By Bill Hendrick, Staff Writer
THE ATLANTA JOURNAL & CONSTITUTION
MONDAY, SEPTEMBER 12, 1988
Last summer, when the wildest bull market in history was still raging, an Atlanta-based Army recruiting officer took a flier on a stock called Stars To Go that he says his broker told him was going places.
It did. It went down, and it may well soon go under.
Many stocks recovered from their post-crash lows, but Stars To Go kept plunging. From a February 1987 high near $20 a share, it sells now for 25 cents. The Los Angeles-based video cassette rental firm is out of money, deeply in debt, grappling for a deep-pocketed investor, and considering a bankruptcy filing.
Fortunately for the military man, he sold his Stars To Go stock a month after the stock market crashed in October for $2.50 a share. Unfortunately, he paid $11 a share for the first 2,000 shares he bought in July 1987 and continued to buy more even while the initial investment was going sour.
By the time he realized that Stars might never rise again, he'd bought $80,000 worth. He sold out for $18,000, his attorneys say.
The Army man claims his broker told him Stars To Go was a safe investment. The broker claims the officer knew he was speculating and is only screaming now because the gamble didn't pan out.
Who's lying and who's not will be decided by a three-person arbitration panel -- the securities industry's version of a judge and jury.
And whatever it decides, its decision will be final. In extremely rare circumstances, decisions can be appealed.
The Atlantan has a better than even shot of getting some of his money back. Of 1,058 cases decided last year by securities industry arbitration panels, disgruntled customers received monetary awards in 588 cases, or 56 percent of the time.
But the sizes of the awards are closely guarded secrets that the industry-run self-regulatory organizations, such as the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE), refuse to divulge. And according to investors, consumer advocates, legislators and securities lawyers, the awards seldom come close to matching losses.
What's more, with the arbitration process becoming increasingly slow because of a flood of complaints arising from last October's market crash, more and more investors, and the lawyers who represent them, are complaining that the system -- devised by brokerages to handle disputes expeditiously -- is inherently flawed and biased in favor of the industry.
Not surprisingly, the brokerage industry contends the arbitration process is not only fair but designed specifically to benefit small investors by saving them time and money.
Such questions are at the heart of a debate now going on in Congress, where legislation drafted by Rep. Edward J. Markey (D-Mass.) is pending that would revamp the arbitration process and give investors the option -- now denied them in many cases -- to sue their brokers in courts of law.
Many investors don't realize it, but one of the dotted lines they signed to open their brokerage accounts probably compelled them to arbitrate disputes with their brokers. The U.S. Supreme Court held last year that customers who sign such agreements -- even if they do so unwittingly -- must arbitrate rather than sue.
According to Mr. Markey, most brokerage firms' contracts contain such arbitration agreements, but the clauses are usually so "buried" and disguised in legalese that few consumers know what they are signing. What's more, he said, few brokers bring the clauses to the attention of new clients.
J. Boyd Page, senior partner in the Atlanta law firm of Page Gard Smiley Bishop & Porter , which specializes in securities cases, said that after Black Monday, many of his current clients were shocked to learn that they had agreed not to take their brokers to court
He told Mr. Markey's House subcommittee that he strongly advocates arbitration but that the current methods pose "serious problems" of. fairness. Brokerage firms, he said, should have the right to require customers to sign arbitration agreements but only if customers are "specifically" warned that they are giving up the right to sue.
Many other securities attorneys, including Mr. Page's partners, Brian N. Smiley and Steven J. Gard, back the provision of Mr. Markey's bill that would outlaw brokerage contracts that essentially give customers the choice of accepting arbitration or finding another broker.
The Securities and Exchange Commission appeared ready in June to approve a staff proposal banning compulsory arbitration but decided a month later to wait until October for more comment from the brokerage industry. Mr. Markey angrily accused the agency of knuckling under to a "firestorm" of industry lobbying.
According to Mr. Page, Mr. Smiley and other attorneys, such as Marion Smith II of the Atlanta firm of Fortson & White, the arbitration process needs reforms to give the small investor a better shake.
For one thing, Mr. Page said, for arbitration to be as fair as court proceedings, brokerages must be forced to cooperate more fully with customers' attorneys.
