The way Fordham Law Professor Constantine N. “Gus” Katsoris ’57 remembers it, securities disputes before 1987 mirrored the Old Testament’s Tower of Babel. Each jurisdiction hearing securities cases spoke different languages, or rather conformed to different rules, creating “confusion and bedlam,” according to Katsoris, which prevented disputes from reaching timely or cost-effective resolutions.
Katsoris championed a uniform code of arbitration—both as a long-serving public member of the Securities Industries Conference on Arbitration (SICA) and as a frequently published scholar on the subject—that paved the way for the Supreme Court’s landmark ruling in Shearson/American Express, Inc. v. McMahon in 1987. Katsoris’ former student Ted Krebsbach ’78, an attorney for Shearson, successfully argued McMahon before the Supreme Court, which thrice cited the Katsoris’ 1984 Fordham Law Review article “The Arbitration of a Public Securities Dispute.”
Thirty years after McMahon, the case remains a turning point in the securities industry, causing arbitration to mushroom, promoting a fairer process in settling disputes between the investing public and the securities industry, and reducing costs for litigants and case backlogs in the courts system.
“Could you imagine if today they said you can’t arbitrate, and then you had 200 litigants in 200 different jurisdictions?” Katsoris said, describing the pre-McMahon landscape in securities disputes. “You would have the potential for 200 different decisions. The forum shopping would be outrageous and unfair.”
“At least now you can say with five different cases in FINRA that they would all be tried under the same rules,” Katsoris added, referring to the Financial Industry Regulatory Authority (FINRA), a private corporation that acts as a self-regulatory organization and is the successor to the National Association of Securities Dealers.
The considerable efforts of Katsoris and Krebsbach placed Fordham Law at the forefront of securities arbitration. Fordham’s reputation in the field ascended higher in 1998; with the approval of the Securities and Exchange Commission, Fordham launched a pilot securities arbitration clinic on the Lincoln Center campus. The clinic, now called the Securities Litigation and Arbitration Clinic, has since earned the distinction of being the first of its kind to win punitive damages for a client, Katsoris said.
Lead-Up to McMahon
SICA was formed in 1977, with Katsoris, a highly regarded professor and arbitrator, appointed as one of its three public members. At that time, many securities disputes did not go to arbitration because it was not mandatory. SICA’s public members were very outspoken about arbitration’s benefits, especially the need to provide everyone a fair opportunity at resolving securities disputes, said Katsoris, who testified before the SEC and Congressional committees in support of arbitration.
“We did not get a uniform code overnight,” Katsoris conceded. “We had a lot of opposition.”
The Supreme Court’s longstanding ruling in Wilko v. Swan (1953) presented a major challenge to the pro-arbitration movement. In this ruling, the Supreme Court held that in an action brought by a customer against a securities brokerage firm to recover damages for alleged misrepresentation in the sale of securities, the agreement for arbitration of any controversy arising in the future between the parties was void, in accordance with the civil liabilities provisions of the Securities Act of 1933. The lower courts routinely cited Wilko in refusing to enforce pre-dispute arbitration agreements with respect to claims asserted under the Securities Exchange Act of 1934.
In the years leading up to McMahon, Krebsbach and his fellow litigators for Shearson brought numerous cases before the district and circuit courts to challenge Wilko, with the end goal to have the Supreme Court overturn its securities arbitration ruling.
McMahon reached the circuit stage first, appearing before Second Circuit Judge William Timbers, the attorney who argued for the SEC in the Wilko case. While Krebsbach lost that battle, he soon scored a major victory convincing the SEC to argue in favor of Shearson in an amicus brief to the Supreme Court, primarily due to the fact that the SEC was given oversight responsibility for the securities arbitration rules by the 1934 act.
“If the SEC had opposed it, it would have been a tough row to hoe,” Katsoris acknowledged.
Arguing the Case
On May 5, 1986, then-Supreme Court Chief Justice Warren Burger presided over the first Fordham Law Alumni Supreme Court Bar Admission Ceremony, during which Krebsbach was admitted under the co-sponsorship of the Hon. William Hughes Mulligan and Katsoris. Krebsbach argued the McMahon case before the Supreme Court the following year. While at Fordham, Krebsbach took three courses with Katsoris, whom his pupil described as “the godfather of securities arbitration.”
Krebsbach subsequently participated in numerous moot court sessions and watched arguments before the Supreme Court in preparation for his turn on March 3, 1987. Among those who provided Krebsbach insights was Fordham Law Professor Emeritus Maria Marcus, who has long served as the School’s moot court board moderator.
On his day before the Court, Krebsbach’s parents, his three sisters, and his brother sat behind him in his “cheering section.” In addition, Shearson’s General Counsel Philip J. Hoblin Jr. ’57 (a Fordham Law classmate of Katsoris’) arranged for 20 to 25 lawyers from Shearson’s litigation department to attend the oral argument.
“This was a big issue for the securities industry,” Krebsbach said, recalling that there was “a lot of focus, attention, and pressure” associated with McMahon.
The Court ruled 5–4 in favor of Shearson, deciding that the Securities Exchange Act of 1934 claims could be arbitrated pursuant to pre-dispute arbitration agreements. The dissent cited Katsoris’ Fordham Law Review article three times.
