Hartley Bernstein knows all about the problems investors can have with their stockbrokers. As a partner in the Manhattan law firm of Brandeis, Bernstein, Pollack & Greene, he has filed 40 to 50 arbitration claims for investors who claim they were injured by their broker or financial institution following the stock market plunge of Oct. 19, 1987.
Not one of those cases, however, has yet come before an arbitration panel, he says, even though the market dive happened more than a year ago.
The problems for Mr. Bernstein, other lawyers, and their clients have arisen because many brokerages have required their customers to sign agreements that they will settle any dispute through arbitration, and not take the issue to court. As a result, disputes that might have been settled in court, or between lawyers before a case came to trial, have to wait for a lengthy and now-overburdened arbitration process.
The ``number of arbitration cases has increased far more rapidly than anyone had anticipated,'' says Bernstein. Some 4,500 cases, he estimates, are now or will be before the National Association of Securities Dealers, compared with about 2,000 a year ago. The NASD is one of the major organizations that deals with arbitration cases, along with the New York Stock Exchange (NYSE) and the American Arbitration Association.
Although Bernstein's first case will come before arbitrators in November, and he expects another to be heard in December, most aren't likely to come before such a panel until some time next year.
Given the growing number of cases, the arbitration process appears to be getting increasingly clogged. This is of particular concern to small investors, who often have to sign mandatory arbitration agreements and for whom the loss of a even few thousand dollars might represent a big share of their assets.
``Many of my clients are not particularly wealthy people,'' says Bernstein, who is concerned about the extensive waiting periods involved in arbitration cases. ``Yet, they cannot afford to continue to wait, in part because of tax considerations.''
The arbitration system has come under increasing criticism in recent years from individuals and some in Congress who claim it favors the securities industry, rather than private investors. Yet in June 1987 the United States Supreme Court, in Shearson/American Express Inc. v. McMahon, held that mandatory pre-dispute arbitration agreements are enforceable. In other words, the court said, any investor who has signed an arbitration agreement would be required to take the claim to arbitrators, rather than to court.
But that is unfair, critics insist. They say the membership of arbitration panels tends to be weighted in favor of the securities industry.
Proponents of arbitration, however, argue that investors can always negotiate the terms of the contract, or take their business to a dealer who does not require arbitration. And they deny that there is any predisposition within the system toward the securities industry.
Because of the mounting outcry against mandatory arbitration agreements, the Securities and Exchange Commission considered asking Congress to prohibit them. But by a 5-to-0 vote in July, the SEC voted not to do so, allowing the current process to stay in place, at least for now. The SEC did, however, ask the securities industry to study the matter and report back to the commission by Oct. 15. Those replies are being reviewed by the commission staff, says Katherine McGuire, an SEC official.
In the meantime, there are the arbitration suits.
``We project no less than 4,200 cases this year, and probably about 4,500,'' says Thomas Wynn, assistant director of arbitration at the NASD. Mr. Wynn says caseload has been steadily climbing. In 1986, there were 1,586 cases; in 1987, 2,886 cases; so far this year, there are 3,215 cases. Of all of these claims, or cases, he says, about 80 percent involve private individuals, either as claimants, or respondents (defendants.)
The turnaround time for arbitration claims before the NASD is about 13 months, Wynn says. ``We're working hard to streamline things and get that number down to under 12 months.'' In fact, he says, the NASD has increased its staff related to arbitration from 40 people to 75 this year.
Claims are also up at the New York Stock Exchange and the American Arbitration Association. ``We've had over a 400 percent increase,'' says Barbara Brady, who works at the association. For the first seven months of this year, for example, there were 295 related securities claims under arbitration. Last year, for that period, there were only 58, Ms. Brady says.
According to a spokeswoman for the NYSE, there are about 1,175 open arbitration cases before the Exchange. The impact of last October, she notes, can be measured by what happened earlier this year. In March, some 192 new cases were filed, most of them related to the plunge. That compares with 84 new cases filed in March 1987. Again, in April, 137 new cases were filed. That compares with 68 new cases filed in April 1987, before the market plunge.
Turnaround time on cases before the NYSE is about nine months, the spokeswoman says.
Bernstein contends that the arbitration process is far less satisfactory than the court process in many stockbroker-client cases. In court cases, he notes, the discovery process tends to be far more extensive than in arbitration cases, which have ``historically not permitted extensive discovery.'' Time is also important, he says, because over time documents can disappear, or people may die or relocate.
According to the SEC, margin and option accounts tend to involve arbitration more often than cash accounts do. Of 13.6 million cash accounts in the US, the SEC concluded, 39 percent were covered by arbitration agreements. But almost all margin and option accounts included arbitration agreements.