Brian Smiley addresses the recent flood of claims against brokers.
Investors pummeled by last year’s market meltdown are increasingly taking their brokers to task.
In the first eight months of this year, investors’ securities arbitration complaints against stockbrokers surged 65% from the same period in 2008. The 4,991 claims filed exceeded the tally for all of 2008, according to the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulation arm.
Linda Fienberg, Finra’s president of dispute resolution, expects to end the year with nearly 7,500 cases filed, the highest level since 2004, when investors were still reeling from the technology-stock wreck.
“Lots of people are very upset with their brokers, and not just because of a bad market,” says Brian Smiley, of law firm Smiley Bishop & Porter LLP in Atlanta, and president of the Public Investors Arbitration Bar Association. “A huge number of people were put into investments that they thought were relatively risk-free but were actually very speculative.”
Brokerage arbitration, a system run by Finra and previously by the National Association of Securities Dealers, is virtually the only way for investors to seek redress. While the system has long been criticized as being stacked against investors, the picture is starting to change.
Investors won some 45% of the cases decided this year through August, up from 37% in 2007, according to Finra. For claims under $1 million — the bulk of the total — winning investors are typically getting about half the amount they seek, says Richard Ryder, editor of the Securities Arbitration Commentator. “Suitability” claims, which revolve around the broker’s responsibility to the customers to learn their objectives and recommend suitable investments, have predominated in this year’s filings, Mr. Ryder says.
A good chunk of the cases over the past two years have centered around auction-rate securities — short-term debt instruments whose prices reset in periodic auctions, Finra’s Ms. Fienberg says. Many investors were unaware of their risk.
In February, a panel ordered Credit Suisse to pay $400 million to STMicroelectronics, after the Swiss semiconductor maker accused the bank of mishandling its investment in auction-rate securities. That award helped push the average recovery rate — the percentage of winning investors’ claims that is actually awarded — to a whopping 99% in the first quarter, according to Mr. Ryder.
Structural changes also may help. Congress is considering eliminating mandatory arbitration, which would allow investors to take their complaints straight to court.
“There are so many people that are never going to invest in the markets again,” says Denise Voigt Crawford, the Texas securities commissioner and president of the North American Securities Administrators Association. “We have to make sure from a policy perspective that we don’t allow capitalism to destroy itself.”
By Robin Goldwyn Blumenthal