| STOCK DETECTIVE
FIGHT BACK! |
| Get Your Money
Back, Part I: An Inside Look at Broker
Arbitration |
|
| By G. Alexander
Novak | Fri Jun30, 2000 2:57
PM ET
If misery loves company,
then welcome to the crowd. Since the first guy whispered "have I got
a deal for you," investors and their money have often parted. After
a bad experience, many investors leave the market for a spell and
then come back with a new broker.
There is an alternative: If
the broker is at fault, you can recoup your losses. Sophisticated
customers initiate an average of more than 7,000 claims each year
against their brokers. Probably twice that many people complain to
their broker or the branch manager, and work out settlements before
a claim is filed.
But don't mislead yourself. The arbitration
process is not easy or cheap. At the same time, recognize that you
stand a good chance to get your money back if you have a credible
claim and are well prepared.
So, how do you get your money
back?
The short answer is you cannot go to court and sue. In
the early 1980s, Wall Street and the entire securities industry woke
up to the realization that they could get killed in the courts. They
feared large legal fees for their own lawyers and the prospect of
even larger jury awards from irate jurors.
So, the industry
came up with something called the Pre Dispute Arbitration Agreement,
where you give up your right to go to court. You will find it in
your customer agreement and it usually reads something like the
following:
I agree that any controversy relating to any of my
accounts or any agreement that I have with you will be submitted to
arbitration conducted only under the provisions of the New York
Stock Exchange or pursuant to the Code of Arbitration of the
National Association of Securities Dealers Inc.
In
arbitration, you probably will not obtain a damage award as large as
you might receive if you were able to take your claim to court.
However, arbitration provides a reasonably good chance at getting
your money back if the broker did something wrong. In the most
recent surveys, customers win about 60 percent of arbitration claims
when the claim is less than $20,000. These customers typically
receive about 80 percent of their loss.
What is
Arbitration?
Arbitration is fast by court standards: usually about 11
months from start to finish. The timetable and process generally is
as follows.
After you file an arbitration claim, you should
receive an answer from the broker's lawyer in return. Then there is
a period for discovery. The amount of discovery depends in large
part on the size of the claim. Even if your claim is comparatively
modest, don't be surprised if you are bombarded with discovery
requests by the firm's counsel. It's as easy to make such requests
as pulling lengthy form documents from a word processor.
Now
you are ready for your arbitration. One or three arbitrators will
decide your case. If there are three arbitrators, then one of the
arbitrators will be a so-called "industry arbitrator" -- an
individual who either currently or previously worked in the
securities industry. Cases typically last from one to three days,
depending upon the complexity.
The arbitration proceeding
itself is quite informal. You will sit around a table and take turns
presenting your sides of the case. But don't think that the
proceeding will be quick. The firm almost always will take its time
presenting its case and cross-examining you. They have attorneys on
staff and for securities firms, arbitration is just a cost of doing
business.
When you go to arbitration, you give up some levels
of justice we have come to expect in the courts. Strict adherence to
the Rules of Evidence is thrown out the window. Another big
difference is that arbitrators can do what they want. They are not
bound by precedence. They are barely bound the law.
As you
would suspect, some arbitrators are much better than others. and
there are certain arbitrators you absolutely do not want. Both you
and defense counsel have an opportunity to review potential
arbitrators during the selection process. There are databases that
experienced securities attorneys access and they review all the
decisions made by possible arbitrators. If you want to prevail, it
is absolutely critical that you do your homework.
Thirty days
after the hearing, the arbitrators make their decision. There is no
real right to appeal the decision except in very limited situations.
Win or lose, the decision is final. If you were awarded, the brokers
must pay within 30 days or they will lose their license. Of course,
if the broker has left the industry or the firm is out of business,
you will probably find it very difficult to collect your
award.
Critical Concerns of Investors
- What are my arbitration
fees?
About 85 percent of arbitration cases are
arbitrated at the NASD. As you can see from the chart below,
arbitration is not cheap. You must pay a non-refundable filing fee
plus a hearing session deposit. In addition, the NASD recently
appears to be requiring a telephonic pre-hearing conference even for
very modest cases and charging investors a session fee for this
conference, even though it may only last 15
minutes.
Depending upon the size of the claim, you may have
the choice of having one or three arbitrators. Obviously, three
arbitrators will cost more. For very small claims, you can opt for a
simple arbitration that will not have a hearing, and will be decided
by a sole arbitrator based on a written
submission.
NASD Schedule of
Fees
|
Amount in Dispute
(Excludes Interest) |
Filing Fee |
1 Arb. |
3 Arb. |
|
| $10,000-$25,000 |
$125 |
$450 |
NA |
| $25,001-$30,000 |
$150 |
$450 |
$600 |
| $30,001-$50,000 |
$175 |
$450 |
$600 |
| $50,001-$100,000 |
$225 |
$450 |
$750 |
| $100,001-$500,000 |
$300 |
$450 |
$1,125 |
| $500,001-$1,000,000 |
$375 |
$450 |
$1,200 |
| $1,000,000-$3,000,000 |
$500 |
$450 |
$1,200 |
- What information must I
disclose?
