Arbitration Altercation

John Worden enjoyed a moment of fame within the securities bar in August. Lawyers from around California sent the Morgenstein & Jubelirer litigator e-mails congratulating him for his good work in an arbitration.

Worden hadn't yet won or lost, but he and his colleagues had accomplished something considered more important: They had gotten the person representing the opposing party expelled from the proceedings because he wasn't a lawyer.

“We were kind of heroes for a while,” says Worden.

The victory was short-lived. Richard Sachs, the ejected non-attorney representative, claimed the arbitrators had exceeded their authority in disqualifying him, and he threatened to sue. Within days, the three arbitrators reinstated Sachs and summarily resigned from the panel.

It's not unusual for parties to wrangle over the appointment of neutrals in an arbitration, but a long-running battle in broker-dealer arbitrations revolves around who has the right to represent investors at the proceedings.

A cottage industry of non-attorneys has carved out a profitable niche bringing investor claims against securities brokerage houses during the past decade. According to securities lawyers, these non-attorneys are engaging in the unauthorized practice of law and pose a threat to consumers. But despite repeated attempts to bar non-attorneys, they don't appear to be going away.

Both the National Association of Securities Dealers (NASD) and the New York Stock Exchange, which administer the two main forums for broker-dealer arbitrations, say they allow the participation of non-attorney representatives in California. A spokesperson for the NASD said this is simply a reflection of California law, which allows non-attorney representation in arbitrations.

But Worden and other securities lawyers contend that the California Supreme Court's 1998 decision in Birbrower v. Superior Court, 17 Cal.4th 117, makes clear that participating in an arbitration is the practice of law, and therefore, non-attorneys aren't eligible.

“There's a misconception out there that this is legal,” says Cary Lapidus, a San Francisco solo attorney who represents investors in arbitrations. The main problem, he says, is that no one is enforcing the rules.

Non-attorney representatives take a different view, arguing that what they do is perfectly legal, and that they're at least as qualified to represent investors as lawyers.

“This notion that somehow or another you need to be a lawyer to effectively advocate or effectively rule on these types of disputes is absolutely ridiculous,” says Sachs, who says he's handled more than 800 cases in his 12 years running Novato, Calif.-based Investors Recovery Service.

As a former stockbroker, Sachs says he's intimately familiar with the issues involved in investor claims, making him more effective and less expensive than many lawyers. While a typical litigator might have to retain a $200-an-hour expert witness for 25 to 70 hours to evaluate a case, Sachs says he can figure it out himself within two hours.

“Advocates that have knowledge of the industry are going to be far more effective in representing their clients than lawyers who don't have any,” he says.

While critics point out that Sachs was suspended from working as a stockbroker, Sachs says that he ran out of money to appeal the suspension and that it has no bearing on his role as an investor advocate in arbitrations.

Participation by non-attorneys in quasi-legal proceedings is not unheard of. In Department of Social Services hearings and workers' compensation appeals board hearings, for instance, parties are routinely represented by individuals who are not lawyers. In those cases, the rules permitting non-attorney participation are set by the individual agencies.

“The issue really is this, if someone is compelled to arbitration, or compelled to a certain forum, why shouldn't they be able to use who they want,” says Arthur Leider, president of San Diego's Investors Arbitration Specialists.

Leider says he works on a contingency basis and often represents elderly investors with $20,000 to $30,000 claims, cases he says many lawyers consider too small to bother with.

“Who's going to represent the little old lady with the 50 grand?” asks Leider.

A non-attorney representative for more than six years, Leider notes that Birbrower did not involve non-attorneys, but rather out-of-state attorneys trying to collect fees for work on a California case. The court held that individuals need to be registered with the California State Bar in order to take part in California arbitrations.

Soon after the decision, however, the state legislature carved out an exception to the ruling, creating a pro hac vice system for out-of-state lawyers to participate in California arbitrations. The legislation also contains a clause stating that a party's right to elect “to be represented by any person in a non-judicial arbitration” is not expanded or restricted beyond what it was prior to the Birbrower decision.

