By Andrew Leckey
Time marches on, and abuses by brokers and brokerage firms are taking on their own personality in 2005.
The good news is that new arbitration cases involving broker disputes are down significantly as those filed following the bursting of the technology bubble are gradually closed out.
For example, a retired Clearwater, FL, couple earlier this year won a $419,202 arbitration award against Raymond James Financial Services for negligence in the supervision of a broker who had been overly aggressive in investing their money during the boom.
A total of 3,602 arbitration cases were filed with the National Association of Securities Dealers Dispute Resolution Inc. in the first seven months of this year, down from 5,083 last year and 5,516 in 2003 for that same time period.
The bad news is that different forms of abuse are surfacing.
"We're particularly concerned about the sale of variable annuities to seniors," said Patricia Struck, newly elected president of the North American Securities Administrators Association and administrator of the Wisconsin Division of Securities.
In many cases, those selling annuities don't fully understand the investment or what makes it suitable for various clients, she said.
"We're starting to see more hedge fund cases, with investors realizing they're not appropriate for everyone even though they're sold by many different firms," added Steven Caruso, treasurer of the Public Investors Arbitration Bar Association and an attorney with New York-based Maddox, Hargett & Caruso.
Caruso also is receiving more business from disgruntled overseas investors.
"There's been a falling off of churning claims in which brokers traded too frequently in client accounts in order to generate more commissions," said Mark Astarita, attorney with Beam & Astarita LLC in Bloomfield, N.J., who has been involved in more than 500 arbitration cases on both sides over 23 years. "Nearly every case I have today is a suitability case in which broker recommendations weren't suitable for the investor's circumstances."
What should have been prescribed for that particular investor must always be determined in those suitability cases, he pointed out.
"There are more mutual fund and annuity arbitration cases, while cases against brokerage analysts have pretty much peaked," said Linda Fienberg, president of NASD Dispute Resolution in Washington, D.C., noting that 47 percent of customers involved in arbitration recovered some form of damages last year. "We've closed out a lot of cases and our claim level is now back to where it was before the tech bubble burst."
Among the cases filed with the NASD in the first seven months of this year, the most frequent involved common stock, followed by mutual funds, annuities, options, corporate bonds, certificates of deposit and limited partnerships, Fienberg said.
When deciding whether to seek arbitration, realize that 80 percent of unpaid awards involve firms or individuals no longer in business and likely unable to make restitution.
You can't go after a broker simply because a recommended investment goes down, since markets go in cycles and every investment carries some risk. But infractions such as unauthorized trading in your account, failure to diversify, misrepresenting a material fact about an investment, breaching fiduciary duties or outright negligence are different matters altogether.
If you have a problem with a broker, first talk with him or her to see whether the problem can be corrected. If that doesn't work, go to the branch manager. You can talk with the manager on the telephone, but also write everything down. If that isn't satisfactory, go to the brokerage firm's compliance office.
Mediation, which is quicker and less costly than arbitration, is an option with the NASD or an exchange such as the New York Stock Exchange.
If all these steps fail or if you signed an arbitration agreement when initially opening your account, there is arbitration with the NASD or NYSE. The claims process is explained on the Web site of NASD Dispute Resolution (www.nasdadr.com), which handles the vast majority of claims. Its hotline number is 212-858-4400. It has 70 hearing locations, including 10 opened this year that include London and Puerto Rico.
Under the NYSE resolution process, the threshold is $10,000. You needn't appear in person if your claim is $25,000 or less. The NYSE Arbitration Department's phone is 212-656-2772 and Web site is www.nyse.com. Meanwhile, investors can reach the SEC by phone at 800-SEC-0330, on its Web at www.sec.gov/investor.shtml, or by post at 450 5th St. NW, Washington, D.C. 20549.
Before doing business with a broker or firm in the first place, go to the NASD's broker site (www.nasdbrokercheck.com) to check his or her history. Ask the potential broker for references and follow them up. You can also call the NASD at 800-289-9999 to check out a broker.
Caruso first determines whether financial recovery is likely by obtaining copies of the investor's account statements and the original new account report with investment objectives and financial profile. Since these cases are accepted on a contingency fee basis, he must feel confident.
Chances of getting money back go up dramatically with documentation such as confirmation slips, account statements, records of conversations that include the dates, details of investments recommended, risks explained and specific instructions you were given.
"Arbitration hearings are much more formal than people expect, a lot like a trial and never a slam-dunk," said Astarita.
Editor's Note: Andrew Leckey's column, "Successful Investing," appears regularly in The Bull & Bear Financial Report print edition.
