[PODCAST] When Scammers Strike: How Mediation Can Help Resolve Consumer Fraud Claims

In this podcast, JAMS neutrals Peter Kamminga, Esq., Ph.D., and Jeffrey Grubman, Esq., discuss the rise in financial scams targeting consumers and the various ways in which those scams typically take shape, including authorized push payment scams and phishing scams. The neutrals also discuss how these scams can be orchestrated—including through downloading malicious software or by a scammer assuming an online identity to befriend a victim. From there, Dr. Kamminga and Mr. Grubman discuss how both financial and non-financial damages can be claimed following these scams, as well as how to understand some of the legal distinctions that are often present in these cases, such as the difference between authorized and non-authorized transactions.

Dr. Kamminga and Mr. Grubman discuss the growing role of mediation in the financial scam space and how the confidentiality of the process, in particular, can be beneficial for parties involved. The neutrals also offer their insights on the factors that may influence how a financial institution approaches mediations in scam cases. Finally, the neutrals wrap by sharing anecdotes of financial scam cases that they have mediated and conclude that mediation will continue to be a prevalent route for resolving these types of disputes.

Moderator (00:02): Welcome to this podcast from JAMS. In this episode, we're discussing the rapid rise in financial scams and how mediation can help resolve disputes arising from them. Fueled by globalization and digital transformation of the financial industry, scams targeting consumers at brokerages have become increasingly sophisticated over the last decade. To help us understand the dispute landscape in this area, we have two veteran JAMS neutrals with deep experience mediating claims against financial institutions for third-party claims. Jeffrey Grubman, a former litigator at Manatt, Phelps and Phillips and Morgan, Lewis and Bockius, and Peter Kamminga, who was part of Judge Daniel Weinstein's global mediation team before joining JAMS. So, thank you for joining us, gentlemen. Peter, your practice sits at the intersection of privacy and cyber matters and disputes involving the financial sector and banks in particular. How did you come to mediating disputes in this area?

Peter Kamminga (00:57): Yeah, thanks. How I got to this, when I started out as a mediator as part of Judge Weinstein's mediation team, that was just around the time that the financial crisis claims came into mediation. So, I started out with a lot of banking claims involving large banks. So, I got kind of interested in that banking sector. And at the same time, there was a number of scams going on at the time. There was the Madoff Ponzi scheme, and that also resulted in various claims that also went to mediation. So, it kind of got an interest in both the banking stuff or kind of on the crossroads of banking scams. And lately, the last couple of years I got into privacy and cybersecurity related matters. So, this is kind of where that all comes together.

Moderator (01:51): Jeffrey, you have a background in Big Law. Is that where you came to this area of law?

Jeffrey Grubman (01:54):Yes. So, my practice as a lawyer was big law firms and then later small law firms. So, I extensively litigated and arbitrated cases involving the financial securities industry, both stock brokerage firms, including claims before FINRA arbitration, as well as claims involving banks and did so on both sides. And when I moved over to mediation many years ago, my practice focused initially almost exclusively on claims against financial institutions. It's much broader now than it was at that time, but I have seen an uptick in the types of cases that we're going to be discussing today as a result of my focus on claims that are brought principally by consumers against brokerage firms as well as banks.

Moderator (02:54): So, take us through some of the most typical disputes over financial schemes that you're seeing today, Jeffrey. What's giving rise to them?

Jeffrey Grubman (03:02): So what I've learned from mediating a bunch of these cases is that there are a couple of different types of scams. There is what's called the tech scam, which the FTC on its website describes it as tech support scammers may try to trick you with a pop-up window that appears on your computer screen. It might look like an error message from your operating system or antivirus software, and it might use logos from trusted companies or websites. The message in the window warns you about a security issue on your computer and tells you to call a phone number to get help. And then what happens is the person calls the phone number to get help and it's really a scammer, and they encourage the person to download software that the victim doesn't realize allows the scammer to view and then manipulate their computer. So that's one type of scam.

(04:03): The other type of scam is what's called a confidence scam, which is just what it sounds like. It takes many different forms, but it's essentially when a scammer assumes an online identity to befriend a victim or form a personal connection. It can be as simple as somebody finding a lonely widow and trying to develop some kind of a romantic relationship online. It could be somebody focusing on an Amazon scam…that Amazon has issues. It can be… I had a case where the scammer told the victim that there was a mole inside the financial institution and he just had to listen to that person because he was going to protect his money and follow his direction. But there's a whole host of ways, but I think the tech scam and the confidence scam is a good general summary.