According to non-attorney representatives, this means that since their behavior was acceptable before Birbrower, it remains so today.

Of course, the presence of non-attorney representatives in securities arbitrations was controversial before Birbrower. The State Bar, which can only exercise jurisdiction over lawyers, has no rules specifically addressing representation at securities arbitrations.

Gilbert Serota, a partner at Howard, Rice, Nemerovski, Canady, Falk & Rabkin, had numerous clashes with non-attorney representatives throughout the 1990s. Among his objections to non-attorney representatives is the fact that they're not bound by any ethical rules, as lawyers are.

“You can't rely on them to do things that you can rely on opposing counsel to do,” he says. A lawyer is obliged to relay a settlement offer to the client, he notes as an example, but there's no such assurance with non-attorneys.

While Serota believes that non-attorney representatives are practicing law without a license, he says that they're rarely stopped, as the arbitrators overseeing a case typically don't consider themselves authorized to rule on client representation matters.

“So for each of these things, you'd have to go to court,” Serota says. “It's expensive and time consuming.”

On a couple of occasions, Serota says that he's gone to court and has succeeded in getting non-attorneys removed from arbitrations. In one of the cases, Serota says, he obtained an order to show cause against Sachs.

But Sachs notes that the case was ultimately settled, with Sachs opting to settle rather than fight only because he'd suffered a heart attack around the same time. Meanwhile, Sachs says he has a favorable ruling from a case in Contra Costa County Superior Court that maintains that his involvement in arbitrations is not the unauthorized practice of law.

Despite this history of antagonism, Sachs believes the relationship between non-attorney representatives and securities lawyers has improved, noting that roughly half of his client referrals come from attorneys.

“I'd say most of the firms that we deal with buried the hatchet a long time ago,” says Sachs. “I think they know and understand that I have a right to do this.”

John Worden enjoyed a moment of fame within the securities bar in August. Lawyers from around California sent the Morgenstein & Jubelirer litigator e-mails congratulating him for his good work in an arbitration.

Worden hadn't yet won or lost, but he and his colleagues had accomplished something considered more important: They had gotten the person representing the opposing party expelled from the proceedings because he wasn't a lawyer.

“We were kind of heroes for a while,” says Worden.

The victory was short-lived. Richard Sachs, the ejected non-attorney representative, claimed the arbitrators had exceeded their authority in disqualifying him, and he threatened to sue. Within days, the three arbitrators reinstated Sachs and summarily resigned from the panel.

It's not unusual for parties to wrangle over the appointment of neutrals in an arbitration, but a long-running battle in broker-dealer arbitrations revolves around who has the right to represent investors at the proceedings.

A cottage industry of non-attorneys has carved out a profitable niche bringing investor claims against securities brokerage houses during the past decade. According to securities lawyers, these non-attorneys are engaging in the unauthorized practice of law and pose a threat to consumers. But despite repeated attempts to bar non-attorneys, they don't appear to be going away.

Both the National Association of Securities Dealers (NASD) and the New York Stock Exchange, which administer the two main forums for broker-dealer arbitrations, say they allow the participation of non-attorney representatives in California. A spokesperson for the NASD said this is simply a reflection of California law, which allows non-attorney representation in arbitrations.

But Worden and other securities lawyers contend that the California Supreme Court's 1998 decision in Birbrower v. Superior Court, 17 Cal.4th 117, makes clear that participating in an arbitration is the practice of law, and therefore, non-attorneys aren't eligible.

“There's a misconception out there that this is legal,” says Cary Lapidus, a San Francisco solo attorney who represents investors in arbitrations. The main problem, he says, is that no one is enforcing the rules.

Non-attorney representatives take a different view, arguing that what they do is perfectly legal, and that they're at least as qualified to represent investors as lawyers.

