Stock slide brings rising ire directed at brokers


As stocks decline, complaints against brokers are increasing

September 30, 2001|By EILEEN AMBROSE

JUST AS stocks soared to new heights last year, their steep descent is creating another record - claims against brokers.

This year, the number of securities arbitration cases is expected to outpace those in any previous year, including cases filed in the aftermath of the 1987 crash.

Through August, 4,542 cases were filed with the National Association of Securities Dealers' Dispute Resolution subsidiary, which handles most of the cases. That's a 23 percent increase over the comparable period last year.

Typically, complaints jump when the market falls and losses occur. But cases have been increasing in recent years, too, because there are so many more investors than just a decade ago.

Most brokerages require customers to sign an agreement requiring arbitration to settle disputes because it's cheaper and faster than going to court.

In arbitration, both sides tell their story, present evidence, call witnesses and cross-examine each other. Arbitrators render a decision that is, in most cases, final.

Arbitration rulings come down in favor of customers 50 percent to 60 percent of the time, with customers on average receiving 55 to 60 cents for every dollar they claim to have lost, said Richard Ryder, president of the newsletter Securities Arbitration Commentator in New Jersey.

Henry and Donna Riston of Baltimore County went through arbitration last year after a dispute with their New York broker. "It was very fair," Henry Riston said.

The Ristons' case involved margin calls, one of the fastest-growing areas of investor complaints. The problem, Henry Riston said, surfaced about two years ago when they received a bigger bill for stock than agreed upon.

Riston said the broker told him not to worry. Later, when he got a statement, he noticed that the shares were bought on margin. The Ristons said they had no idea what that meant.

When investors buy stocks on margin, they do so with borrowed money. It magnifies gains when stocks rise but amplifies losses when shares drop.

Riston said he again contacted the broker, who told him the margin purchase would cost only a couple of dollars a month in interest. Riston kept notes of his conversations, which later helped build his case against the broker.

Then the market tanked, and the Ristons received a margin call, or a request to either put up more money to offset losses or have their shares sold. "I started getting telegrams that I owed all this money," Henry Riston said. "It was a lot. It was like every other day, $6,000 or $4,000 or $3,000."

Riston complained to the broker but wound up paying the money. He then complained to the brokerage and later to securities regulators. The Ristons hired a lawyer and went to arbitration. After a one-day hearing, the arbitrators awarded the couple half of their losses.

"If I got a nickel, it would have been OK," said Henry Riston, 51. "They were found guilty, and that's what I was seeking. You just don't do that to people."

So, what can investors expect from arbitration, and what can they do to improve their chances of success? First, determine if you have a case.

"You don't have an arbitration case just because you lost some money or just because the value of your securities went down. You don't have an arbitration case when you only made a 10 percent return when the markets were up 20 percent," said Mark Maddox, an Indianapolis lawyer and former Indiana securities commissioner.

"You don't have one if you are viewed as a sophisticated investor who understands most, if not all, the investment risk you are taking," he said.

Brokers have a responsibility to know their customers and to make stock recommendations suitable for a client's investment objectives and risk tolerance, said Mark M. Dumler, a Baltimore lawyer who represented the Ristons.

Arbitration cases often involve claims of misrepresentation, the purchase of stock that's unsuitable for a client, and churning, when the broker trades in the account frequently to generate commissions, Dumler said.

Most cases are filed with NASD Dispute Resolution, although claims can be filed with the exchanges.

Claims of $25,000 or less filed with the NASD are handled by a single arbitrator who is not from the industry. The arbitrator can base his decision solely on documents and written testimony submitted, or an investor can request a hearing.

Claims above $25,000 are heard by a panel of three arbitrators, one of whom comes from the industry.

Just because arbitration is informal doesn't mean investors don't have to prove their case or that they can expect the arbitrators to do the legwork, Ryder said.

Brokers and their firms are likely to be represented at arbitration by lawyers. Investors, too, can hire a lawyer, but legal fees may be too costly for small claims.

But even investors with small claims can benefit from hiring a lawyer for a couple of hours of advice and to make sure they have a sound case, Ryder said.

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