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Investor Dispute Settlement ...

While the majority of investor disputes, perhaps 80% or more, are settled through negotiation or mediation prior to arbitration, some precautions should be considered before entering such discussions or agreeing to any terms that may be proffered therein.

An obvious factor in settlement deliberations is the lower cost of resolution prior to arbitration or litigation. However, the economy of an early settlement carries with it the risk of agreeing to less favorable terms than might be achieved by moving forward in a more formal way.

A prime example of this risk is the assumption that one can enter settlement talks without the use (and cost) of expert witness analysis or testimony, neither of which is required prior to arbitration or litigation. Three considerations illustrate the downside of this apparent economy.

One is the most accurate estimate of overall damages incurred and the commensurate relief that should be sought to remedy those damages. Such damages may include a number of factors beyond the simple out-of-pocket losses that may have triggered the dispute and can include gains that would have been realized in alternate investments, mandatory interest payments and attorney fees and expenses to which the plaintiff or claimant may be entitled in certain circumstances.

Next is an understanding of the underlying causes for the loss, whether a result of unsuitability, lack of supervision and/or any of several other possible mutually re-enforcing patterns of misbehavior. The demonstration of a full grasp of the factors leading to the loss can be very effective in motivating the opposing side to an appropriate and favorable settlement.

A third consideration, while less obvious, is nevertheless important. By having an expert involved prior to settlement discussions, the investor benefits not only from the above factors but also demonstrates the means and willingness to proceed beyond settlement talks should these prove unsatisfactory. This apparent readiness to move forward will in and of itself often result in substantially better outcomes and is widely used by brokerage firms as a gauge of a complainant’s seriousness.

Having reviewed customer complaints for the Office of General Counsel of a number of Wall Street firms, Market Consulting Corporation has participated in settlement discussions as a consultant, and is aware of the interplay between the branch and headquarters of the respondent firm in agreeing to a settlement as well as other factors important in determining the size and timing of the offers made.