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Wall Street Plays Dr. Jekyll to Avoid Courtrooms


When duped investors set out to make themselves whole after a fleecing by a broker, the American way is to hustle them off to a private court run by Wall Street. It’s a tradition that was set in stone when the Supreme Court in 1987 said that, if an investor signed an agreement to arbitrate, the sorry loser is out of luck if he ever wants a day in court.

Brokers have enjoyed having a say in the management of their own justice system ever since then, even getting to stack every three-person jury with an investment professional. So you’ve got to wonder what’s going on when regulators at the Financial Industry Regulatory Authority, whose paychecks come from Wall Street, are all of a sudden recommending something that would benefit investors in Finra’s courts: the option to have a panel that excludes brokerage employees.

You can think of the role of the so-called industry arbitrator the way you might if you sued me for libel and wound up with four very opinionated columnists on your 12-member jury, or one-third of the panel. When investors come to Finra with a claim that they’ve lost $100,000 or more, it’s mandatory to include a panelist from finance. Why would a clear-thinking person in the brokerage industry contemplate giving that up?

It’s a real head-scratcher when you consider that the status quo turns out to be an even better deal for Wall Street than we’d ever known. For the past two years, Finra has run a pilot program with 14 brokerage firms that agreed to give customers the option to ax the industry guy or gal from an arbitration panel.

Decision Record

At the end of two years, 23 cases had made it all the way through to a decision without first reaching a settlement. And guess what? Investors won half of the six cases where there was a finance person on the panel, but they scored in 12 of the 17 cases, or more than 70 percent, when the panel had nobody from Wall Street.

“The whole character of the proceeding changes when it’s an all-public panel,” said Seth Lipner, a Long Island, New York, lawyer who represented customers in two of the pilot cases where investors won decisions from Wall Street-free panels. Arbitrators “are more aggressive in wanting to know about the terrible stuff that happened,” he said.

Nancy Condon, a Finra spokeswoman, said in an e-mail that there are “too few awards to draw statistical conclusions.” Wall Street arbitrators aren’t involved in cases where investors claim to have lost less than $100,000 because a single public arbitrator decides those cases, she said.

Seeking Change

Finra this month will ask the Securities and Exchange Commission for a rule change to give investors the option of having their cases heard by panels without a financial industry representative, thereby making the pilot program permanent. The request reflects the Dr. Jekyll side of Finra’s dual personality as a self-regulator: it sometimes fulfills its charge to protect investors — thus, a pro-investor proposal — but often gets sidelined when the brokers that endow its budget push the agency toward light-touch regulation.

The SEC will seek public comment once it gets Finra’s proposal, and you can expect the usual suspects to weigh in.

Andrew De Souza, a Securities Industry and Financial Markets Association spokesman, said the group would like to see the full Finra proposal before passing judgment, but Sifma in the past has been clear about its soft spot for industry arbitrators.

In 2007, Sifma published a white paper that depicted arbitration as a fair process in which non-Wall Street arbitrators benefited from having a panelist associated with the securities business in part because — hold the guffaws –“they can serve to educate them” about things such as industry customs.

Fairness Concerns

Any benefits from that educational component seem to be going unnoticed by aggrieved investors. When two law professors sought out the opinions of arbitration participants in 2008, four out of 10 investors said they started out with concerns about arbitration before they even filed their dispute; by the time their arbitrations were done, six out of 10 had fairness concerns.

In spite of the obvious advantage Wall Street gets by having one of its own on dispute panels, there are political reasons that industry types might actually support Finra’s proposal: forces that are threatening mandatory arbitration altogether. The Dodd-Frank Act has the SEC looking into whether arbitration contracts are in the public interest; the Arbitration Fairness Act of 2009 had raised questions on the issue even before Dodd-Frank passed.

‘What’s Driving This’

If this pro-investor proposal goes through, the SEC will be better able to justify the preservation of mandatory arbitration, Wall Street’s prized license to stay out of court.

“That’s what’s driving this,” says Ryan Bakhtiari, a California lawyer who won $1.56 million for clients in two pilot cases where no Wall Streeters were on the panel.

Condon notes that the pilot program began in 2008, “before regulatory reform occurred,” and that the point of Finra’s proposal is to give “choice” to investors.

Another choice would be to let customers decide whether they want arbitration at all, opening the courts to injured investors. Don’t hold your breath to see a proposal like that make it to the SEC from Wall Street’s Finra cops.