Judicial Council Moves to Dismiss NYSE Suit Over Arbitration Rules

Tuesday, August 20, 2002

Page 3

Judicial Council Moves to Dismiss NYSE Suit Over Arbitration Rules

By a MetNews Staff Writer

Attorneys for the Judicial Council of California sought dismissal yesterday of a lawsuit challenging California’s ethics standards for arbitrators.

The New York Stock Exchange and the National Association of Securities Dealers’ Dispute Resolution Corporation sued the Judicial Council and all of its voting members to set aside the new rules. The NYSE and NASD, both of which administer investor complaints against stockbrokers, stopped appointing arbitrators to hear new complaints in California after the rules took effect July 1.

The action has delayed the cases of investors who have accused their brokers of wrongdoing.

The Judicial Council’s motion, filed in U.S. District Court in San Francisco, asks the court to dismiss the lawsuit because there is no federal jurisdiction, the plaintiffs have no standing, and there is no case or controversy.

“At a time when the nation’s confidence in the stock market is wavering, it is unfortunate that these stock exchanges are opposing ethics standards designed to help protect investors, who are required to have their disputes resolved by arbitration, rather than in court,” said Joseph W. Cotchett of Cotchett, Pitre, Simon & McCarthy of Burlingame, the firm representing the Judicial Council and the individual defendant judges and other members of the council.

The new ethics standards for arbitrators were adopted by the Judicial Council at the direction of the State Legislature, which was concerned with assuring California’s citizens a fair and adequate forum to resolve disputes through arbitrations.

The rules require neutral arbitrators to make detailed disclosure of any financial relationships or conflicts of interest between arbitrators and the companies, attorneys or parties involved in disputes. The NYSE and NASD claim the new rules are too burdensome and are preempted by the Federal Arbitration Act.

Lawyers for the stock exchanges sent process servers around the state to personally serve council members with the lawsuit.

State Senate President Pro Tem John Burton and Senator Martha Escutia, Chair of the Senate Judiciary Committee, last week filed a complaint with the U.S. Securities and Exchange Commission alleging the NYSE and NASD were illegally refusing to proceed with arbitration of claims by California investors.

In a letter to SEC Chair Harvey Pitt, the two senators said: “We fail to understand why the exchanges would jeopardize their reputations and, more importantly, undermine investor confidence in the securities market by embroiling themselves in a dispute between an investor and his or her brokerage firm to the outright and undeniable disadvantage of the consumer investor.”