Disputes With Brokers Go Mostly to Arbitration

It's probably not surprising that disputes over stock transactions are on the rise, given increasing participation in the market by individual investors. Last year, for example, some 6,388 claims were filed before two of the main arbitration groups in the US, up about 10 percent from 1994.

Complaints vary, but involve such practices as (1) misrepresentation - such as statements by a broker that an investment has a certain guaranteed return; (2) omissions, when one party hides important information; (3) "churning," where a broker frequently trades investments to generate commissions; (4) unusual markups, such as large spreads between a buying price and selling price; (5) selling a client clearly inappropriate investments; or (6) a broker trading an account without the client's permission.

MOST individuals seeking redress in a securities case have no other option than arbitration. Brokerages usually require that an individual opening an account sign a release form stating that in event of a dispute, the matter will go to arbitration rather than court litigation.

That's not necessarily bad. Arbitration is usually less costly and speedier than a court action. Arbitration panels may now lean more to individual claimants than to brokerage houses, says Hartley Bernstein, an arbitration expert with Bernstein & Wasserman, a New York law firm.

A person signing an arbitration clause can still request that a matter go to court. Usually, however, the brokerage house, "insists on arbitration," Mr. Bernstein says.

Arbitration is a method of resolving a dispute through use of a panel of impartial experts. The hearing is held under the auspices of an exchange or securities group, such as the National Association of Securities Dealers (NASD), or by the American Arbitration Association (AAA), a national group that arbitrates diverse types of claims, not just securities cases.

Usually the panel includes one to three arbitrators. One is from the securities industry; the other panelists are nonindustry experts. A claimant usually can reject an arbitrator. In that case, a substitute will be appointed.

If you feel you have a legitimate case involving a securities transaction, consult either an arbitration lawyer or an arbitration consultant. They can be found in a local telephone directory under "Attorneys - securities," or "Arbitrators." You could also call your local bar association for a list of names. For background information, contact the NASD at (212) 858-4000, and the AAA, at (212) 484-4000. Some experts recommend going before the AAA, which is not formally linked to the securities industry.

Payment to the lawyer or consultant is usually based on a contingency fee. The lawyer will get a percentage of the final amount collected, assuming you win. Lawyers can also charge up-front costs. If you lose, they usually keep the initial payment. Many individuals write a "mediation" clause into the arbitration agreement they sign with a broker. This means a mutually agreed compromise will be sought before the matter moves to arbitration.

To go to arbitration, the matter must have occurred in certain specified time frames. For the NASD, for example, the limit is the past five years. Smaller claims, frequently $20,000 or less, are resolved under a simplified process. That usually involves just a reading of the pertinent documents by the arbitrators, without having the parties go to an actual hearing.

The claimant can request a specific site or city where he or she wants the hearing to take place, although the final decision will be made by the arbitration group. The claimant has the right to an attorney. Brokerage houses frequently bring in legal counsel.

Once an arbitration claim is accepted, documents will be requested under formal time schedules, as would occur in a courtroom. A stenographer makes a record of the hearing. Each party makes an opening statement. Witnesses and other parties are sworn in and are asked questions by opposing parties. Each party makes a closing argument.

Once arbitrators have reached a conclusion, it will be signed and mailed to the parties. The awards are public records. The arbitrators need not write an opinion as to why they made a decision, although the parties can request such an opinion. The decision, once made, is final and binding.

The entire arbitration process "is becoming more and more like a court process," notes Bernstein.

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