Investors, brokers differ on arbitration

There's nothing like a fresh crop of opinions about Wall Street's court system to get the industry and investor advocates into a scrap.

In a report earlier this month, professors at Pace University and the University of Cincinnati College of Law said that, if you're not from the securities industry, you probably don't think arbitration is fair.

More than 3,000 investors, lawyers and securities employees voiced their opinions in a survey of people who had been involved in arbitration between January 2002 and December 2006.

And what a surprise: While just over half of the non- customers (the lawyers and brokerage people) said the process was fair, only 28 percent of aggrieved customers felt that way.

Do customers find arbitration panels to be impartial? Only 25 percent of the time. Lawyers and industry insiders were more positive about Wall Street's private judges, though, with almost half saying arbitrators were impartial.

The results touched a nerve with folks at the industry's trade group, the Securities Industry and Financial Markets Association, known as Sifma.

To the extent that investors think that there is bias in the process, ``such perceptions are simply faulty and out of touch with the objective reality,'' Sifma wrote in a ``Thinking Person's Guide'' to interpreting the survey.

Besides, Sifma wrote, investors who responded were drawn from a period when many customers filed ``meritless, bloated, unsuccessful claims.'' An accompanying Sifma press release referred to the ``flawed process'' of the survey.

Out of touch
"Sifma is out of touch with objective reality,'' says Theodore Eppenstein, a lawyer for investors who is a member of the Securities Industry Conference on Arbitration, or Sica, an advisory group on matters that affect brokerage industry arbitration. Or at least out of touch with the reason the study was done in the first place.

The whole purpose of doing the research was to learn about perceptions of arbitration, says Jill I. Gross, director of the Investor Rights Clinic at Pace University School of Law in White Plains, New York, and co-author of the study. The securities industry group is ``denigrating the observations and views of an entire class of arbitration participants,'' she says.

Sica hired Gross and co-author Barbara Black to raise these questions: Was arbitration fair? Were arbitrators competent? And how did Wall Street arbitration stack up against litigation in court for those who had experienced both?

A third of customers said they wouldn't choose arbitration in the future because it isn't fair. Asked if arbitrations were conducted ``without bias,'' 44 percent disagreed.

No choice
Investors with a complaint about their broker have no choice but to use securities arbitration if something goes awry with their account.

Before they allow a customer to open an account, brokerage firms require customers to sign an agreement that they won't go to court, opting instead for industry-run arbitration.

In the industry's view, pre-dispute arbitration clauses put brokerage firms and customers on an equal footing, giving brokers ``the same right as customers to choose arbitration,'' according to a white paper published by Sifma in October 2007.

How that's the case, when brokerage firms choose the forum and tell customers to take it or leave it, is anybody's guess.

If people really had a choice, the Sica survey gives hints that consumers would shun arbitration. Among those in the survey who had been lawyers, plaintiffs or defendants in a civil court case during the past five years, 63 percent said arbitration was ``very unfair'' compared with court. Since investors can't take a case against a broker to court, it's impossible to directly compare an arbitration hearing to a hearing in court. But the responses don't inspire confidence in arbitration.

Plus for investors
Sifma sees settlements as a plus for investors. ``Surely, claimants would not agree to settle unless they felt that settlement was fair,'' Sifma spokesman Travis Larson said in an e-mail. ``Otherwise, they would allow the arbitration process to run its course, letting the arbitrator deliver a decision.''

What looks fair to one party doesn't always look that way to the person on the other side, though. Investors may not study the industry statistics that show fewer ``wins,'' smaller recoveries of losses, and more early settlements. But they sure can tell you when they get involved in a private judicial system, and something just doesn't feel right.