California Wins Arbitration Ruling
Handing California a major victory, a federal judge in San Francisco on Tuesday tossed out a lawsuit challenging the state’s tough disclosure rules for arbitrators who hear complaints about stockbrokers.
The New York Stock Exchange and the NASD filed suit in federal court in July challenging the state Judicial Council’s authority to establish guidelines for the arbitrators who hear complaints from investors.
The NYSE and the NASD, formerly known as the National Assn. of Securities Dealers, called the state’s rules cumbersome and in conflict with their ethics rules for arbitrators.
But U.S. District Judge Samuel Conti ruled late Tuesday that the Judicial Council is protected from being sued in federal court. Conti said that in this case, the 11th Amendment to the U.S. Constitution “prohibits naming state agencies and departments as defendants.”
The NYSE and the NASD are in a tough position as they decide whether to appeal Conti’s decision, a process that could take a year or more. Thousands of arbitrations have backed up because the NYSE and the NASD have refused to provide arbitration panels in California since the new rules were imposed.
The rules require private judges -- including arbitrators in securities cases -- to reveal financial and other ties they and their families have with parties to the disputes.
The NASD, which handles the vast majority of disputes with stockbrokers, had been providing arbitration panels -- but only if investors would agree to have their cases heard under existing NYSE and NASD rules, which are approved by the Securities and Exchange Commission.
NYSE spokesman Ray Pellechia and NASD spokeswoman Nancy Condon declined to comment, saying they had not had time to review the decision fully.
Attorney Joseph W. Cotchett, whose Burlingame, Calif., law firm was chief counsel for the state, called the decision “a tremendous victory for California consumers” by reaffirming the state’s right to set standards for arbitration of disputes between investors and their stockbrokers.
The Judicial Council, which oversees the state’s judicial system, wrote the disclosure rules as a result of a law passed by the state Legislature.
The conflict took a heated turn when lawyers for the NYSE and the NASD sent process servers into the courtrooms of some of the judges on the Judicial Council, serving them with notice of the lawsuit while their courts were in session. Ronald M. George, chief justice of the California Supreme Court and a Judicial Council member, said in an e-mail responding to complaints that he found the tactic “highly offensive.”
Conti’s decision also is a defeat for the SEC, which had filed a “friend of the court” brief signed by outgoing commission Chairman Harvey L. Pitt saying it supported the single national standard for ethical disclosures by arbitrators.
When investors open accounts with brokerages, they must agree to submit disputes to arbitration. Cotchett said Tuesday’s ruling could apply to hospitals, car-rental agencies and other businesses that sometimes require consumers to settle disputes through arbitration rather than in court.
