In mid-February, a little over a month before a scheduled three-day arbitration hearing against a broker-dealer firm, Yelan Escalona, 3L, Katie Johnson, 2L, and Andrea Ochoa Lozano, 3L, student fellows with Miami Law’s Investor Rights Clinic, were intensely focused on pre-trial prep.
They were busy drafting direct and cross-examinations of witnesses, including liability and damages experts, selecting exhibits among over 15,000 pages of documents the firm produced in the case and dealing with the logistical challenges of having to conduct the hearing by Zoom. Suddenly, the firm suggested trying to resolve the matter through a Zoom mediation, and the students pivoted to creating a settlement strategy and presentation for what would be 10-hour mediation.
Excessive trading in elderly client’s account
The IRC’s client, Linda McFarland, approached the clinic in late 2019 with concerns about potential misconduct in her father’s brokerage account. McFarland’s father, Roy Hoover, then a 92-year-old retiree living in southwest Florida, had collapsed after taking medication intended for his neighbor. Although he survived the collapse, his physical and mental condition required his move to an assisted living facility. In the days and weeks that followed, McFarland took control of her father’s finances and became concerned when she saw excessive charges in her father’s brokerage statements.
The case presented some complex challenges for the IRC fellows and student interns. The trading conduct spanned over six years and involved numerous trades. Hoover had dementia, so the students could not interview him about the relationship with his broker or how or why the transactions occurred. But after analyses of the securities products involved (mutual funds and unit investment trusts) and their costs, the students concluded the broker had engaged in a form of excessive trading, specifically, switching between expensive funds that carry high upfront fees. The students calculated that Hoover had paid nearly $50,000 in fees to the fund issuers alone.
Consequently, in early 2020 the IRC filed an arbitration action on behalf of McFarland, who served as her father’s representative, before the Financial Industry Regulatory Authority Office of Dispute Resolution. FINRA is the self-regulatory organization that oversees U.S. brokerage firms and administers the arbitration of almost all individual claims for investment losses against those firms.
Miami Law students gain litigation skills and argue discovery motion working on case
Over the year, student interns conducted arbitrator selection for a three-person panel, worked with liability and damages experts, handled prehearing conferences, reviewed significant discovery production, and drafted and argued motions.
“The discovery process was an invaluable hands-on opportunity to learn large document case management,” said Ochoa Lorenzo. “We had to sift through thousands of documents and distill the most pertinent information for our client, identifying ‘hot’ documents to use in the case. After reviewing time and again, the content of the documents became second nature to us. However, we were challenged by the firm’s late and sporadic production, which forced us to identify and review documents up until days before mediation.”
When the parties could not resolve a significant discovery dispute, Escalona drafted and argued a contested motion. “It was intimidating to go up against an in-house attorney for a large financial firm,” said Escalona. “Fortunately, Professors Teresa Verges and Scott Eichhorn walked me through the process and let me practice my arguments through a realistic practice session. The entire experience was rewarding in itself, but I was ecstatic to learn the chairman granted our motion. It felt like I had secured a small victory for our client that represented a meaningful steppingstone in our case.”
The virtual mediation
Even before starting their spring semesters, the IRC fellows began preparing the case for hearing, scheduled for March 2021. They focused on identifying key witnesses, preparing examinations, and working with experts to finalize liability and damages arguments.
But then came the opportunity to resolve the matter in mediation. Mediation is a private process where a mediator – a neutral third person the parties mutually agree on – engages with each side privately in a series of meetings, or “caucuses,” in an effort to bring the parties to a resolution. During an in-person mediation, the mediator goes back and forth between separate conference rooms where each party and counsel are seated. In a Zoom mediation, however, the caucuses occur in the form of breakout rooms, with the mediator switching between the two virtual rooms. Firms like mediation because the process is confidential. Claimants like mediation because it is less expensive than arbitration and results in settlements more than 80% of the time, according to FINRA.
Recognizing the benefit of mediation, and with the client’s agreement, the IRC fellows quickly shifted gears from trial prep to client counseling and mediation preparation. “The most challenging aspect of the mediation experience was preparing the opening statement and drafting a written mediation submission with exhibits, streamlining our strong arguments and addressing weakness – all in an accelerated timeframe,” said Ochoa Lozano.
Another challenge was conducting the mediation through Zoom and with COVID-19 restrictions in place. “Although the IRC has represented clients in both in-person and telephonic mediations,” said Teresa Verges, the IRC’s director, “the client is usually in the same room with us, allowing us to interact with our client during an often challenging and long process.”
The mediation started with a “joint session” – where both sides are present together with the mediator.
“Presenting the statement was an exhilarating experience,” said Ochoa Lozano, who delivered the opening for the IRC’s client. “Even better was hearing opposing counsel’s opening statement, which allowed us to identify discrepancies and argue counterpoints during our first private caucus with the mediator, giving us an opportunity to show our extensive preparation from the beginning.”
What followed was nearly 10 hours of discussion, persuasion, argument, and negotiation in private caucuses with the mediator. When the mediator was in the respondent’s breakout room, the fellows seized the opportunity to discuss factual and legal issues with our client and strategize about potential concessions.
The IRC fellows were able to draw upon the extensive pre-trial work they had prepared in anticipation of the hearing. “Having my cross-examination ready to go helped me get through the numerous points I needed to in order to show the entirety of the broker’s misconduct,” said Johnson, who had developed a substantial cross-examination for the broker. “I had data points for every trade made and commission earned on that trade, plus the broker’s justifications for those trades. That meant I was able to walk the mediator through each unsuitable choice, step-by-step, and account for the profits made by the broker and the firm — this was especially important in a case where we wanted to show the firm had an incentive to not supervise their broker.”
Knowledge of the facts and numbers was also essential to effective client counseling and, ultimately, reaching a fair settlement. “Having data broken out into clear sections made it much easier to explain to the client why we were looking at certain dollar-targets when we walked into mediation,” said Johnson. “Once negotiations were underway, our clients appreciated that I could say ‘this number is the sum of X, Y, and Z, and that’s why this offer is fair.’”
“Mediating this case has probably been the most exacting and rewarding experience I’ve had in law school,” said Escalona. “I saw the case evolve through the different phases of pleadings, discovery, and settlement. In the process, I learned valuable skills, including written and oral advocacy, negotiation, interviewing and counseling clients, and problem-solving. The most rewarding aspect of my clinical experience has been advocating for a client who could not otherwise afford an attorney. Most importantly, we were able to secure a favorable settlement for our client.”
“Mediation is the intersection of all the strict academic components we learn in law school, combined with the more flexible, human aspects of practicing law,” said Johnson. “There are the rules we learn about; then there’s what actually happens in mediation. The biggest lesson I learned was to pack snacks! My snack break in hour seven gave me the energy to make it through hour 10.”
Read more about the Investor Rights Clinic