Moderator (05:07):Peter, what are you seeing?

Peter Kamminga (05:10):Yeah, I'm seeing several types. It could be, and some of them are similar as what Jeffrey just described, such as the phishing scams where you just get consumers to hand over financial information through email or SMS, and then the hacker will access that themselves. It could be account takeovers where hackers directly steal credentials and hack directly themselves into accounts. It could be fake identities where accounts are opened by hackers or the scammers themselves and to secure loans. So, there's a variety, but the ones I see the most are those ones that Jeffrey also described, the authorized push payment scam. So, where consumers are tricked into sending money either through a peer-to-peer platform or wire transfer, and they generally impersonate somebody… could be a fake investment opportunity or romance fraud as they're also sometimes referred to where, yeah, someone who starts a conversation with somebody and at some point will ask for money. So, it can be across the board. There's a variety that I see.

Moderator (06:26): And Peter, in terms of the damages, how would you characterize the damages that plaintiffs are typically seeking in these matters?

Peter Kamminga (06:33): I see both financial and non-financial damages that are being claimed, depending a little bit on whether it's an individual case or it's part of a class actions. What I see the most, of course, is the reimbursement of lost funds. Folks want their money back sometimes as well as consequential damages. So not just the money that's gone, but for instance because of money that's been stolen that can result in missed payments. Or for instance, also business losses if it involves small businesses so that consequential damages are being claimed. But also, sometimes I'll see emotional distress, reputational damages and harm to credit standing. So, it can be a variety of things.

Moderator (07:22): And Jeff, how about the financial institutions in the middle of these scams? What's at stake for them beyond the dollar value of the disputes?

Jeffrey Grubman (07:32): Well, there's obviously the dollar value and there's the cost of defending the cases and there seem to be more and more of these cases. But there's also a reputational component if the public has a sense that their funds are not safe where they're being held at their financial institutions, and that's certainly a concern for the financial institutions that are the defendant or respondents.

Moderator (08:00): So, let's talk about some of the legal distinctions in these fraud cases. Peter, can you explain the difference between fraudulent transactions authorized by the customer and those that aren't and why that distinction is so important?

Peter Kamminga (08:13): Yes, that is a fundamental distinction. If a transaction is unauthorized, say a hacker gains access and initiates transfers, then the law is generally more protective of the consumer and the institution is expected to make the customer whole oftentimes. If it's authorized, so like for instance, the APP scams where people are tricked into transferring money themselves, it is basically the customer who technically initiates that transfer even if they were deceived. And that is a much more gray area, which often leaves consumers without automatic reimbursement rights. So, then there's often a dispute between the consumer and the bank about whether money should be reimbursed. It's important because it defines liability and that legal line has enormous implications for outcomes.

Moderator (09:11): Jeff, I imagine that those distinctions affect a consumer's ability to recover lost funds. Right?

Jeffrey Grubman (09:16): So Peter has summarized that well, many of the cases I've been seeing recently are ones where the victims are unwittingly involved in the scam itself. The claims that I've seen are typically common law claims such as negligence claims. The law has not developed that significantly, although I understand there are some banking statutes that apply to some extent.

Moderator (09:45): Peter, what about mediation? What role does mediation play in resolving these disputes? How does it compare to litigation or arbitration?

Peter Kamminga (09:54): It does play a growing role as Jeff sees as well. There's a growing amount of cases that I see in this area as a mediator. The advantage I think of mediation is that it offers a chance for both sides to tell their stories, to discuss the context and come to some kind of resolution without the formality and the cost of court. It's less rigid. It's much more collaborative than arbitration or litigation. And particularly as these cases, oftentimes the ones I see, the financial fraud cases, emotions can run high, right? People feel really, well, they're scammed, right? And they have trust in their institutions, so they have high expectations of being reimbursed. So, these are types of cases that lend themselves well for mediation setting where outcomes are not black and white, and mediation provides that space for nuance and empathy and problem-solving skills I find are important and can be the mediation process lends itself well for that.

Moderator (11:15): Jeffrey, Peter talked about just the ability to tell your own story and sort of the high kind of emotional stakes involved, which lend themselves nicely to mediation. Do you see any other advantages that mediation can offer both to consumers and the financial institutions involved?

