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Late last year, Laurence Padway took a securities dispute to the New York Stock Exchange because he knew arbitrators there would refuse to hear it. Padway’s client, Royal Yates, wanted his money back from a deal with Florida brokerage firm GunnAllen Financial Inc., and Padway wanted to go to trial. The contract’s standard arbitration clause locked Yates into a choice of two forums, including the New York Stock Exchange � but GunnAllen Financial wasn’t listed there, so the NYSE rejected the case. “I was looking for a way not to arbitrate,” the Alameda-based solo said Tuesday. By arguing that the NYSE would have been Yates’ choice, Padway got the arbitration clause thrown out and forced the complaint into Northern California’s U.S. District Court � where last week a federal jury awarded his client $1.8 million. Yates v. GunnAllen Financial, C05-01510, alleged securities fraud and breach of fiduciary duty, among other charges. The dispute revolved around $128,000 in broker fees charged during a three-month period, plus a net loss between $250,000 and $360,000. Few such disputes between securities dealers and investors result in punitive damages. And because most brokerage agreements include arbitration clauses, even fewer reach the courtroom unless they’re class actions involving multiple investors. Padway said he thinks this is the first case of its kind to proceed in federal court in more than a decade. “Most of the people I talked to said, if they’re not [NYSE] members, just go to NASD for arbitration,” said Padway, a civil litigator who does not specialize in securities disputes. Last year, the National Association of Securities Dealers received more than 5,000 investor complaints � the vast majority of them � while NYSE received just 300. It’s unclear why GunnAllen Financial offered to arbitrate disputes under NYSE rules and procedures when it wasn’t even a member. Lewis, Brisbois, Bisgaard & Smith’s Charles Murray, who represented GunnAllen, did not return calls for this story. In court papers, GunnAllen acknowledged it wasn’t a member of NYSE but sought to compel arbitration before the NASD. Padway thinks the firm took contract language from a brokerage clearinghouse, which represents groups of smaller securities firms, without properly vetting each clause individually. “My guess is that the clearinghouse is the big cheese, and the brokerage firm is the little cheese. They just kind of follow the lead of the clearinghouse,” Padway said. Gideon Schor, a partner at Wilson Sonsini Goodrich & Rosati, said jury verdicts in this type of case are virtually unheard of. And even though courts are growing more willing to permit arbitrators to award punitive damages, Schor said he knows of no reported cases in the federal courts where so-called “churning cases” against a securities dealer resulted in a plaintiff’s award. “Way more than 90 percent of [private] cases settle. Maybe more than 95 percent,” he said. Padway called the verdict a “fair result,” even though the complaint he filed in federal court asked for $25 million, plus another $4.5 million in “special damages.” Padway says he can’t figure out how the jury arrived at its verdict � exactly $140,382 in compensatory damages, $1,442,292 in punitive damages against GunnAllen, and $120,191 against an individual broker. “I’m dying to know,” he said.

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