In a separate ruling associated with the case, the Court ruled unanimously in Shearson’s favor that its claim under the Racketeer Influenced and Corrupt Organizations Act (RICO) was arbitrable under the Arbitration Act.
Prior to McMahon, disputes over $100,000 might result in legal fees north of $150,000. Post-McMahon, securities firms stopped farming out cases to outside law firms, and instead opted to handle matters in-house because it was much cheaper.
“We were inundated in-house, and it was a baptism by fire for our group,” Krebsbach recalled about the months after McMahon. “We were trying arbitrations around the country like crazy.”
Two years after McMahon, Krebsbach put the “last nail in the coffin” of Wilko when he successfully argued Rodriguez de Quilas v. Shearson/American Express, Inc. (1989) before the Supreme Court. The Court ruled 5–4 that pre-dispute arbitration clauses in brokerage agreements do not become unenforceable by the Securities Act of 1933. “Not only did the Supreme Court reverse Wilko but they said it was wrongly decided,” Krebsbach noted.
Fairness and Sense
The Supreme Court settled the matter of securities arbitration with McMahon, and later Rodriguez, but Katsoris recognized that the fight over mandatory arbitration would not stop. As such, he maintained his prominent role as a securities arbitration supporter, serving as a public member with SICA until 1997 and then as chairman in 2003. He also published a prolific series of articles about the subject, notably “Should McMahon Be Revisited?” in the Brooklyn Law Review (1994) and “The Betrayal of McMahon” in the Fordham Urban Law Journal (1997).
“A lot of people started questioning whether arbitration should be mandatory,” Katsoris recalled, when asked about the impetus for his Urban Law Journal article. “Somebody had to come to its defense, and I came to its defense.”
“Vigilance always has to be there, because there’s always going to be people ready to nibble at the edges,” Katsoris added, noting that the SEC still attends SICA meetings twice per year to ensure the rules remain fair to the investing public.
Katsoris also participated in a series of lectures sponsored by the New York Stock Exchange in Russia and the Balkans in 2000, and subsequently in Cairo, Egypt, in 2003, about the use of arbitration and how it worked in the United States. He is also a member of the board of editors of the Securities Arbitration Commentator (SAC), a leading, nationally distributed periodical focusing and reporting on the practice and process of securities and commodities arbitration issues. The SAC’s August 2017 issue celebrated the 30th anniversary of the McMahon decision and its impact.
Back at Fordham, Katsoris, at the suggestion of then-SEC Chairman Arthur Levitt and with the unwavering support of then-Law School Dean John Feerick, established the Securities Arbitration Clinic, which represents small investors who cannot find lawyers to handle their securities grievances. Katsoris and Feerick praised the efforts of Fordham Law alumna Pamela Chepiga ’73, who started the clinic in 1998 after a successful career as a partner at a large firm and as a federal prosecutor in the Southern District of New York, where she served as chief of the securities and commodities frauds unit. Chepiga “worked day and night overseeing the students and running the clinic,” Feerick recalled.
The clinic launched amid a period of “great growth of relatively unsophisticated individuals opening securities accounts,” Chepiga noted.
“In the dot-com era, people were talking about securities trading in ways they had not talked about before,” she continued, noting the clinic took cases involving blue-collar workers such as taxi drivers and maintenance workers. “There were a lot of people worried about missing out on the American dream if they didn’t have a securities account. They may not have understood that markets go up and go down.”
Many of these new traders did not have the means to hire legal representation from securities lawyers, among the highest paid in the legal profession, or the wherewithal to file a complaint. Fordham’s new clinic offered aid in cases where the recovery amounted to fewer than $50,000, with exceptions made for cases turned down by three lawyers.
In addition to providing a service to a needy population, the clinic supplied Fordham Law students with valuable training in areas such as cross-examination, case evaluation, and legal writing; it also taught them how to be more receptive to client’s needs, Chepiga said.
“With this clinic, the Law School’s motto of ‘In the Service of Others’ was being rendered to people who had great need in a practical way,” Chepiga added, noting it would not have been possible without Katsoris’ presence at the School and in the industry. “This clinic has impacted the way 19 years of students look at lawyering.”
Today, Professor Paul Radvany heads the clinic and has built on its solid foundation. His students participate in all aspects of the cases, including openings, closings, and direct and cross-examinations. In many of the cases, the clinic has been able to recover, either through arbitration or settlement, all the money the client has lost.
“The current success of the clinic would not be possible without the visionary people that helped establish it,” said Radvany, who also holds an annual meeting for clinic peers and regulatory officials to discuss improvements to arbitration regulation as well as pedagogy. “Fordham Law leaders like former Dean Feerick and Professor Katsoris have been immensely supportive of our work, and we are grateful for their inspiration and guidance.”
Meanwhile, McMahon’s lesson to Katsoris’ protégé, Krebsbach, is as clear as it was the day he argued it before the Supreme Court.
“Going through the arbitration process is fair and makes sense,” Krebsbach said. “Looking back pragmatically, before McMahon there were thousands of cases where people might have won but lost because of legal fees. Over the years, so many people were better served having their disputes settled in arbitration.”