May 8, 2003
No day in the past year has held as much potential for aggrieved investors as April 28, 2003, the day securities regulators unveiled a broad settlement with 10 Wall Street firms over alleged wrongdoing. In a crowded briefing room at the Securities and Exchange Commission, New York State Attorney General Eliot Spitzer announced reforms aimed at curbing conflicts of interest on Wall Street.
Meanwhile, far in the back of the room, staff members unloaded reams of documents collected during the investigations. This evidence was what investors and their lawyers had been anticipating for months -- the internal documents that would launch a thousand lawsuits.
"What we have done is create ... an opportunity, given the evidence that is being released, for every investor to make his or her case," intoned Spitzer.
With this chapter in the investigation of Wall Street closed, the onus now falls on individual investors to file claims to recoup their losses. The evidence released on April 28 will be a significant asset, but it will be up to investors to determine how they will use it. Many may be eligible to receive money from a $387 million restitution fund created as a part of the settlement. Investors can also file claims in securities arbitration, a process widely used in the securities industry to resolve disputes outside of the court system. Although many details of the restitution fund are still unclear, regulators have said that investors will be able to both file arbitration claims and receive payment from the fund.
For investors who would like to try their case in court before a jury, the prospects are dim. The fine print in the brokerage contract customers sign when they open an account usually includes a binding agreement to bring all disputes to arbitration, preventing the customer from bringing individual action in the courts.
"Most customers do not understand that they are agreeing to arbitrate," says James Cox, an expert in securities arbitration at Duke University. "They have a lot of faith in the person shoving this piece of paper under their nose. Otherwise they wouldn't be there."
One exception to the agreement is class-action. Investors can join a class-action complaint instead of arbitrating, but experts agree that class-actions usually return only 5 or 10 cents on the dollar -- much less than a customer might be awarded in a similar arbitration complaint. Since an investor cannot pursue both, most individuals stick with arbitration.
"Arbitration is a completely different animal"
Regulators are bracing for an onslaught of new arbitration claims in the wake of the global settlement. NASD Dispute Resolution, a subsidiary of the National Association of Securities Dealers, which handles the majority of the claims, plans to hire more staff, rent more office space and recruit additional arbitrators to prepare for thousands of new claims arising from the settlement. Filings at NASD are already up 24 percent over the first quarter of last year.
Investors will have to become familiar with the process of arbitration, which differs markedly from the familiar proceedings of a court case.
"Arbitration is a completely different animal," said Tracy Stoneman, a Colorado Springs attorney who represents investors and serves as an arbitrator with both NASD and NYSE. Arbitration follows few of the procedural rules of court cases and relies very little on precedent. Both factors tend to make the system more reliant on the facts of a particular case, perceptions about who is telling the truth, and the gut feelings of the arbitrators.
Arbitration is typically faster and less expensive than trying a similar case in court. The phase known as discovery, where lawyers investigate the facts of the case, is scaled down, which has the effect of shortening the time needed to carry out the arbitration. The brokerage industry subsidizes the proceedings, further lowering the expense to investors.
About half of NASD cases settle, meaning that the parties are able to come to an agreement before the arbitration hearing. Others continue on to an arbitration hearing where the case usually is decided by a panel of three arbitrators -- two representing the public and one from the industry. Of the public representatives, about 60 percent are lawyers, 20 percent are accountants, 20 percent are academics and 20 percent fall into sundry categories -- teachers, retirees, dentists -- estimates attorney Seth Lipner, former president of the Public Investors Arbitration Bar Association. Industry arbitrators tend to be current or past employees of securities firms.
In the simpler proceedings of arbitrations, small investors may even be able to represent themselves. "Arbitrations are very informal, the rules of evidence do not apply," said Linda Fienberg, president of NASD Dispute Resolution. "If someone who is not an attorney wanted to represent herself, it's much less intimidating than being in court." For claims of more than $50,000, NASD recommends getting an attorney.