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Disputes with Brokers on Track to Beat Record
By DEBORAH BREWSTER
in New York
Mar 20, 2009 NEW YORK (Financial Times) - Investors filed almost twice as many disputes against their brokers in the first two months of this year as in the same period last year, and 2009 is on track to exceed the record set in 2003.
To the end of February, 1,065 cases were filed for arbitration with the Financial Industry Regulatory Authority, which operates a dispute resolution forum for dissatisfied investors and securities firms. In 2008, 561 such were cases filed for the same period.
So far, 350 cases filed relate to brokers' or advisers' alleged negligence and 320 relate to alleged breach of contract. Omission of facts, and a failure to supervise, are the other two main allegations in filed cases.
Members of Finra, which includes almost all broker-dealers, require investors to seek arbitration in case of dispute, rather than go to court.
Michael Deutsch, a principal in the law firm Singer Deutsch, said there were probably many more lawsuits against investment advisers who were not members of Finra.
"Whenever there's a downturn, people look a lot closer at their portfolios. In good times they might not look past the first page of the statement, which shows everything going up," he said. The record of 8,945 cases set in 2003 was part of the fall-out from the dotcom bubble.
The Standard & Poor's 500 fell by 40 per cent in 2008, leaving average investors with huge losses. Mutual funds account for the largest number of arbitration filings this year with 221 cases, followed by stocks with 170.
Mr. Deutsch said his firm had had a big rise in the number of inquiries from dissatisfied investors wanting to know what legal redress they had. "We have one case where the client gave the financial adviser $215,000 and in a three-year period was charged almost $400,000 in fees and commissions," he said.
Compared with previous downturns, he said there were an unusually large number of claims relating to preferred shares. "It appears that advisers were trying to get a little higher return than fixed income, so were putting people into preferreds," he said. This failed when preferred stock fell along with everything else.
Finra oversees 5,000 brokerage firms and 170,000 investment advisers. The arbitration system has been criticised for keeping brokers and advisers out of the courts, and for being stacked in favour of the industry because industry members are present on the arbitration panel.
Mr. Deutsch said: "There is a very high rate of settlement through arbitration."
