securities arbitration, punitive damages


There is controversy over awarding punitive damages by arbitration in securities disputes. Securities disputes are unique because the vast majority of such disputes are filed at Self Regulatory Organizations (“SROs”) which are subject to SEC oversight. However, other securities disputes are filed at the American Arbitration Association (“AAA”), which is not subject to SEC oversight. As a result differing rules evolved for SRO arbitrations than those applicable at the AAA. No SRO rule directly authorized punitive damages but section 31(d) of the Uniform Code of Arbitration prohibits limiting the ability of arbitrators to make any award. Whereas a AAA rule specifically provided that arbitrators may award any remedy or relief which the arbitrators deem just and equitable. Predictably, the turmoil over punitive damages continued in the courts. The Ruder Committee Report proposed the imposition of a cap on punitive damages of $750,000. Even if the SEC approved the rigid cap rule in a filing by the National Association of Securities Dealers (“NASD”), the question arises where is the legislative authorization to deprive an investor of relief otherwise available in court? The Supreme Court through McMahon gave an investor the ability to obtain in arbitration whatever relief was available in court, which the Ruder Report’s cap rule clearly violates. The rigid cap rule must be rejected in view of the fact that it bears no reasonable relationship to compensatory damages, its unilateral imposition by an SRO subjects it to questionable validity, it is strongly opposed by the public, it is not imposed at the AAA or at the other SRO arbitration forums, it violates Section 31 of the Uniform Code of Arbitration, it buttresses the argument that the pre-dispute arbitration agreement has become an unenforceable contract of adhesion, it rekindles public distrust of the SRO arbitration process, it violates the spirit under which McMahon was decided, and there are less objectionable ways to solve the securities industry’s fears of a runaway punitive award.



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