Class Action vs. Securities Arbitration


Securities arbitration can many times represent 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. Recent Supreme Court decisions have made 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 may allege damages from any securities losses over a period of time longer than the class action period. FINRA securities arbitrations will proceed faster than class actions and may allege causes of action for damages from additional wrongdoing.

According to a study conducted by the Stanford University Law School and Cornerstone Research published in 2015, Securities Class Action Filings – 2014 Year in Review, “Filings against energy companies gained prominence in the fourth quarter of 2014 as oil and gas prices declined.” The study pointed to trends in the number of Initial Public Offerings (IPO) and the exposure to future litigation. As the Cornerstone Research Report notes, “On major U.S. Exchanges, there were 206 IPOs in 2014, a 31 percent increase from 2013.”

Securities Arbitration and Class Action

An investor who is already a 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 pusuing all potential avenues of recovery.

FINRA Arbitrations May Recover Greater Investment Losses Versus Class Actions Settlements

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. A Stanford University Law School and Cornerstone Research report, Securities Class Action Settlements – 2014 Review and Analysis, published in January 2015 found “Total settlement dollars in 2014 declined 78 percent compared to 2013 and were 84 percent below the average for the prior nine years.” The Cornerstone Research study also found, “In 2014, the median and average time to settlement was three years.”

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 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 loss recovery, favorable case facts specific to the individual investor, longer claim period, and resources available to pursue an FINRA arbitration claim. Some of these factors are considered in greater detail below:

Why Does Size of Investment Loss 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. Investor-specific considerations provide the basis for recovery of losses from all of the securities held with a brokerage firm, 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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