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Broker complaint? Who ya gonna call?

Amy Scott Jul 9, 2007

Broker complaint? Who ya gonna call?

Amy Scott Jul 9, 2007


Bob Moon: So you think you’ve been ripped off by your broker. As the saying goes: Who you gonna call?

There really aren’t too many places to take your complaint. Most people choose to avoid court by going through what’s called mandatory arbitration — taking their cases before one of the industry’s two self-regulatory groups, the NASD or the NYSE.

But the Securities and Exchange Commission is expected to sign off any day now on a merger of those two. And, as Marketplace’s Amy Scott reports, critics fear the system will soon be stacked even more against investors.

Amy Scott: Almost 10 years ago, Earnestine Strobel invested her life savings with Morgan Stanley Dean Witter. This was the late 1990s, and like a lot of investors, Strobel lost a pile of money when the tech bubble burst.

When she filed a complaint, an arbitration panel said Morgan Stanley was liable for Strobel’s losses. But the panel awarded her just $5,000. She had to pay twice that amount in arbitration fees.

Strobel is now in her late 80s and lives outside Austin, Texas. She says she didn’t even cash the check.

Earnestine Strobel: I didn’t want $5,000, I wanted $283,000. And $5,000 is just chicken feed compared to that.

Strobel thinks she would have done better in front of a jury. But, like most investors, she signed an agreement when she opened her account to settle any disputes through arbitration.

Twenty years ago last month, the Supreme Court ruled that those kinds of mandatory arbitration clauses were legal. Attorney Ted Eppenstein represented investors in that case. He says the decision effectively took away the investor’s right to sue.

Ted Eppenstein: Previously, the investor could do that. There’s a constitutional right, under the Seventh Amendment, to a jury trial. Only the Supreme Court decided in this very close decision, 5-4, that the brokerage firms could have the investor waive that constitutional right.

In other words, wronged investors have only one place to go: the arbitration panel.

With the merger of the NASD and NYSE regulation, they’ll have just one choice of venue. And then, Eppenstein says, the odds are stacked against them. Most of the three-person panels include at least one industry representative.

Eppenstein: You get someone from the very securities industry that you’re suing for fraud sitting in as one of the three arbitrators in all but the smallest of cases. But there’s no arbitrator who’s supporting the investors’ point of view.

Critics say the two so-called public arbitrators often have industry ties as well. The outcry against mandatory arbitration clauses is getting louder. Democratic Senators Patrick Leahy and Russ Feingold recently asked the SEC to make arbitration voluntary for investors.

Last month, economist Edward O’Neal and attorney Daniel Solin published a study of arbitration awards. They found that in 1999, 59 percent of investors won their cases. Five years later, just 44 percent won. And those investors recovered just 22 cents for every dollar they lost.

But investors may be faring better than these numbers suggest. Linda Feinberg is president of NASD Dispute Resolution. She says these days, more cases are settling before they reach arbitration. Stiffer regulations have weeded out the kinds of “renegade” firms that might have defrauded investors in the past. And Feinberg says the bull market has helped.

Linda Feinberg: The market has been on an extended run up. And there haven’t been any major regulatory issues that have as directly affected investors’ pocketbooks. And as a result of that, you see that in the decline in the number of cases that have been brought in the last few years.

Investors who think they got a raw deal in arbitration may not be out of luck. Remember Earnestine Strobel, the Texas senior? Her attorney asked a federal judge to review her $5,000 award. The judge ordered the arbitration panel to come up with a more appropriate amount. So far, the panel has refused.

In New York, I’m Amy Scott for Marketplace.

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