NEW YORK – An arbitration panel’s record $10 million punitive damage award this week to a California radiologist, who says he was misled by his stockbroker, could force Wall street to rethink how it resolves investor disputes.
F. Clark Gardner says he lost $209,000 because of unauthorized trades and other deceptions orchestrated by his broker in 1995 at Stratton Oakmont, a now defunct firm with a long history of disciplinary problems.
Aside from the size of the award, Gardner’s case was Unprecedented In that arbitrators made the unusual decision to require four Stratton employees to pay rather than the firm. Two of the four, including top executives never had any direct contact with the radiologist, the panel said.
To open a brokerage account Investors agree to mandatory arbitration to resolve disputes. Unlike court cases, the closed door hearings aren’t bound by legal standards. But experts say the long-standing self-policing could be in jeopardy. “As the system becomes fairer with larger punitive damage awards, the industry may now reconsider mandatory arbitration,” says San Francisco civil rights lawyer Cliff Palefsky. `They might want more judicial review.”
Gardner first filed a claim last year against his broker, Samuel Weber, at Long Island, N.Y.-based Stratton.
`The amount of the damages is not significant. It’s the message it sends about who at these firms can be held liable,” says Gardener’s lawyer Philip Aidikoff.
The $10 million is the largest punitive damage award ever in a customer arbitration case, according to newsletter Securities Arbitration Commentator. Next highest: $3.5 million in a 1992 Florida arbitration case.
The award comes when NASD Regulation (NASDR), which administers customer arbitrations proposes capping punitive damages at $750,000 or no more than twice compensatory damages. The Securities and Exchange Commission will soon consider the rule change proposal.
“A cap is a way to prevent runaway awards against individuals when there aren’t the processes and checks available in court,” says Linda Fienberg the NASDR’s arbitration chief. She doesn’t think securities firms will scrap the arbitration system out of fear of more large, punitive damage awards. “if the cap proposal is adopted, they won’t have to worry about that,” Fienberg says. And if It’s not? “The industry could seek legislation for a cap, or stop requiring, mandatory arbitration, making it voluntary for investors.”
But critics say the cap proposal should never have gotten this far along in the approval process. “The SEC should have really shut down this notion of limiting damages a long time ago,” Palefsky says. “This $10 million award will be good because nothing deters wrongful conduct better than a big punitive damage award.”