Investor Complaint Statistics Reveal Interesting Trends

ecently National Association of Securities Dealers (NASD) Dispute Resolution released statistics on securities arbitration claims by brokerage firm customers to recover their investment losses. These statistics, coupled with complaint statistics that the Securities and Exchange Commission (SEC) released, reveal areas in which investors are concerned.

First, new case filings with NASD Dispute Resolution (which is the forum in which most claims are heard) have increased 22% in 2003 (through May) compared to the same period in 2002. In 2002, a total of 7,704 claims were filed. The NASD has opined that conflict of interest claims against brokerage firms (relating to their research analysts and fraudulent and/or misleading research reports) will contribute significantly to increased filings in the years ahead.

Second, several trends have emerged. For example, compared to 2000, 2001 and 2002 show a notable increase in filings relating to churning (excessive trading in customer accounts) as well as unauthorized trading (not obtaining permission in advance of each trade). Moreover, there have been dramatic increases in the following categories: unsuitable investment recommendations (nearly triple the filings since 2000); omission of facts (nearly triple the filings since 2000); misrepresentation of facts (nearly double the filings since 2000); breach of fiduciary duty (nearly double the filings since 2000); and brokerage firm failure to supervise (nearly double the filings since 2000).

Third, there has been an increase in claims relating to corporate bonds, no doubt as "high yield" or junk bonds default. And we see nearly a five times increase in the number of claims filed since 2000 relating to mutual funds. Common stock still is the type of security about which most investors complain.

Fourth, arbitration claims are being resolved in line with historical statistics. That is, the parties settled 37% of the claims in 2002. An arbitration hearing and an award were necessary for 25% of the claims resolved in 2002. Of those claims requiring an arbitration hearing, in 2002 investors received an award 55% of the time. That percentage is in line with the historical average.

Fifth, in 2002 investors were awarded $116 million in damages, with an additional $23 million in punitive damages. That amount of damages reflects a substantial increase from 2001 ($82 million in non-punitive damages), from 2000 ($55 million in non-punitive damages and from 1999 ($78 million in non-punitive damages). Damage awards for 2003 may exceed damages awarded in 2002, as investors have been awarded $65 million in damages with an additional $18 million in punitive damages through May 2003.

Similarly, the statistics for 2002 published by the SEC reveal interesting trends. During 2002 the SEC received over 21,000 complaints. Complaints concerning fees, commissions and administrative costs were the number one complaint and they rose 40%. The next largest category was for misrepresentations. Complaints concerning the adviser's failure to follow the customer's instructions rose 37%.

The SEC statistics also show that approximately 20% of all complaints were directed at online brokerage firms (down from 24% in 2001). The largest complaint category against online firms related to fees, commissions and administrative costs (up 19% since 2001). The second largest category was for complaints against online firms for failures to process orders or delays in processing orders. However, that category decreased 41% since 2001.

Moving forward, one should expect to see an increased number of complaints to the SEC and an increased number of arbitration claims being filed with the NASD. Categories of NASD claim filings which should show considerable increases will be misrepresentation of facts, omission of facts and unsuitable investment recommendations.

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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 maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.