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

A 2008 study done by researchers at the University of Cincinnati on behalf of the Securities Industry Committee on Arbitration surveyed around 3,000 investors who had participated in industry-run securities arbitration. Some 62 percent said they thought the arbitration process was unfair; 70 percent were dissatisfied with the outcome. Nearly half of the respondents felt their panel was biased.

At the time the study was released, Bryan Lantagne, director of the Massachusetts Securities Division and chair of NASAA's Arbitration Project Group, said that the "study's results are disturbing, and support what state regulators have been hearing from investors in their states -- investors believe that the arbitration forum they are forced to participate in is rigged against them."

A separate study done by attorney Daniel Solin and finance professor Edward O'Neal studied approximately 14,000 cases between 1995 and 2004 and found that on average investors recovered between 22 percent and 38 percent of the monetary claims sought. For claims of more than $250,000 and involving the largest 20 firms, the recovery rate dropped to only about 12 percent of the amount claimed.

Changing Perception

FINRA has taken steps to make the system at least appear fair and not biased toward the industry.

Three-person arbitration panels can only have one person from the financial industry, either a direct practitioner or a lawyer for the industry. This type of arbitrator is known as a "non-public" arbitrator. The other two panelists need to be "public" arbitrators, or, ostensibly, not from the industry. However, public arbitrators can sometimes be retirees who at one time or another once worked in the industry.

Lawyers who deal with FINRA say outright deck stacking is far less of a problem than the generally wide latitude given to panelists to find reasons to rule in favor of the industry members who, while putting their own interests ahead of clients, never technically breach any codes of conduct. The burden of proof in an arbitration case, in other words, is much harder for investors than it would be if they were to pursue claim in a regular civil court where a broker defendant is held to a higher fiduciary standard, and thus shoulders more of the burden of disproving the claim.

"Imagine having a defective tire that caused an accident and then being forced to have your claim decided by the national association of tire dealers -- I tell my clients that's the level of fairness they can expect," said Rosenfield, who added that he avoids panels at all costs and almost always tries for a settlement.

Two years ago, FINRA introduced a pilot program that allowed claimants to use panels consisting of all purely public arbitrators, and later expanded it. In most cases, though, claimants still chose to have a non public, or industry person, hear the case. So even though the option for an all public panel is available, most lawyers recommend the traditional panel mix, undermining claims that FINRA can stack the deck.

Industry expertise can be useful, Rosenfield said.

"You have industry people whose expertise works in favor of the investor, and then you just have plain old shills or hired guns," he explained.

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