Understanding Arbitration Claims in Securities Disputes: Elements, Burden of Proof, and Damages.

In the context of securities disputes, filing an arbitration claim with the Financial Industry Regulatory Authority (FINRA) is a common pathway for investors seeking resolution outside of the court system. Claims can arise from various issues, including suitability, fraud, breach of contract, negligence, unauthorized trading, and failure to supervise. Understanding the elements required to prove these claims, the burden of proof, and the potential damages recoverable is essential for anyone involved in such disputes.

Suitability

The concept of suitability in securities arbitration pertains to the obligation of brokers to recommend investments that align with an investor’s financial situation, objectives, and risk tolerance. To establish a suitability claim, the claimant must demonstrate that a broker recommended a specific security or investment strategy that was unsuitable for the investor. The reliance on this recommendation must have led to financial losses. The burden of proof in suitability claims, as with most arbitration claims, is a preponderance of the evidence, meaning it must be more likely than not that the recommendation was unsuitable and caused harm. Damages awarded in suitability claims typically include compensatory damages for financial losses, consequential damages for additional impacts, and sometimes interest and costs associated with the claim.

Fraud

Fraud claims in securities arbitration involve allegations of intentional deception by brokers or firms. To prove fraud, the claimant must establish that the broker made false statements or omitted material facts with the intent to deceive the investor. The investor must have relied on these misrepresentations or omissions, resulting in financial loss. The burden of proof is the preponderance of the evidence, requiring the claimant to show that it is more likely than not that the fraud occurred and caused harm. Damages for fraud can include compensatory damages for direct financial losses and, in some cases, punitive damages designed to punish the wrongdoer and deter future misconduct, as well as interest and costs.

Breach of Contract

Breach of contract claims arise when a broker or firm fails to fulfill the terms of an agreement with an investor. The claimant must demonstrate the existence of a valid contract, a breach of that contract by the broker or firm, and resultant financial harm. The burden of proof is again a preponderance of the evidence. Damages for breach of contract aim to put the investor in the position they would have been in had the contract been performed as agreed. This can include compensatory damages for financial losses and consequential damages for additional impacts directly resulting from the breach, along with possible interest and costs.

Negligence

Negligence claims in securities arbitration involve allegations that a broker failed to exercise the appropriate standard of care, leading to investor losses. To establish negligence, the claimant must prove that the broker owed a duty of care to the investor, breached this duty, and caused financial harm as a result. The burden of proof is a preponderance of the evidence. Damages for negligence typically include compensatory damages for the financial losses incurred due to the broker’s failure to meet the standard of care, and interest and costs may also be awarded.

Unauthorized Trading

Unauthorized trading claims occur when brokers execute trades without the investor’s consent. To prove unauthorized trading, the claimant must show that trades were made without authorization, that the broker had control over the account, and that these trades caused financial harm. The burden of proof is a preponderance of the evidence. Damages in unauthorized trading claims generally cover the losses from the unauthorized trades, and interest and costs may also be awarded.

Failure to Supervise

Failure to supervise claims are directed at brokerage firms for not adequately overseeing their brokers and employees. To prove such a claim, the claimant must demonstrate that the firm had a duty to supervise, failed to do so, and that this lack of supervision led to broker misconduct resulting in financial harm to the investor. The burden of proof is a preponderance of the evidence. Damages for failure to supervise can include compensatory damages for losses resulting from the misconduct, punitive damages in cases of egregious failures to deter future misconduct, and interest and costs.

Conclusion

Arbitration claims in securities disputes cover a range of issues from suitability and fraud to breach of contract, negligence, unauthorized trading, and failure to supervise. Each type of claim requires specific elements to be proven, typically under the burden of a preponderance of the evidence. Understanding these elements, the burden of proof, and the potential damages recoverable is crucial for investors seeking to navigate the arbitration process effectively. By providing detailed evidence and, where necessary, seeking legal advice, claimants can better position themselves to achieve a favorable resolution through FINRA arbitration.