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How to win in securities arbitration

Gavel
Highlights
  • To build your case, call the broker to gather, but don't reveal, information.
  • Obtain your broker's compensation records for both your account and others.
  • Correspondence between the broker and supervisor may help your case.

Shortly after selecting your stockbroker, when the partnership was fresh and prosperity seemed just a series of carefully placed trades away, you also decided on where you'd settle any future legal disputes. That's right: Tucked into most customer agreements is a clause saying, sure, you might one day accuse your agent of something unsavory -- unauthorized trades, excessively risky positions, failure to execute your order -- but the matter will be handled outside of court and instead in securities arbitration, where a panel -- not a judge and jury -- will make the legally binding decision.

Not long ago, investors feared having to face brokerage houses and their sizable defense teams in front of a group made up of industry insiders. But no more, says Miriam Lefkowitz, a securities compliance attorney. Nowadays, about a year after the Financial Industry Regulatory Authority, or FINRA, changed the rules, the decision-making team -- which is chosen by both parties in a selection process -- can include even everyday investors or people who have never so much as dabbled in the market.

And because the securities arbitration process doesn't require the weighty preparation needed for court, it's less expensive and more efficient for claimants (that's you, the person with the problem). All this has created a big crop of attorneys willing to fight big firms on contingency, meaning you pay only if you win.

"It's almost all good news for investors," says Lefkowitz.

Document, control your conversations

And it can get even better if you follow a few guidelines. For starters, securities arbitration cases -- as those in court -- are heard about two years (sometimes three and four) after the action you're opposing might have occurred. That's why writing down your conversations in the margins of your account statements could be critical to winning the case.

"Listen to what your broker is telling you, and take notes," says Lefkowitz. "Memories are fuzzy, but contemporaneous documentation goes a long way."

After deciding you have a complaint, make sure your conversations with the firm have you gathering -- not giving -- information, says Michael Sullivan, a securities litigator as well as an adjunct professor in the field at Rutgers University. The brokerage house records some or all of its phone calls and your words may be used against you.

"Say things such as, 'Please explain what happened,' and get the broker talking," says Sullivan. "When the lawyer from the brokerage house starts to cross-examine you on the phone, don't engage in that. You shouldn't give them information."

Gather the information you need

Rather, you should aim for what's in the firm's filing cabinets, says Barry Lax, a Manhattan securities litigator, who says there could be a gold mine of information there to support your case. FINRA maintains guidelines about the documents that are discoverable -- meaning they're fair game -- and so first you'll want to request any prior complaints about your broker.

"They won't voluntarily provide them," says Lax, who notes that the guidelines say the firm must hand you complaints of a similar nature but says that is a subjective term.

Also discoverable: your broker's compensation records for both your account and those of other clients, says Lax. You won't see any names, just the last four digits of the account number. Try to get your hands on these because your broker may argue a particular trade was your idea -- not hers. But if you can prove the very same transaction has popped up in other accounts, then score one for your side.

"Compensation records show patterns and practice," says Lax.

Your broker's outgoing emails, on the other hand, will rarely prove any point, as they're not likely to be incriminating, says Lax. Instead, request the company's internal messages, ensuring they're searched using your name, account number, broker and the compliance person assigned to watch over it all.

Get supervisor's input

The correspondence -- written and electronic -- within your brokerage firm's chain of command can also help your case. That's because supervisors are not only required to regularly review accounts but must also record their results on paper, he says.

"Imagine if a supervisor caught some of the illegal activity," says Lax. "It might be in writing somewhere."

Finally, tell the truth, says Lax. You can't sue someone simply because you lost money in the market. Instead, explain what went wrong: Were the broker's commissions too high? Did you have all your money in one stock? Was your investment too speculative? Did you buy stocks on margin?

"The arbitrators can tell if you're lying and the defense attorney can tell," says Lax. "I have never had an arbitration (case) where the broker-dealer has not done something wrong. They tend to be sloppy and to not follow their own rules to the letter."

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