Legal Definitions - Securities dispute resolution: Experts

In the context of resolving disputes within the securities industry, an expert refers to an individual with specialized knowledge, skills, experience, training, or education in a particular field relevant to the case.

These experts are often called upon to provide their professional opinions and insights to help an arbitration panel or hearing officer understand complex financial matters, evaluate evidence, and determine facts in dispute. Their testimony can be crucial for either the party bringing the claim (the claimant) or the party responding to it (the respondent).

The decision to involve an expert typically depends on factors such as:

• The complexity of the financial transactions or investment strategies involved.
• The need to quantify financial losses or gains accurately.
• The relevance of specialized industry practices or standards of care.
• The cost of hiring the expert compared to the potential amount of damages in question.

The Financial Industry Regulatory Authority (FINRA), which oversees securities arbitration, has specific guidelines regarding the use of experts. For instance, a hearing officer has the authority to ensure that an expert's testimony is relevant and not overly repetitive or prejudicial. They can also request detailed information about an expert's qualifications, publications, and involvement in other cases to assess their credibility and expertise. Furthermore, while experts are generally permitted to attend all hearings, the arbitration panel ultimately decides whether to allow an expert witness to testify, often guided by principles that ensure the expert's knowledge will genuinely assist in understanding the evidence.

Once an expert is permitted to testify, the party who called them will ask questions (known as direct examination). The opposing party then has the opportunity to question the expert (cross-examination), and the arbitrators themselves may also pose questions to clarify points.

Examples of Expert Testimony in Securities Disputes:

• Quantifying Investment Losses: Imagine a client alleges that their financial advisor invested their retirement savings in excessively risky ventures, leading to significant losses. A forensic financial expert might be hired to analyze the client's portfolio performance, calculate the precise monetary damages incurred due to the alleged unsuitable investments, and project what the portfolio's value might have been under a more appropriate investment strategy. This expert's testimony would help the arbitration panel understand the true financial impact of the advisor's actions.

• Assessing Industry Standards of Care: Consider a dispute where a customer claims their broker failed to adequately explain the risks associated with a complex derivative product. A securities industry practice expert could testify about the standard disclosure requirements and communication protocols expected of brokers when recommending such products to clients with similar risk profiles. Their opinion would help the panel determine if the broker's conduct fell below the accepted professional standards within the industry.

• Valuing Illiquid Assets: In a case involving a dispute over the sale of shares in a privately held company, where the valuation is subjective and not publicly traded, a business valuation expert might be engaged. This expert would use specialized methodologies to determine a fair market value for the shares at the time of the transaction, considering factors like company financials, industry trends, and comparable transactions. Their expertise would provide the arbitration panel with a credible basis for assessing the fairness of the sale price.