By Andrew Leckey
Investors are fed up and they're not going to take it anymore.
Now the brokerage firms that let them down must pay the price.
A total of 4,384 arbitration cases involving disputes with brokers were filed with the National Association of Securities Dealers Dispute Resolution in the first half of 2004, a pace equal to last year's all-time record. There was a 33 percent increase from a year ago in number of cases decided.
In one glittery recent example, Nancy Stafford Myers, a regular on the "Matlock" and "St. Elsewhere" television dramas, was awarded $274,000 by a NASD arbitration panel.
Despite her request for conservative investments, a broker at Janney Montgomery Scott LLC stashed her life savings in high-risk growth stocks, junk bonds and private loans. Her nest egg declined by $500,000.
"I'm seeing more investor complaints against brokers than in a long time, a lot from investors who suffered significant losses in the bursting of the tech and telecom bubble," observed Jacob Zamansky, principal in the New York law firm of Zamansky & Associates (www.zamansky.com). "Their main complaint is unsuitable recommendations by brokers."
Pressured by critics who say a self-regulatory industry body shouldn't be in charge of the dispute resolution system, the NASD is hiring more arbitrators, has stiffened requirements for them, and has launched online claim filing.
As part of the crackdown, Citigroup Global Markets, Merrill Lynch and Morgan Stanley were recently fined $750,000 for failing to produce documents in 20 arbitration cases. Wachovia Securities and two of its brokers were ordered to pay $408,000 for misconduct in account management.
Seventy percent of cases are settled before a hearing even takes place, with the investor getting back some of what was claimed as a loss. Fifty-five percent of cases going to arbitration-which is binding-are decided in favor of the investor.
Problems can't be blamed simply on a rocky stock market, since all investors were in that same boat. However, not all investors got the same advice or encountered the same sales practices.
"The fact that your investment performed more poorly than you'd hoped is not a basis for a claim," explained Barbara Roper, director of investor protection for the Consumer Federation of America in Washington, D.C.
Instead, common abuses subject to arbitration include "churning" - excessive trading in and out of stocks to generate commissions - and unauthorized trading in an account, Roper noted.
Another kind of misconduct involves the conflict of interest a brokerage firm may create when it recommends the stock of a company with which it has a business relationship. According to John Markese, president of the American Association of Individual Investors in Chicago, a full-service brokerage house touted the stock of one such firm, an Internet concern, long after the company imploded.
Bondholders, too, may soon seek arbitration in greater numbers now that rising interest rates are reducing the value of existing bond holdings in individual portfolios.
"You rarely see investor complaints about brokers in bull markets, but they do rise in bear markets," Markese said.
If something goes wrong in your relationship with your broker, first talk with him or her to see whether it is a correctable mistake. If that isn't fruitful, go to the branch manager. You can talk with the manager on the telephone, but also write everything down. If that doesn't satisfy you, go the brokerage firm's compliance office, which may be located elsewhere.
If that fails, look into arbitration at the NASD or the New York Stock Exchange. The NASD Dispute Resolution's hotline number is 212-858-4400, and its Web site (www.nasdadr.com) explains the claims process. Its new online claim filing system can be accessed at http://www.nasdadr.com/online_filing.asp.
Under the NYSE Dispute Resolution process, the threshold is $10,000. You don't have to appear in person if your claim is $25,000 or less. Investors may reach the SEC by phone at 800-SEC-0330, on the Web at www.sec.gov/investor.shtml, or by post at 450 5th St. NW, Washington, D.C. 20549.
"Before you even do business with a broker or firm, use the NASD's broker check site (www.nasdbrokercheck.com) to check out their past history," advised Linda Fienberg, president of the NASD Dispute Resolution in Washington, D.C. "Also ask the potential broker for references and follow up on them." Investors may also call the NASD at 800-289-9999 to check out a broker.
Look closely at documents you're asked to fill out and sign, particularly the parts about your tolerance for risk and objectives, and retain a copy, Fienberg added.
"Read your brokerage account statements each month when you get them and ask questions about anything you don't understand," counseled Susan Wyderko, director of Investor Education for the SEC in Washington, D.C. "We sometimes see investors complain about unauthorized trading in their account which actually involved the sale of their securities to satisfy a margin call, something the brokerage firm is entitled to do."
Even though the broker may have sold a stock that you'd have preferred to keep, in a call on a margin account the action was justifiable, Wyderko added.
"The best thing you can do is keep good records," concluded Roper. "Your chance of getting your money back goes up dramatically if you can document what happened."
That includes confirmation slips, account statements, records of conversations that include the dates they occurred, details of the nature of investments recommended, the risks explained and specific instructions you were given.