Jeffrey Grubman (11:30): I do. One of the principal benefits of any mediation is that it's confidential. So anything that happens in mediation stays in mediation, not quite as much fun as Vegas, but you get the idea. So, it allows the parties to discuss the issues openly either with the other side or in caucus with the mediator, but the parties can be rest assured that whatever is discussed will remain at the mediation. Mediation is certainly a very cost-effective way of resolving disputes. In these types of cases that I've mediated, I've seen cases that are a hundred, two hundred thousand dollars, where it's probably not going to make great economic sense to litigate the case. And then I've seen seven and even eight figure cases where people's monies have been stolen and scammed by a third party. So, for the smaller cases, mediation is very cost effective for both sides. And then the last thing I would say, which can be at issue, is that it allows the consumer and the financial institution potentially to preserve the relationship. It's not a case where the consumer is arguing that there was fraud by the financial institution. They were scammed by a third party. So, I see some potential benefit there at times.

Moderator (13:00): Peter, what do you see from the consumer when they're entering mediation? Do you get the sense that a lot of times they have explored other options, and this is sort of their last best hope? What are the biggest concerns or goals that you see consumers have when they're entering mediation?

Peter Kamminga (13:18): What I see a lot is that, of course, they like their money back, but there's also the sense of acknowledgement of what's been done to them and fairness. So, it's not only the financial aspects, and they often had an experience beforehand with the banks directly and which where they didn't get what they to get right. So, they may even be blamed that they should have paid more attention. So, they're often entering the process after some frustrating experience with customer service or some claims department. So, restoring a sense of justice, of being treated with respect can be oftentimes just as important as the financial outcome. And in my experience, banks also or financial institutions see that and see that as a benefit of the process as well to be able to provide for that.

Moderator (14:22): Jeffrey, obviously every mediation is different, every dispute is different, but in general, do you sense that financial institutions approach mediation in a consistent way? What factors influence their willingness to settle disputes?

Jeffrey Grubman (14:38): That's a very broad question, and it very much depends on the financial institution. So, for example, there are financial institutions that will tell the mediator from the beginning that they don't consider cost of defense. They evaluate the case and they settle the case based on the merits. There are other financial institutions which will acknowledge that there's a cost of defending the case, and that's a consideration. Another question is whether this is a widespread problem like a data breach, something like that where it's sort of global or is this a one-off? Most of these cases tend to be that we're talking about, tend to be one-off. And that would influence, I believe, the way the financial institution approaches it. It also depends on the forum. If there is a claim that's in FINRA arbitration, for example, against the brokerage firm, then that case is going to go to a final hearing.

(15:48): There will likely not be any basis to dismiss the case before a hearing. And then you have three arbitrators make a decision. And then depending on how sympathetic the plaintiff is, that could factor into the financial institution's decision. If it's a bank and the case is in court and the bank feels that it has some very strong legal defenses, whether it's statute of limitations or whatever the case may be, and they feel that the plaintiff isn't taking an adequate level of responsibility for what happened, then they may take a different approach and take a shot with the court to see if they can get the case dismissed prior to trial. But of course, the goal in any mediation is to avoid all of that and for both parties to work collaboratively to try to understand the other side's position to get to a reasonable resolution.

Moderator (16:42): Peter and Jeffrey, I want to see if you can share with us an example of a successful mediation. What were the factors that made it work?

Peter Kamminga (16:51): Yeah, I can give you an example. I recently had a small business owner that fell victim to a sophisticated email spoofing scam, believing he was paying a long-time vendor. He transferred basically a substantial sum of money and then later found out that the email was faked and the account belonged to a fraudster. So, the business, they immediately reported this, but the bank reported it to client responsibility and said, well, you transferred it yourself as main reason. So, this went to mediation. I was a mediator, and my role was to help both sides, an understandably frustrated business owner and a somewhat more cautious, reputationally conscious financial institution to find a resolution where legal liability wasn't very clear. And there were some emotions in the case. I facilitated a dialogue, as you should do in a mediation, having the business owner share some of the impact of the fraud and the steps he's taken to fair verify the transaction.

(18:04): And also looked at the banks, the protocols that they followed. And well, it turned out that one of the issues did result in changes to informing clients that these things can happen, which is one of the key elements for financial institutions as a best practice to keep clients informed. So, there was a question whether that was done appropriately. So, we got this resolved, the bank, without admitting liability, agreed to partial reimbursement, and there was a resolution where both parties were satisfied in this matter.

Moderator (18:57): And Jeffrey, how about you? Any success stories that you can share?

