A federal judge has thrown out a lawsuit filed by Charles Schwab Corp. (SCHW) against the Financial Industry Regulatory Authority Inc. The financial firm had sought to stop the SRO’s enforcement case against it over an allegedly illegal arbitration agreement.
Schwab had added a new provision to over 6.8 million customer account agreement that would prevent clients from beginning or joining a class action lawsuit against the broker-dealer. Customers would also have to agree that industry arbitrators wouldn’t be able to consolidate securities claims from different investors. (Both kinds of cases typically involve investors with smaller claims that are usually less than $10,000. Lawyers who oppose Schwab’s arbitration provision have said that it leaves many of these investors without a legal process to be able to recover any financial losses.) By February, more than 50,000 clients had opened accounts with Schwab since it had implemented its new arbitration provision.
However, FINRA does not let class actions go through its arbitration system and it prevents broker-dealers from limiting the ways in which customers can file claims in court that are not allowed in arbitration. In its enforcement case against Schwab, the SRO accused the brokerage firm of violating its rules by making clients waive their right to file a class action complaint against it. Schwab immediately responded with a lawsuit against FINRA.
The brokerage firm said that it added the class-action waiver last year following the US Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion. That decision held that the Federal Arbitration Act preempts laws guaranteeing rights to file class action cases and supports the use of private dispute resolution by making sure that arbitration agreements are upheld. Schwab wanted a determination that its class action waiver was enforceable. (It even cited the Supreme Court’s decision in Compucredit Corp. v. Greenwood. In that ruling, the court ruled that only a congressional mandate could preclude the enforcement of an arbitration agreement under the FAA.)
In her opinion, U.S. magistrate judge Elizabeth LaPorte of the U.S. District Court for the Northern District of California agreed with FINRA that Schwab must follow the SRO’s procedures for disciplinary cases, which includes a review by a federal court judge. She also said that the court of appeals would have the final say in these cases and can fix any mistakes. Also, even though Schwab had tried to argue that going through FINRA’s process, which can take four years or even longer, would cause it harm that was irreparable, the court said that such a delay is not enough of a reason to be allowed to avoid FINRA’s process.
At Shepherd Smith Edwards, and Kantas, LTD, LLD our FINRA arbitration lawyers represent investors with claims against brokerage firms, brokers, and investment advisers. Your initial case evaluation with one of our stockbroker fraud attorneys is free.
Court Throws Out Finra Suit Against Charles Schwab, FOX Business/Dow Jones Newswires, May 11, 2012
Schwab client-waiver spurs FINRA complaint, Reuters, February 1, 2012
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FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, May 8, 2012
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Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012