2002 Securities Arbitration Review:
A Busy Year for Investors Seeking To Recover Their Investment Losses
ear 2002 was a year of big numbers. Securities arbitration filings increased across the board as investors sought to recover their investment losses from major events such as the "Tech Wreck" and the telecommunications industry meltdown. Investors' trust and confidence in Wall Street eroded as we witnessed numerous brokerage firm investment banking and investment research shenanigans, with Merrill Lynch, Salomon Smith Barney and Credit Suisse First Boston, to name a few. We also witnessed the passage of two new rules that will assist investors. One rule assists investors in recovering from brokerage firms that no longer exist. The second rule removes any obstacles from the paths of investors who wish to transfer their accounts from one brokerage firm to another.
The Numbers
National Association of Securities Dealers Dispute Resolution (NASDDR) handles the lion's share of securities arbitration claims - about 90%. The New York Stock Exchange (NYSE) arbitration department administers the balance.
Year 2000 and Year 2001 certainly were busy years in terms of new case filings at both NASDDR and NYSE. But 2002 filings (through September) increased 14% from the prior year at NASDDR, for a total of 5,680 claims. The NYSE showed even more growth: a 90% increase in filings, totaling 954 claims versus 502 claims one year earlier.
These significant increases put pressure on the system, as can be measured by average turnaround (or case closure) time. Still fast relative to court litigation, however, NASDDR statistics (through September, 2002) reported that it took 16 ½ months for securities arbitration filings to complete the hearing to adjudicate the claim. NYSE arbitration reported (through September, 2002) an 11.3-month turnaround time, actually down from 14 months in 2001.
What have investors alleged to justify their claim that they should be able to recover their investment losses from their brokerage firms? Year 2002 statistics show some interesting trends. For example, online trading claims dwindled to almost nothing. Instead, 2002 NASDDR statistics showed large gains in the number of claims, as well as year over year percentage increases, in the following causes of action:
4,183 claims alleging breach of fiduciary duty, a 21% increase from 2001;
2,627 claims alleging a failure to supervise, a 33% increase;
2,608 claims alleging misrepresentation, a 38% increase;
2,557 claims alleging unsuitable investments, a 68% increase; and
1,129 claims alleging omission of facts, a 63% increase.
The subject matter of these claims continued to be related to investments in common stocks by overwhelming numbers. Mutual funds was the second largest category; options was the third.
How successful were investors in recovering their investment losses in 2002? Through September 2002, NASDDR statistics show that arbitration panels awarded $113 million to investors. That reflected an increase from $97 million in 2001 and $76 million in 2000. Overall, arbitrators decided 32% of the claims filed. The balance of 68% was settled directly by the parties (38%), settled through mediation (12%), withdrawn (10%), and otherwise closed (9%). Of the 32% of the claims filed which arbitrators decided, investors were awarded damages in 57% of them. That "win" percentage has remained fairly consistent over the years, with customers winning 53% in 2001, 53% in 2000, and 61% in 1999.
New Rules Help Investors
In 2002, the NASD adopted a "Default Procedures" rule that makes it easier for investors to prosecute claims against brokerage firms that are defunct (and against brokers who no longer are in the securities business). The rule provides that if the defunct firm (or former broker) files no answer or response to an investor's arbitration claim, then the investor may expedite the arbitration process, thereby saving time and money.
Additionally, the NASD implemented a rule that assures that investors who wish to transfer accounts from one brokerage firm to another will be able to do so without restriction, even if they are following a departing broker who has a dispute with the predecessor brokerage firm. The rule states in part that:
"It shall be inconsistent with just and equitable principles of trade for a [brokerage firm or broker] to interfere with a customer's request to transfer his or her account in connection with the change in employment of the customer's [broker], provided that the account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes, but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his or her account."
Overall, we witnessed strong growth in the securities arbitration arena in Year 2002. We expect this trend to continue for the next several years.
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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is a past co-chair of the Chicago Bar Association's Securities Law Committee, a past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat & Filipowski and can be reached at 312-621-4400.
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