The Expert's Examiner

April 9, 2019

The Dow Jones Industrials ended 2017 at 24,719; at the close of business for 2018, the average had dropped to 23,062, an event not seen in many years. While there is no parallel in importance and probably no parallel in cause, the new complaints record at FINRA also broke a long-standing pattern in 2018, as incoming volume rose dramatically from the prior year. According to FINRA-DR's year-end statistical report, posted recently on the facility's website, total new case filings ended 2018 at 4,325, a 25% climb over the 3,456 cases received in 2017. December itself was also a bit of a surprise. New claims had been erratic in the second half of the year and generally ebbing, but claims surged in the final month, registering 388, a result more reminiscent of monthly tallies in the first half of the year.

Industry Cases Surge

Another twist in the new filings figures was the greater contribution of industry cases to the intake growth. Industry claims rose 38% (1,612 v. 1,189) in 2018 versus 2017 and customer claims rose 20% (2,713 v. 2,267). Those who try to divine the reason for this surge on the industry side by reviewing the "Industry Controversy" Chart supplied in FINRA's monthly report will come away frustrated. Promissory note cases are down dramatically -- 261 new cases in 2018, a dip somewhat from 296 in 2017, but down big-time from 401 cases filed in 2016. The only other claim category that moved significantly was the "Libel, Slander, or Defamation" class, which rose from 117 in 2017 to 166 in 2018. There's a separate "Defamation" category for Form U5 disputes, which was stable year-to-year, so these disputes are of a separate nature. In addition to the slackening in promissory note claims, we noted that raiding, wrongful termination and commission claims all registered stable year-to-year. We invite readers to comment on what's causing the surge in defamation claims.


We continue to think the expungement surge explains much of the volume in intra-industry case filings, but FINRA's statistics are not telling. Expungement Awards also influenced other statistical results in the FINRA-DR report. Readers of SAC's weekly UPDATE: ARBchek will recognize that expungement-only cases were plentiful among FINRA Awards this past year. Those cases are essentially single-issue petitions, so they do not require much discovery, involve little or no motion practice, and, by their nature, demand a hearing decision. FINRA reports that only 17% of the cases closed by staff in 2018 involved arbitrator decisions, so: (1) expungement-only Awards had a disproportionate impact on that percentage; and (2) they also likely helped to mitigate average turnaround times.

Customer “Win Rates”

The overall “win rate” on customer-claimant Awards was 40%. Breaking that down, we see that "Customer Award Paper Cases" scored only 35% of the time for Claimants, while disputes warranting three-arbitrator panels (usually $100,000 and over) delivered a 44% "win" rate for customers. Panels comprised of all-public arbitrators (about 73% of the three-person panels) awarded customers monetary damages 42% of the time, while majority-public panels - for the first year since 2013 -- awarded damages at a higher rate than the APPs -- 47% of the time. As for the number of arbitrators in service, FINRA's roster grew this year by almost 400 (from 7,343 to 7,730): a net of 234 arbitrators were added to the Non-Public rolls (4006 to 4,240); and a net of 153 Public Arbitrators joined the Neutral Roster in 2018 (3,337 to 3,490).

(ed:  *As always, a key question is “what does this portend for next year?” We don't have any bold predictions, but one would think recent market volatility will result in more customer arbitrations down the line. Watch for claims of improper margin liquidation, unsuitability of naked puts, and other income-generating ploys toppled by market volatility. **SAC provides these analyses on a monthly basis as FINRA-DR releases them. The February Report issued in late March -- it showed customer claims down, year-to-year, by 32% and industry claims down 23% year-to-year. The reasons, we surmised, was a "perfect storm": the three big contributors to case volume in 2018 (prom notes, PR cases, and expungement requests) all subsided.) (SAC Ref. No. 2019-04-01)