Legaspy v. FINRA: No, Your FINRA Arbitration Isn’t Too Complex for Zoom

Would you feel confident attending legal proceedings via a Zoom call? Do you think presenting complex documents in a virtual meeting might put you at a disadvantage?

The COVID-19 pandemic initially forced the Financial Industry Regulatory Authority, or FINRA, to postpone in-person arbitration hearings; however, FINRA and a federal district court have ruled that arbitration hearings can take place online. Read on to find out why.

Disputes against stockbrokers and brokerage firms are adjudicated through FINRA at a trial called a “hearing.” FINRA arbitration hearings used to only take place in person — FINRA arbitration panels selected a location from one of their 70 hearing locations throughout the country. As of August, only a handful of those locations met CDC guidelines for public health conditions. Luckily for claimants who are seeking damages against their brokers (and want the proceedings completed as soon as possible), FINRA has determined that arbitration and mediation meetings can take place via Zoom.

Preparing for Zoom Arbitration

If parties or counsel aren’t comfortable with Zoom, they can request a trial run with FINRA Dispute Resolution Services. FINRA also provides Zoom training guides for arbitrators. Arbitrators are the FINRA-appointed neutral parties who make decisions regarding dispute resolutions between brokers and their clients.

Prior to the hearing, FINRA Dispute Resolution Services sets up a trial run with arbitrators to test their equipment and make sure they understand how to use Zoom. Important features include the share screen, breakout rooms, and recording functions.

· “Breakout rooms” refer to the Zoom function that makes it possible for participants to confer privately. If participants want to use a breakout room, a FINRA Case Administrator can make those arrangements.

· Screen sharing allows all of the participants to view evidence and documents at the same time.

Privacy and Security

A FINRA Case Administrator is also responsible for arriving early, making sure the Zoom call is set up correctly, allowing participants to enter, and locking the meeting once everyone has arrived. Zoom’s “waiting room” feature ensures that the Administrator can screen participants before they enter.

Legaspy v. FINRA: Judge Rules that FINRA Can Hold Remote Hearings

Zoom arbitration is still new. Could a virtual hearing offer an advantage to the claimant or the broker? One broker recently set out to argue that his case was too complex for a Zoom hearing.

On August 11, 2020, Carlos Legaspy (CRD #: 2148751), a broker registered with Insight Securities, sued to prevent FINRA from holding a virtual evidentiary hearing. The hearing was to be held with two of his clients, who are seeking over $2.7 million in damages. According to Legaspy’s BrokerCheck record, the clients who are seeking that amount allege “Insight Securities, Mr Legaspy and Pershing LLC were negligent in missing the red flags” of fraudulent transfer documents. The clients also allege that part of their funds was invested in worthless notes.

The hearing was originally scheduled to take place, in person, on August 17, 2020. On June 25, 2020, a FINRA panel determined that the hearing would take place virtually on the same date. Legaspy argued that that given the number of witnesses, and the sheer volume and complexity of the documents that he would need to present, that he could not adequately defend himself via Zoom. His clients require an interpreter, which Legaspy also argued would make the proceedings unworkable.

A Northern Illinois judge disagreed, stating in the Order and Opinion Legaspy v. FINRA, №1:20-cv-4700 (N.D. Ill.) that Legaspy’s “oft-repeated line” about the number of documents and witnesses was his argument’s only support. The Opinion also stated that “Legaspy — who bears the burden of persuasion — cites no evidence that defenses cannot be presented remotely. He thus pits his conjecture against this court’s experience holding several remote evidentiary hearings since the pandemic began (once with an interpreter), all of which permitted the parties to air their claims and defenses fully.”

The Opinion did state that remote hearings are “clunkier,” but points out that this is more of a problem for the claimant, since the burden of proof lies with them. (Legaspy’s argument also raises the question — if his claimants have to use an interpreter, isn’t that more to their disadvantage than his?)

Legaspy also argued that “because the rules specify that the hearings will take place at some ‘location’ but do not mention remote hearings, remote hearings are categorically prohibited.” FINRA’s Rule 12213 states that the Director will decide at which of FINRA’s hearing locations the arbitration will take place. It also states that the Director will generally choose the hearing location closest to the customer’s residence at the time of the dispute.

Although these rules do seem to imply a physical location, Rule 12409 states that the FINRA panel has the authority to make final and binding interpretations, and in this case, the panel chose to interpret “location” to include a virtual meeting. The Opinion states that “the parties, witnesses, and arbitrators are still ‘located’ somewhere in a remote proceeding; it is simply not all the same location.” Legaspy also argued that proceedings cannot be remote because Rule 12602 states that all parties are entitled to attend. In the Opinion, the judge counters that Legaspy “may still ‘attend’ the hearing remotely, just as he did for the telephonic temporary restraining order hearing in this court on August 12, 2020.”

FINRA arbitration is designed to save claimants time and money, instead of enduring a lengthy and expensive court proceeding. Delaying the hearing until it could take place in person could potentially delay their settlement. According to the Opinion, “It would substantially burden the Claimants to enjoin the hearing. The Claimants argue that Legaspy has injured them to the tune of $2.6 million, and delaying the hearing delays their chance to make themselves whole,” and that moreover, “…the delay will be effectively indefinite, because it is not clear when FINRA will be able to hold in-person hearings again, given the uncertainty around the pandemic.”

Investors beware: The pandemic doesn’t mean you have time on your side.

If you’re an investor and you’re worried about proving your case in a virtual hearing, don’t hesitate to contact the securities attorneys of Fitapelli Kurta. Call (877) 238–4175 or email info@fkesq.com for your free case consultation.

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