"In my experience, brokerage firms constantly try to stonewall the discovery process and generally will produce, few, if any, documents until the eve of the [arbitration] hearing," Mr. Page said. "Reforms are needed to ensure that the customer is given a full opportunity to gain access to relevant documents so that he can present his claim fully."
Also, Mr. Page added, in many cases months pass between the time arbitration panels hear the investor's side of a dispute and the brokerage's version.
"This often presents a serious disadvantage to the investor," he said. "The brokerage firm gains a significant advantage by being able to hear the customer's entire case; the firm then has several days, weeks or months to evaluate the customer's case and procure rebuttal evidence."
According to many critics, the process might be fairer, and certainly would appear fairer, if it were not administered by the self-regulatory organizations, which are owned and operated by the brokerage industry.
To Mr. Smith, who represents brokers as well as their customers and is a veteran arbitrator, a big problem with arbitration is "conceptual" -- an investor knows "the industry he is complaining about is the same industry that is passing judgment on him."
What's more, arbitration panels normally include one representative of the brokerage industry, often a branch office manager. Other panelists include lawyers, bankers or others with some knowledge of brokerage operations and a "judicial demeanor," according to Deborah Masucci, director of arbitration for the National Association of Securities Dealers.
Though brokerage industry representatives often "bend over backwards" to be fair and in many cases are "harder on the industry" than other panelists, Mr. Page said, many investors perceive that the process is unfair.
Daniel Beyda, managing attorney and senior arbitration counsel for the NYSE, said, "The fact that we're getting so many filings shows to a large extent the confidence that litigants and attorneys have in the arbitration process."
Miss Masucci said "there's no basis in fact" to the allegations bias.
William J. Fitzpatrick, senior vice president and general counsel for the Securities Industry Association, a New York-based trade group, said most complaints against arbitration are based on "myths and erroneous information"
Arbitration, he pointed out, has been available as a method of solving brokerage disputes for more than a century, and investors like it because claims generally can be settled in less than a year, compared with five years for a court suit.
Fair or not, it is the only choice most investors have, and Black Monday so skewed the timetable that it now takes a year or more before most consumers' cases are heard.
Mr. Beyda said that 1,156 cases were pending at the end of July, compared with a total 1987 caseload of 1,050. About half of investors who file for arbitration settle with their brokers before their cases are heard, he said.
Miss Masucci said the NASD is expecting 4,000 new complaints this year, compared with 2,886 in 1987 and only 1,587 in 1986.
Sixty-six percent of the claims filed at NASD are seeking $50,000 or less, she said, and the "average turnaround time is now 12 to 13 months."
One reason for the delay is a shortage of arbitrators, who are reluctant to sit on panels more than a few times a year because of the "low" pay of $225 a day.
Douglas H. Yarn, an attorney in Atlanta for the American Arbitration Association (AAA), an independent, non-profit dispute-resolving organization based in New York, said "the SROs [self-regulatory organizations] didn't have panels set up to handle the enormous number of claims that came down the pike after Meltdown Monday."
But the AAA, considered the model for resolving disputes outside of court, has also become bogged down with complaints, though the wait is not as long as at the self-regulatory organizations, Mr. Yarn said.
And the AAA also has drawbacks, lawyers contend. For one thing, it generally costs much more to arbitrate a dispute at the AAA than before security industry organizations. The minimum filing fee at AAA is $300, compared with $15 at NASD.
Still, more investors are choosing AAA, or would if they could.
"A lot of people have tried to move their arbitrations over to us to get them to be handled, and they can't because the agreement doesn't provide for us to do it," Mr. Yarn said. Only a few brokerage firms include AAA among their list of permitted forums.
Allegations of bias aside, many experts, such as David A Lipton, a professor of law at Catholic University in Washington, insist that the arbitration process -- though in need of improvement -- works for many investors.
In a study of security industry arbitration, he found that customers won 58 percent of the time, although 70 percent of those who won received 60 percent or less of what they said they had lost.
"You rarely get a home run in arbitration," said Mr. Gard of Page Gard Smiley Bishop & Porter . "But you do get a lot of singles."