Jeffrey Grubman (19:01): Sure. As I mentioned, I've mediated a bunch of cases where the victim unwittingly participates in the scam. And I can think of a fairly recent case where he had an account at a brokerage firm and the scammer gave him instructions on what to tell the representative of the firm in terms of where the money was going to be moved, and to let him know that if questions were asked, he had to be clear that this is what he wanted to do because the scammer was the only one that the person could follow. And interestingly, the calls were recorded, so the brokerage firm's position was we verified this was the account holder, we asked him all the information as to his account. He was clearly competent based on the phone calls, and he told us where to move the money. So, it's an unfortunate situation, but what more could we have done?

(20:08): And then the lawyer for the person who was scammed, the claimant pointed out that there were at least a couple of instances where somebody at the brokerage firm said something like, are you sure you want to do this? This almost seems like it might be a scam or something to that effect. And of course, the consumer said, no, no, no. This is absolutely what I want to do. And as Peter pointed out, it's our job to try to facilitate a resolution and point out that there's risk on both sides, and ultimately both sides understood that they had risk if they were to proceed forward and were able to compromise and come to a resolution that both sides could live with.

Moderator (20:54): Jeff, if you look at the regulatory shifts that are happening, such as the CFPB’s decision regarding Zelle, how do you see that influencing mediation and arbitration in financial fraud cases? Whether there's been any changes to date or whether you expect any changes in the future?

Jeffrey Grubman (21:13): It's probably too early to tell. We were obviously in a very relaxed regulatory environment. My experience has been that when you have active regulators who have brought actions regardless of who the regulator is, that plaintiff lawyers tend to piggyback off of that, they'll sometimes even parrot allegations that are in the regulator's complaint and might even attach it to their statement of claim or their complaint. And if this direction continues where these claims will be far less, if they're filed at all, then that opportunity won't be there. At the same time, the role of private dispute resolution will become even more important. And I don't see these cases going away. So, it will be interesting on a lot of different levels to see how the regulatory framework changes over the next few years.

Moderator (22:14): Peter, what about you? Do you see mediation becoming a more common resolution method or any other factors that you see as influencing whether mediation becomes more common or not?

Peter Kamminga (22:29): Yeah, no, definitely, I'll see it grow. Forecast will be that it will be growing over the coming years. I mean, a lot of contracts, financial contracts like with credit card companies or a lot of similar ones, mediation, arbitration are written in those contracts. So, that has been the case over the last couple years, and I think increasingly so that creates automatically a stream of cases going that directions. But just the speed of digital payments, the growth of that itself is another factor. That means that fraud will keep evolving… hackers, scammers will come up with constantly new and even better or more real ways of doing what they do, which will make it even more difficult to distinguish reality from a scam. And mediation offers a flexibility in the human touch that these cases often need. The legal lines blur, regulatory expectations rise. Mediation becomes a middle ground and a way to resolve issues efficiently before they spiral into full blown court battles or public complaints. And last reason I want to list is that I think it's not only just to resolve a dispute, but it's at the same time kind of a trust building mechanism. And in the financial service industry, that's invaluable. The trust is a currency for banks, and they have an interest in resolving matters, and consumers trust the banks and the systems, and that's what they want, and that's what they want to restore. So, I believe there's definitely in the coming years a trend towards mediation.

Moderator (24:26): Jeffrey, I know you would agree that the financial scams, it's a growth industry, unfortunately, right? And so, we probably are going to see certainly more disputes and probably more mediation.

Jeffrey Grubman (24:38): I don't think there's any question about that. I remember when I did my first of these cases a few years ago, it just seemed so sad, but novel and interesting. I had no idea that I would be mediating so many of them. And with the proliferation of these frauds and AI and the sophistication of the scammers, it just seems inevitable that there's going to be more and more of these cases. I expect the case level will develop further, but it's still going to be common law, so unclear how much it will develop, and there's going to be a need for a resolution process like mediation for both the companies and the consumers to have a way to resolve these cases over the course of a day in a confidential and reasonable way.

Moderator (25:29): Jeffrey and Peter, I want to thank you so much for your time. It's been an enlightening and fascinating conversation. Thank you so much.

Jeffrey Grubman (25:37): My pleasure.

Peter Kamminga (25:39): Thank you.

Moderator (25:41): You've been listening to a podcast from JAMS, the world's largest private alternative dispute resolution provider. Our guest have been JAMS neutrals, Jeffrey Grubman and Peter Kamminga. For more information about JAMS, please visit www.jamsadr.com and be sure to subscribe or follow wherever you get your podcasts, to continue learning valuable strategies and insights from some of the most respected neutrals in dispute resolution. Thank you for listening to this podcast from JAMS.