Skip to main content

Finra Arbitration Claims Up Dramatically


The number of arbitration claims filed with the Financial Industry Regulatory Authority has surged in the first seven months of 2009.

Through July, investors filed 4,481 claims, as compared to 4,982 claims during all of last year. That’s a 71% increase in the number of new case filings over the same period in 2008, according to Finra statistics.

Mutual funds were part of more than a thousand of this year’s claims. There were 1,061 arbitration cases involving mutual funds through July. In 2008, there were 930 such claims.

Finra does not break out the exact types of arbitration claims involving mutual funds, says spokesman Herb Perone.

“I think the system is still trying to digest the subprime-related arbitration claims, concentrated very heavily still against Morgan Keegan, Schwab, Oppenheimer and a few others,” says Andrew Stoltmann, a Chicago attorney who represents investors in securities fraud litigation and arbitration. “There are still people just realizing how much money they’ve lost in what were supposed to be conservative bond funds. I think we’re going to see the same surge for the rest of the year.”

Total arbitration claims may reach 9,000 or 10,000 this year, estimates Stoltmann. That would make 2009 a record-setting year. In the last decade, 2004 had the highest number of arbitration claims filed, 8,201.

Claims against mutual funds probably will peak this year and decline in number in 2010, Stoltmann says. About 90 of his current 130 arbitration cases involve mutual funds, specifically bond funds managed by Schwab, Morgan Keegan, Oppenheimer and Evergreen that had severe losses during the downturn, he says.

Meanwhile, the percentage of cases for which customers were awarded damages has increased to 45% thus far in 2009, or 160 cases. Last year, customers were awarded damages in 42% of cases, or 199 cases. The increase this year may be the result of changes to the arbitration process to make it more investor friendly.

In one notable example, an arbitration panel in July awarded an investor $157,498, or 100% of the losses she had suffered in Schwab’s YieldPlus fund, plus expert witness costs of about $16,000, according to Ryan Bahktiari, partner at Aidikoff, Uhl & Bakhtiari, which represented the investor.

The claim was brought against Charles Schwab on the basis of how the fund was marketed to the investor. This is “very unusual” in that arbitration claims are usually brought against the broker that sold the fund, says Bakhtiari.

“This was more of a systemic, institutional problem than a broker-specific problem,” says Bahktiari. The firm has filed more than 100 similar claims against Charles Schwab on behalf of investors all over the country who claim the YieldPlus fund was sold to them as a conservative investment akin to a money market fund, he says.

“I think because of the number of cases that my firm has filed… that Charles Schwab wanted to test us, frankly,” says Bahktiari when asked why Schwab did not settle the case instead of going through the arbitration process.

Schwab did not immediately return a request for comment yesterday.

Like Stoltmann, Scott Silver, managing partner at Coral Springs, Fla.-based Blum & Silver, says he has also seen a number of arbitration claims brought against brokers who sold bond funds. Silver also represents investors in arbitration claims.

The arbitration claims his firm is working on that involve mutual funds fall into two categories, he says. The first are those involving investors who bring claims against brokers for selling proprietary funds, such as the Morgan Keegan funds and the Schwab YieldPlus fund.

The second category of arbitration claims are those in which investors bring claims against brokers for selling them unaffiliated funds. Many of these claims were brought against brokers that sold the Oppenheimer Rochester municipal bond funds, he says.

In addition, almost 180 arbitration claims filed in 2009 involve auction rate securities, down from 299 in 2008. Auction rate securities “are among the main components of the surge in filings,” says Howard Suskin, a partner¬†in Jenner & Block’s litigation department.¬†Suskin has experience as an arbitrator for several self-regulatory organizations, including Finra.

And the sale of leveraged exchange-traded funds has also spurred some arbitration claims, according to Silver. His firm represents investors in five such claims. But since Finra and the Securities and Exchange Commission have said the product is rarely suitable for retail investors, there won’t be a significant increase in claims in the months to come, he says.

A total of 2,454 arbitration claims have been closed this year. About 25% of those claims were decided by arbitrators; 45% of cases were resolved through direct settlement by the parties; 16% were withdrawn; and 5% were settled by mediation. The remaining 9% of arbitration claims were closed by stipulated award, bankruptcy of a critical party or a stayed court action, among other reasons.

There are currently 6,156 Finra-qualified arbitrators, according to Finra’s Perone. This is somewhat fewer than the number Finra had last year because it culled the list over the past few years, eliminating arbitrators who had not completed mandatory training, he says.