Financial Advisor (December 19, 2017) - Would you hire a non-attorney to represent you in Finra arbitration if you knew he had a 1 percent win rate? How about if he routinely cost investors tens of thousands of dollars in forum fees or had been fined and barred from the securities industry for life by the Securities and Exchange Commission?

This is a sampling of the “rogues' gallery” of non-attorney representatives who are currently representing aggrieved investors in Finra arbitration, according to an explosive new report released Monday by the Public Investors Arbitration Bar Association (PIABA).

“What we’re seeing is that investors who are victimized by their securities firms are victimized a second time by these NARs (non-attorney representatives) firms,” PIABA President Andrew Stoltmann, a co-author of the new PIABA report, said at a press conference Monday.

The PIABA report “A Menace to Investors: Non-Attorney Representatives in FINRA Arbitration,” is a compendium of the shadowy operations, unethical practices and subpar recovery records of five of the leading non-attorney firms who represent investors in Finra arbitration.

“As you see from our report, over and over again people who have been barred by regulators keep showing up,” Stoltmann said. “The only way to fix this problem is to bar NARs from arbitration.”

Finra is considering whether to limit or completely prohibit NARs from representing investors in Finra arbitration. Monday was the last day to comment on the notice.

“Right now, NARs are a loophole in the arbitration code that we are trying to tighten up,” Stoltmann added.

These are among the so-called rogues gallery of non-attorney representatives and firms PIABA found:

-Richard Sacks, the owner of Investors Recovery Service in Novato, Calif., who was barred by the SEC for unfair pricing, markups and fictitious trading he used to justify a loan. His now-defunct brokerage firm was subject to a least a half-dozen regulatory actions. While Sacks should be prohibited by Finra rules from acting as an NAR, he was still representing investors as of October.

-Paul Schechter, the founder of Vindication Recovery Services in Mount Sinai, N.Y., has been disciplined by various securities regulators, including Finra, which alleged he engaged in abusive sales practices, unauthorized trading, unsuitable recommendations and trading/churning. Finra barred him for two years and he was ordered to pay a $150,000 fine in 2010. A review of Finra’s award database shows no arbitration awards when VRS represented claimants, PIABA said.

-Mitchell Markowitz, a co-founder of Brooklyn, N.Y.-based Stock Market Recovery Consultants (SMRC), pled guilty in 2004 to fraud in a nearly $1 million dollar jewelry insurance fraud scheme. As part of his guilty plea, gave up his public insurance adjuster’s license, but still represents investors, PIABA reported. In 13 cases where SMRC claims were considered on merit in Finra arbitrations, the SMRC’s win rate was 7.69 percent and customers were awarded an average 1.23 percent of the $2.8 million they sought. Numerous cases were dismissed for discovery sanctions or withdrawals by SMRC the day before a hearing, or were denied—one because SMRC is alleged to have committed fraud by submitting a claim an investor did not ask for and knew nothing about.

-New York City-based Cold Spring Advisory Group had clients “who did even worse than zero.” One investor had to pay their brokerage firm $45,000. Two investors’ cases were dismissed because the SARs engaged in the unauthorized practice of law. When wins are tabulated based on Finra brokers and firms still in business, CSAG’s clients were only awarded $86,216 or 3.66 percent (compared to the national recovery average of 41 percent to 42 percent), PIABA found.

“The success rate of these NARs has been subpar,” Stoltmann said. “While that by itself may not necessarily require elimination of NARs, if one considered all of the other issues we found, the fact that some investors got zero primarily because their NARs representation violated state law is a serious concern.”

PIABA is asking Finra to prohibit NARs from representing investors and allow only two exceptions to the non-attorney rule—investors who want to represent themselves with the help of immediate family members and students at securities arbitration clinics at law schools who are supervised by attorneys. Finra has already donated money to several law schools for this purpose.

“This is like the wild west for investors,” added David Neuman co-author of the PIABA report and a partner with the law firm of Israels & Neuman PLC in Seattle.

Other disturbing practices uncovered by PIABA, which have been mirrored in Finra’s own findings, include firms that charge clients a $25,000 nonrefundable deposit for representation and instances where firms have absconded with client settlement money.

Also troubling, according to the PIABA study, is the fact that NARs are not bound by a code of conduct, ethics or professional licensing, are not required to disclose their disciplinary history, lack attorney-client privilege and often don't have malpractice insurance.

Attorneys and arbitrators corroborated many of PIABA’s findings. “I now decline to serve on any panel where a client is represented by a non-lawyer,” long-time Finra abitrator Micalyn S. Harris said in a comment letter to Finra.

“My experiences with NARS have, without exception, been negative: NARS have ... made numerous baseless objections and irrelevant arguments, resulting in unnecessary long and unpleasant hearings,” said Harris.

While Finra has permitted non-attorneys to represent clients in securities arbitration and mediation since 2006, in order to provide service to public investors with small claims who may have a hard time hiring an attorney, “the allegations reported to Finra raise serious concerns,” the agency said in its NARs notice.

Finra’s own review revealed that there are a small number of NAR firms regularly practicing in the forum, where users have reported NAR firm abuses.

“There are no rules of professional conduct applicable to NAR firms’ activities,” Finra said in its notice. “Moreover, NAR firms are not subject to malpractice insurance requirements. Any recovery against a NAR firm for negligence is generally limited to the assets of the corporation. Therefore, investors have little recourse if a NAR firm negligently represents or defrauds them. In addition, NAR firms are not subject to licensing boards and there is no supervisory body with authority to police their activities. Therefore, Finra is considering whether it would be prudent to further restrict representation of parties by NAR firms,” the agency said in its notice.