The polygraph examination - a valuable arbitration tool.

• Author: Weintraub, David A.

Securities arbitration--once a concept foreign to most attorneys, is now a reality for many individuals whose retirement nest eggs have been decimated within the past year. For better or worse, most individual and institutional investors who do business with firms that are members of the Financial Industry Regulatory Authority (hereafter FINRA) are required to resolve disputes through a FINRA administered arbitration process. For Florida residents, this means that their dispute will be resolved through an arbitration proceeding that will most likely occur in Boca Raton, Tampa, or Lake Mary.

Upon recognizing that their dispute will be resolved by arbitrators, and not by a judge and jury, investors and their attorneys often wonder how the arbitral process differs from the judicial process. This article does not address all of the differences between these processes. Rather, it will address one area of difference and suggest a strategy for making the difference work to the investor's advantage.

One of the key differences between the judicial process and the arbitral process is that discovery is very limited in arbitration. Depositions are rarely permitted in arbitration. Depositions are generally discouraged, but may be allowed where a party or witness is dying, or where a key witness cannot be compelled by the subpoena process to testify. (1) Thus, the final hearing is likely to be the attorney's first opportunity to confront the broker and his/her supervisor. In most cases, these two individuals will be the key witnesses, in addition to the investor/claimant. Any edge that a party can ethically achieve is invaluable.

Pursuant to FINRA Rule 12604, arbitrators are "not required to follow state or federal rules of evidence." Similarly, the American Arbitration Association's Commercial Arbitration Rules provide, "[c]onformity to legal rules of evidence shall not be necessary." Given that neither state nor federal rules of evidence are binding in FINRA arbitration proceedings, an arbitrator's decision to admit evidence that may otherwise be inadmissible in court is unlikely to be the basis of a successful effort to vacate an arbitration award. On the other hand, a refusal to admit relevant evidence may be the basis for a successful petition to vacate an arbitration award. (2)

When arbitrators ultimately retire to deliberate and render an award, they are often left with a simple decision: "Who do we believe, the broker or the investor?" Where there exists an important issue that can be categorized as a "he said, she said" issue, a polygraph report can be an extraordinarily valuable tool to offer to the arbitrators. At the final arbitration, parties are free to attempt to offer the testimony of polygraph examiners, as well as their written reports. Because rules of evidence do not apply in arbitration, it should be easier to have a polygraph examiner's testimony admitted in arbitration, than in a judicial proceeding. (3)

Examples of the types of issues that are appropriate for a polygraph examination in the securities context are 1) whether the purchase of a specific security was authorized; 2) whether the sale of a specific security was authorized; 3) whether the broker represented that a specific investment had no risk; or 4) whether the broker explained the difference between mutual fund "A" shares and "B" shares. These are just examples of factual issues that may be appropriate for a polygraph examination. In order for an issue to be appropriate for polygraph purposes, it must be a "he said, she said" issue, or one that is clearly a "yes / no" issue. One accepted format for a polygraph examination is having an examinee confirm that a specific written statement is true. It is critical that the examiner be sufficiently skilled to identify the issue, and assist with framing the issue for polygraph purposes.

Assuming that the attorney...