After the answer is served, you will be
required to provide information about your investing background. You
will have to disclose your tax returns for about five years. You
will need to give the brokers copies of your other brokerage
accounts' monthly statements.
Many investors understandably
do not want to disclose their tax returns and they are indignant
about the amount of financial information they must surrender. If
you file an arbitration, you do not have a
choice.
You are not required to have an attorney in arbitration, and the
other side certainly will not be disappointed if you do not use an
attorney. Your broker will use an attorney, so you can be at a
significant disadvantage if you do not.
Stronger
Claims
Whether or not you have a viable arbitration case depends
upon the facts in your particular situation. Some claims often bring
success, while others are more difficult to
prevail.
- Misrepresentation. Lying or excessive
puffing is the most common complaint, and such claims can prove
compelling. But remember that if the broker just gives you an
opinion, then you do not have a credible claim. Often, however,
investors lose lots of money because brokers give more than just
an opinion. If broker hype turns about to be a bunch of lies, then
you have a strong case.
- Unsuitable Investments. When brokers
open your account, they must ask about your income, liquid assets
and personal investment goals. NASD and NYSE rules require that
brokers should not make any recommendations in any stock unless
they have first determined it is suitable for you.
- Unauthorized Trading. When your broker
makes a trade without obtaining your permission, he or she
violates NASD rules unless the account is a discretionary one. If
this happens, you should protest to your broker in writing
immediately. If you do not act immediately and wait until the
stock plummets a month later, the broker will say you agreed to
the trade and it will your word against his or her
word.
- Churning. Two components are
instrumental in a successful churning case. First, you must show
that your account in fact was traded excessively. Second, you must
show that your broker was in control of your account. Don't be
surprised if the broker argues that he went over all the trades
with you and that you knew you were paying commissions on all
trades. In an arbitration, the broker likely will say whatever is
necessary to avoid a loss.
Difficult
Claims
- Overconcentration. Cases centering on
overconcentration are difficult to prove unless the broker was in
control of your account. These cases are difficult because almost
all investors diversify. Arbitrators generally believe that
investors should know that putting all their eggs in one basket is
very risky.
- Bad Advice. The least persuasive cases
in arbitration are those which can be generally classified as
"sour grapes." Just because things did not work out like your
broker thought they would does not mean you have a viable
arbitration claim. Brokers do not insure you against market
risk.
- You Did Not Sell. Another area of
contention involves situations when you call your broker with a
demand that he sells a recently recommended "dog stock," but he
talks you out of it. Unless you can show some malicious motive,
arbitrators do not view these claims very
sympathetically.
- Margin Calls. These are tough cases
because the broker does not have to call you before your account
is liquidated.
Troublesome
Defenses
Even if you have a strong arbitration case, you should be
aware that you may not prevail if the broker raises strong defenses.
Bear in mind the following defenses that brokers often
use.
- Statute of Limitations. Every kind of
lawsuit or crime has a statute of limitations. The limit generally
equals six years for filing an arbitration, although it may be
less for certain claims in certain states. Basically, if you think
you have a claim, don't sit around worrying about it. Start the
process.
- Ratification. This is when you claim
that you never wanted to buy the stock and your brokers never
talked to you about it. They claim you received the confirmation
slips, so you must have really wanted to purchase the
stock.
- Mitigation of Loss. You call your
stockbroker. You request to sell all your shares of XYZ Company if
the stock drops to $14 a share -- a stop loss order. Your broker
goofs and does not sell it. You sell two months later at $8. You
want the difference between $14 a share and $8 a share. The
arbitrator likely will consider the stock's position for the week
after the first telephone order -- perhaps $11 a share -- and
limit your recovery to that amount.
How to Choose A
Good Stockbroker
Many terrific, conscientious stockbrokers work
hard and place their clients first - before commissions.
Unfortunately, other brokers and brokerage firms engage in
remarkable misconduct.
Of course, many problems may be
avoided by performing some homework when first selecting your broker
or when changing firms and brokers. Consider the following helpful
hints:
- Ask your friends and business
associates for recommendations.
- Interview prospective brokers and
their bosses, usually the branch manager.
- Thoroughly investigate the history of
the broker and firm.
- Get references: Obtain the names of 10
current clients, and call each one.
- Broker knowledge is critical: Require
the broker and firm to prepare a one-, three- and five-year
detailed investment plan of action.
- Ask about commissions; brokers and all
firms discount.
Once you've found the right broker, don't forget to monitor.
Contact the broker regularly. Perform an account "status check"
monthly by phone and quarterly in person. Review each month's
statement when received, and call the broker immediately with any
questions.
If you remain involved, stay informed and take
responsibility for your money, you may never need to seek redress
and recovery through arbitration. But if you are indeed burned by
your broker and brokerage firm, arbitration provides an opportunity
to fight back and win!
G.
Alexander Novak is a New York City-based attorney and has
represented investors before the NASD, NYSE and in federal courts in
New York and New Jersey. He is the author of a book, How to Sue Your
Stockbroker and Win. He graduated from the University of North
Carolina and Brooklyn Law School, and obtained a master's degree in
international law from the University of Austria at
Salzburg.
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