Why Investors May Find Arbitrators on Their Side
August 19, 2001
MARKET WATCH
By GRETCHEN MORGENSON
From The New York Times
As investors watch their portfolios
wizen, complaints of broker misdeeds
rise at the National Association of Securities
Dealers. The group, which runs the nation's
largest arbitration system handling investor
grievances, reports that through July, 3,950
cases had been filed, 25 percent more than
at the same point in 2000.
But how many disgruntled investors will
succeed in their cases? Will arbitrators view
them, as many in the securities industry do,
as greedy opportunists trying to recover
losses of their own making by picking the
deepest pocket around?
One authority on securities arbitration says that for several reasons, many
investors will fare well. Lewis D. Lowenfels, at the New York law firm
Tolins & Lowenfels, said stock investors' immense losses since last year and
the troubling conflicts of interest coming to light among research analysts and
other brokerage firm employees will encourage arbitrators to give plaintiffs at
least some of what they are seeking.
"The tech stock bubble and conflicts at brokerage firms will be central to
their decisions," Mr. Lowenfels said. "And given the unpredictability of
panels, brokerage firms are going to be more inclined to settle."
Not every case will be a winner for the plaintiff, of course. But Mr.
Lowenfels' argument is borne out by Merrill Lynch's recent payment of
$400,000 to settle a case brought against it and its high-profile Internet
analyst, Henry Blodget.
A Supreme Court case in 1987 confirmed that investors cannot file claims
against brokers in court if they had agreed to bring them to arbitration, as
most are required to do in order to open brokerage accounts. So investors
have little choice about where they air their grievances. Surprisingly, Mr.
Lowenfels said, arbitration may be kinder to beleaguered investors today
than courts would be.
To win a federal fraud case, for example, an investor must prove intent on
the broker's part. Not so in arbitration, where many panels have ruled
against firms for recommending unsuitable investments to clients or for failing
to supervise brokers. Intent to defraud was never at issue.
Arbitration may be more fruitful for investors, especially those suing over
losses in stocks recommended by biased analysts, because in federal court,
investors can bring a fraud case only if they bought or sold based on the
recommendation. Arbitration, on the other hand, allows for cases in which an
investor already owned the stock and simply held on because of the analyst's
call.
Finally, Mr. Lowenfels argued that in some arbitration opinions, panelists
have said they were concerned about treating plaintiffs equitably even if it
meant appearing to go beyond the law to do it. "In these cases, plaintiffs
receive at least some portion of their demands," he said. "But in a court of
law, the same claimants would probably have received nothing."
Investors are in the midst of the worst bear market since arbitration was
mandated. If throngs of them prevail, it will come as an unpleasant surprise to
brokers who cheered when they won the right to compel investors to
arbitration rather than the courts. They felt that arbitration panels — made up
of industry executives, lawyers and business people — would be more
conservative than juries of people unfamiliar with investing.
But now, Mr. Lowenfels said, "in a number of important areas, arbitration
panels seem to have reached beyond existing legal authorities to expand the
rights and protections accorded to the investing public."
Wonder which brokerage will be first to stop forcing its clients into
arbitration?
nytimes.com |