“This notion that somehow or another you need to be a lawyer to effectively advocate or effectively rule on these types of disputes is absolutely ridiculous,” says Sachs, who says he's handled more than 800 cases in his 12 years running Novato, Calif.-based Investors Recovery Service.

As a former stockbroker, Sachs says he's intimately familiar with the issues involved in investor claims, making him more effective and less expensive than many lawyers. While a typical litigator might have to retain a $200-an-hour expert witness for 25 to 70 hours to evaluate a case, Sachs says he can figure it out himself within two hours.

“Advocates that have knowledge of the industry are going to be far more effective in representing their clients than lawyers who don't have any,” he says.

While critics point out that Sachs was suspended from working as a stockbroker, Sachs says that he ran out of money to appeal the suspension and that it has no bearing on his role as an investor advocate in arbitrations.

Participation by non-attorneys in quasi-legal proceedings is not unheard of. In Department of Social Services hearings and workers' compensation appeals board hearings, for instance, parties are routinely represented by individuals who are not lawyers. In those cases, the rules permitting non-attorney participation are set by the individual agencies.

“The issue really is this, if someone is compelled to arbitration, or compelled to a certain forum, why shouldn't they be able to use who they want,” says Arthur Leider, president of San Diego's Investors Arbitration Specialists.

Leider says he works on a contingency basis and often represents elderly investors with $20,000 to $30,000 claims, cases he says many lawyers consider too small to bother with.

“Who's going to represent the little old lady with the 50 grand?” asks Leider.

A non-attorney representative for more than six years, Leider notes that Birbrower did not involve non-attorneys, but rather out-of-state attorneys trying to collect fees for work on a California case. The court held that individuals need to be registered with the California State Bar in order to take part in California arbitrations.

Soon after the decision, however, the state legislature carved out an exception to the ruling, creating a pro hac vice system for out-of-state lawyers to participate in California arbitrations. The legislation also contains a clause stating that a party's right to elect “to be represented by any person in a non-judicial arbitration” is not expanded or restricted beyond what it was prior to the Birbrower decision.

According to non-attorney representatives, this means that since their behavior was acceptable before Birbrower, it remains so today.

Of course, the presence of non-attorney representatives in securities arbitrations was controversial before Birbrower. The State Bar, which can only exercise jurisdiction over lawyers, has no rules specifically addressing representation at securities arbitrations.

Gilbert Serota, a partner at Howard, Rice, Nemerovski, Canady, Falk & Rabkin, had numerous clashes with non-attorney representatives throughout the 1990s. Among his objections to non-attorney representatives is the fact that they're not bound by any ethical rules, as lawyers are.

“You can't rely on them to do things that you can rely on opposing counsel to do,” he says. A lawyer is obliged to relay a settlement offer to the client, he notes as an example, but there's no such assurance with non-attorneys.

While Serota believes that non-attorney representatives are practicing law without a license, he says that they're rarely stopped, as the arbitrators overseeing a case typically don't consider themselves authorized to rule on client representation matters.

“So for each of these things, you'd have to go to court,” Serota says. “It's expensive and time consuming.”

On a couple of occasions, Serota says that he's gone to court and has succeeded in getting non-attorneys removed from arbitrations. In one of the cases, Serota says, he obtained an order to show cause against Sachs.

But Sachs notes that the case was ultimately settled, with Sachs opting to settle rather than fight only because he'd suffered a heart attack around the same time. Meanwhile, Sachs says he has a favorable ruling from a case in Contra Costa County Superior Court that maintains that his involvement in arbitrations is not the unauthorized practice of law.

Despite this history of antagonism, Sachs believes the relationship between non-attorney representatives and securities lawyers has improved, noting that roughly half of his client referrals come from attorneys.

“I'd say most of the firms that we deal with buried the hatchet a long time ago,” says Sachs. “I think they know and understand that I have a right to do this.”