In Disputes With Wall Street, Investors Face 'Rough Justice'

Historically, going back decades, the securities industry used to prevail in roughly 60 percent of cases, according to the industry's own past studies. But in more recent years, that percentage has fallen. Of the 304 investor cases last year that went to arbitration, a slight majority, 55 percent, concluded with a decision favoring the industry. The industry win rate has come down from 58 percent in 2008, and 63 percent in 2007.

Stacked Deck?

Linda Fienberg, the president of FINRA Dispute Resolution, declined to be interviewed for this story. A FINRA spokesman pointed out that when counting claims that were settled, complainants in 2009 won some form of award in 70 percent of cases.

Most commonly, investor cases involve allegations of negligence, misrepresentation or instances of assets being placed by brokers in unsuitable investments -- like when a senior citizen is placed inappropriately in an aggressive, high-risk growth fund that pays the broker a high commission fee.

Cases of account "churning" -- excessive trading by brokers to generate commissions -- were common in the 1990s, but not as prevalent nowadays, lawyers said.

FINRA picks its arbitrators from a pool of about 6,000 professional arbitrators nationwide who are paid up to $475 per day. Many are retirees.

Disputes involving sums of money exceeding $100,000, if not settled, go before a three-person panel. Two of three panelists need to agree for a decision to become final. FINRA insists the majority of cases, some 98 percent, are resolved with unanimous decisions. Cases involving less than $100,000 (about one-third of claims) are heard by just a single public arbitrator.

Critics of FINRA, including some former professional arbitrators who have sat on panels, insist that the system is not set up with investors' best interests in mind.

"I've seen a disturbing amount of examples where it appears that attempts were made to fix cases," claimed one former arbitrator who requested anonymity, fearing a professional backlash from FINRA. "In general, their system is conflicted. If you don't vote in favor the industry, you don't get assigned any more cases, it's as simple as that."

The arbitrator, who no longer sits on panels, described several specific instances when he said FINRA assigned a new, hand-picked "replacement" panelist at the 11th hour, usually for some ambiguous reason.

"When I would see that, it usually involved a big case, and a major firm – and it also meant the investor was in for a tough time," the arbitrator said.

John Mark, a former NASD arbitrator, recalled being removed from a panel several years ago for "geographic reasons" after he objected to what he described as an unabashed bias shown a fellow panelist who had been a last-minute replacement.

"This guy was clearly trying to rig the case, and I wouldn't go along with it," Mark told

The episode eventually made the Wall Street Journal and drew the attention of Massachusetts Secretary of State William Galvin, who has repeatedly said that industry arbitration was unfair, at one point calling it "an industry sponsored damage-containment and control program masquerading as juridical proceeding."

Last year, Galvin testified before the House Financial Services Committee, urging arbitration reform.

State regulators such as Galvin are now among those leading the charge for an end to mandatory arbitration.

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