Investor's case gives Pitt law students a chance to make a case to the nation's highest court

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When Laurence Stone cried foul after losing big time in a Bear Stearns hedge fund that invested in mortgage-backed securities, the suburban Philadelphia investor got no love from a panel of arbitrators who unanimously threw out his $7.6 million claim. Ditto when he took his complaint to a federal district court and a federal appeals court.

Undaunted, he is trying to get the U.S. Supreme Court to hear his case.

His fight has attracted the attention of nine University of Pittsburgh law school students, who for the first time have filed a friend of the court brief asking the nation's highest court to consider Mr. Stone's case. The students are part of the school's Securities Arbitration law clinic, which represents small investors in disputes with the investment industry.

"I would love to take the students to Washington to hear the arguments," said Alice Stewart, director of the clinic.

Ms. Stewart, who ran a similar clinic at Duquesne University before moving to Pitt, acknowledges that making that field trip is a long shot. Of the 10,000 requests the U.S. Supreme Court gets to hear cases each year, only 75 to 80 go to oral argument. The purpose of filing the brief was to give students a chance to wrestle with an important securities law issue in a structured, real-world way.

"It's the best practical experience I've had in law school. It's like being on the job," said second-year student Sydney Normil, 23, of Jamesburg, N.J.

Ms. Stewart said the way the arbitrators and courts treated Mr. Stone has serious implications for all small investors.

"The holding in the [appeals court] opinion unduly burdens small investors, and that concerns me," she said. "This is an important issue. Just about everybody over 30 has an investment account, so it affects a lot of people."

In 2008, Mr. Stone alleged Bear Stearns fraudulently induced him to invest in the hedge fund. Like other investors, he was required to submit his complaint to a panel of three arbitrators supervised by the Financial Industry Regulatory Authority. The Wall Street-funded organization regulates about 630,000 brokers and is subject to oversight by the Securities and Exchange Commission.

After FINRA's arbitrators unanimously rejected his claim, Mr. Stone began investigating their backgrounds. He discovered that the husband of one of them was a finance professor at the University of Pennsylvania's Wharton School of Business who regularly lectured to the securities industry and was a paid keynote speaker at a conference sponsored by JPMorgan Chase.

That was a far more complete picture than he got before his case was heard. All he was told was that a member of the arbitrator's family had a relationship with the university.

While the findings of the arbitrators are final in most cases, they can be challenged in federal court if there was something wrong with the way the hearing was conducted. Mr. Stone asked a federal court to throw out the decision because of the failure to provide more thorough information about the arbitrator's background and because not providing it indicated she was biased in favor of the securities industry.

U.S. District Judge Legrome Davis ruled that although there could have been better disclosure, the arbitrator's conduct did not amount to "evident partiality" or "misbehavior" standards that have to be met in order to dismiss an arbitration decision. He also ruled Mr. Stone lost his right to challenge the decision because he did not look into the arbitrator's background before the hearing.

"Stone's actions show him to be the quintessential sore loser improperly seeking a second bite at the apple," the judge said in his decision.

The appeal's court agreed, calling Judge Davis' opinion "thoughtful and thorough."

The Pitt students respectfully disagreed. In their brief, they argued that the appeals court ruling forces an investor to prove that a reasonable person would believe an arbitrator was biased in favor of the industry. Most small investors lack the knowledge and resources to do that, they wrote. They noted that FINRA has acknowledged its arbitration process can be unfair to small investors and is taking measures to assure them that it is unbiased and fair.

"Arbitrators should be required to disclose any material affiliations that give any 'appearance of bias' or risk voiding the arbitration award if they fail to so comply," the students wrote in their 27-page brief.

They also noted that while some appeals courts have ruled that an arbitrator's alleged bias has to be challenged before the hearing, others have ruled investors only lose the right to challenge an arbitrator's impartiality after a decision if they knew about it beforehand, and and did not challenge it.

"It was great being able to advocate for the small investor," said Kieran O'Leary, 25, a third-year student from Harrisburg.

Ms. Stewart said eight students were split into teams of two and assigned to research one aspect of the case and write that part of the brief. The ninth student verified information about the cases and other materials cited in the brief. Their drafts were edited and consolidated. The entire brief went through two rewrites before it was sent to law professors Ron Ricci, John Rago and Bruce Antkowiak for review. It was filed with the court March 14.

Mr. Stone also is getting a boost from students at Pace Law School in White Plains, N.Y., who also filed a brief in favor of hearing his case.

"It's an issue that we think is in dire need of addressing," said Jill Gross, director of Pace's investor rights clinic. "[Mr. Stone] was supposed to get a neutral panel of arbitrators. He did not get a neutral panel of arbitrators and he lost."

Four of the nine justices must agree to hear the case. Ms. Stewart expects a decision 30 to 60 days after lawyers for Bear Stearns file a brief arguing why Mr. Stone's case should not be heard. The court has given them until April 14 to file their argument.

Correction (Published Tuesday, April 1, 2014): An earlier version of this story gave an incorrect number of U.S. Supreme Court justices who must agree to hear a case.

First Published March 30, 2014 12:00 AM

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