Investment fraud is ubiquitous, and results in losses measured in billions of dollars. The recent financial crisis in the United States exposed a growing number of investment fraud schemes perpetrated against unsuspecting investors. In 2010, the Federal Bureau of Investigation, along with several other federal agencies, initiated a sweep known as Operation Broken Trust that focused on scams directly targeting individual investors. The four-month, groundbreaking investigation identified 120,000 victims of investment fraud who lost more than $8 billion due to various fraudulent investment schemes.
Aggrieved investors who pursue damage claims against their investment advisors typically do not have a choice of forum to pursue their cases. Claims against brokerage firms, which are regulated by the Financial Industry Regulatory Authority (FINRA), uniformly require disputes to be arbitrated through FINRA’s dispute resolution process. In contrast, actions against registered investment advisory firms (RIAs), which are regulated by the SEC or its state equivalents, are generally subject to lawsuits in court. As a result, investors pursuing these investment fraud claims have, historically, faced unavoidable disparities in the expense and complexity of bringing securities fraud cases based only on whether their advisor is regulated by FINRA or by the SEC.
While the differences between the two forums
endure, some investors now have a choice to resolve their investment fraud
disputes in arbitration or in court. In
November 2012, FINRA announced that its arbitration forum would be available to
administer investor claims against non-member firms on a voluntary basis. Attorneys
considering whether to litigate claims against RIAs in FINRA arbitration rather
than in court need to consider the significant differences in the costs, the
availability of discovery, and the nature of the hearing on the merits. This article offers practical guidance to
lawyers deciding the appropriate forum for resolution of investment disputes
against RIAs and their advisors.
