Aggrieved investors turning to arbitration
Brokers, customers try to work out settlement

JOSEPH N. DiSTEFANO

As investment values tumble, investors haven't been turning to the nation's securities regulators to bail them out.

Complaints to the federal Securities and Exchange Commission and the broker-run National Association of Securities Dealers have dropped — not risen — as the stock market has fallen over the last three years.

Instead of waiting for the SEC and NASD enforcement bureaucracies to nail the advisers they think may have misled them or wasted their money, aggrieved investors have been submitting to arbitration in hopes of getting at least part of their cash back.

At the SEC, complaints against brokers peaked at 14,000 in fiscal 2000 — then fell to just 9,500 in 2002.

The NASD logged more than 6,500 investor complaints in 2000, the year the bull market peaked. But in 2002, it fielded fewer than 4,500.

Neither the SEC nor the NASD would comment on why investors are filing fewer complaints as their losses mount. SEC officials do not want to "speculate," spokesman John Heine said.

But it's not just complaints that are falling off. Data for both agencies show that their actions against wayward brokers and other market pros have been flat or declining, despite the bear market and high-profile Wall Street scandals. (An exception is the New York Stock Exchange, where the number of members disciplined rose steadily from 150 in 1998 to 253 in 2002.)

A recent SEC report required by last year's Sarbanes-Oxley law acknowledged that the number of brokers, lawyers and accountants the agency found to have broken the law fell from 523 in 1999 to 344 in 2001. The SEC "did not reach any conclusions as to the reasons for the lower numbers in the later years," the agency said in a footnote.

At NASD, the number of members expelled or suspended from the business has fluctuated recently, peaking at 899 in 2001 but dropping to 824 last year.

But while complaints of professional wrongdoing are down, disputes between investors and their brokers that have been submitted for binding arbitration have soared.

According to NASD, new arbitration cases involving customer disputes soared nearly 40 percent since the market began to fall, rising from 5,600 in 1999 and 2000, to 6,900 in 2001, to 7,700 in 2002.

Under 70-year-old U.S. securities laws, brokers that belong to the NASD can direct dissatisfied customers to submit to binding arbitration by a panel of brokers, who may settle the case with a monetary payment. Customers are often represented by lawyers, who get a piece of the settlement. The nation's stock exchanges offer similar arbitration.

By contrast, complaints to NASD's disciplinary arm and SEC's enforcement officers sometimes result in civil or criminal proceedings that result in damages awards, if investigators find that brokers broke the law; such cases can take years to resolve. Some aggrieved investors file complaints while also seeking arbitration.

Roughly half of broker disputes make it to arbitration. Of those, three out of five result in the customer getting at least some cash, according to NASD records.

Investors have come to believe "it's much more effective to file for arbitration instead of complaining to the SEC because you never know how long it will take the SEC to get around to investigating it. With an arbitration, you get quicker results," said Francis G.X. Pileggi, a Wilmington lawyer who represents investors.

"When you get the SEC complaint forms, they're pretty clear they're investigating for their own purposes, not to help the investor. It's sort of the same way at NASD on their enforcement side," said Steven Berkley, a Chicago securities lawyer. Instead, by going to arbitration, "investors have a chance of actually seeing something."

David Zalesne, a former federal prosecutor who now defends brokers accused of wrongdoing in Philadelphia, offers other possible explanations for the drop in complaints. "The people I talk to at the SEC seem pretty busy," he said. "When there's a demand on government agencies with limited resources to deal with massive fraud cases, it gets harder for regulators to spend time" on individual investor complaints.

Plus, many of the investors who suffered the biggest losses were managing their own investments or day-trading. "A lot of people made investment decisions on their own and have nobody to blame for their losses but themselves," Zalesne added. In big fraud cases, brokers and investment advisers were often victimized with their customers, he said.

What kind of cases lead to successful arbitrations? "Just because your portfolio went down doesn't mean you have a claim," says Debra G. Speyer, who represents investors in stockbroker disputes at her offices in Philadelphia and on the Main Line.

She said small investors tended to win arbitration awards when they could show their accounts became concentrated in a risky group of stocks or showed an abnormally high number of trades. Also, she said buying stock on margin is often "a telltale sign" an investor has fallen or been pushed in too deep.

For information on filing an arbitration case, go to the NASD's Web site at www.nasdr.com and select the link for "dispute resolution."