surprised?), and M wanted to give an opportunity to a young, promising broker to succeed.

For his ABC investment, he relied upon B exclusively. B was a rookie broker when he landed up with M's account. He came across as energetic and well-meaning, but incredibly illogical, about ABC. He had sold ABC to almost all his clients. He had no rational basis for recommending ABC, or, for that matter, continuing to recommend it after adverse financial reports.

H did not follow ABC, and issued no recommendations on that stock. However, H had repeatedly requested B to have his customer-investors divest ABC -- a request which he repeatedly ignored. But then, H never followed through to ensure the divestiture.

Who is to blame?: Plainly, both sides shared responsibility. M was not a novice investor; he had other brokerage accounts. He was financially savvy, knew how to get and analyze financial information, and had received the ABC reports regularly (although it appeared that he never read them).

If he had only done what he was clearly capable of doing, and considered the situation independent of B, he would have avoided the loss. But he did not do so.

On the other hand, B apparently had an incomprehensible fixation with ABC. That is unacceptable when you are dealing with someone else's money. Worse, B had no legitimate reason to conceal the adverse information about ABC from M.

Moreover, H ought to have reined in B: H knew that B had shepherded his customers into ABC, and that it would be prudent to divest. H had specifically asked B to divest -- but never followed through. Surely, M did not give the money to B personally -- B was a total stranger to M, and M looked at H's looming banner in the background because M implicitly trusted that H would properly supervise B.

Anatomy of deliberations: First, the obvious: If the industry arbitrator -- and most securities arbitration panels have at least one member who is from the industry -- is a relatively strong personality compared to the remaining two, strike one against M. Most (not all) industry arbitrators would view this case as a sophisticated investor seeking to blame someone else for his losses. And if such an arbitrator dominates the panel, M can kiss his claim goodbye.

Conversely, if the public arbitrator (and most panels have one of these also) has a plaintiff-oriented background and is a relatively strong personality, attention may turn to H's and B's delinquencies and M's result may be different.

However, if both these arbitrators in the panel have strong personalities -- which usually translates into strong views -- the third arbitrator could become a pivotal vote. But panels usually do not render a split decision. (Yes, I know, sometimes they do: I have been the dissenter also).

Enter real-world experience and perspectives, negotiation skills, and who feels how strongly about what aspect of the case.

Arbitrators, like the rest of us, do not want to be the odd man out. This results in a negotiated outcome following (sometimes) bizarre reasoning and personality quirks.

One arbitrator could be peeved at B's irresponsible conduct and H's lackadaisical supervision; he sees systemic problems in letting B and H go scot-free, and hence, could favor awarding compensatory damages.

Another arbitrator could focus on M's sustained indifference and how easy it was for M to have avoided the loss; that meant, from this arbitrator's perspective, that M had so much money that this investment didn't really matter to him, so what was he complaining about? Both positions had an element of truth -- equally important, both arbitrators have to recognize this.

Apportion responsibility, accordingly: Logically, if two parties are jointly to blame, responsibility is apportioned -- 65 percent to B, 25 percent to H, and 10 percent to M, etc. Such allocation is itself entirely subjective. Why 65 percent to B, not 45 percent, for example?

But the result in the first round may still be unacceptable, as for example, one arbitrator may balk, "I don't want to give this guy (M) over 'x' dollars." Some backpedaling takes place then, and apportionment percentages are revisited, to come to a number acceptable to all arbitrators. If the claimant-favoring arbitrator is still insistent and does not have something else pressing for his time, a few other issues are probed.

Punitive damages: A millionaire retiree who could protect himself, but did not, is not a sympathetic claimant; no heartstrings are tugged. But here is where H's indifference to the arbitration process may take significance: H had ignored orders of the panel, failed to produce documents or provide information as ordered, and generally treated the procedural rules with disdain. This would obviously annoy the panel.

Moreover, H's continued failure to enforce its own recognition of the need for divestiture compounded this: The overall picture conveyed was of a brokerage house functioning too loosely for comfort. This leads to a classic dilemma for the arbitrators: How do we convey to H that its conduct is not acceptable, without giving "too much" money to M? One arbitrator may be dead-set against giving over 'x' dollars, but the consensus was in favor of awarding something. The eventual result was a typical "committee" decision: a little bit of both, so that the "punishment" part of the award was more of a statement than a real deterrent, and the "compensation" part of the award was not fully compensatory either.

Lessons from a claimant's perspective: This case is typical, with no intrinsically overpowering emotional undertones (as, for example, an old widow's savings being squandered by a slimy broker). There was enough for both sides to blame each other, and the result could have gone either way. The award was, thus, the product of interaction of the personalities of the arbitrators -- which is normal.

In this sense, arbitrators are akin to jury in trials. Trial lawyers know the importance of jury selection. That can mean the difference between victory and defeat. While you cannot ask questions of arbitrators (as you can with juries), you can find a lot about each individual arbitrator.

The sponsoring organizations such as the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) typically provide a full background and disclosure, together with previous awards by each.

In addition, of course, you can do your own investigation through the Web and myriad other sources. If you do this early enough, you might be able to prevent "undesirable" persons from being empaneled in your case at all -- and what could be better?

Hence, if you are considering -- or are in the process of -- arbitration, you should seek help from the experts. Because what you do not know can hurt you badly. Call us: Initial consultation is free.

(The author is an attorney at law, and an arbitrator with National Association of Securities Dealers, NASD, and the New York Stock Exchange, NYSE. He secured a master's degree in law from Mumbai and a doctorate in juridical science from Harvard.