| July 18
July 18 The surge of securities arbitration
cases provoked by the worst financial crisis since the Great
Depression is coming to an end.
Cases by investors seeking to recover losses tied to the
2007-2008 crisis are down to a trickle, lawyers say. Thousands
have now wound their way through the Financial Industry
Regulatory Authority's (FINRA) arbitration system or been
While some cases are still in play, the worst is over,
FINRA's arbitration unit received roughly 1,190 arbitration
claims from investors this year through June, according to an
estimate from the regulator. If the current pace continues,
about 2,400 investor cases could be filed in 2013.
As a result, the total number of cases filed by investors
this year would be less than half of the 5,200 such cases that
flooded the system in 2009, a post-crisis peak for such filings.
FINRA's statistics do not reveal how many of its cases are
specific to the financial crisis.
Investors, historically, file more cases when markets slump.
For example, FINRA statistics show a wave of claims between 2002
and 2004. That period followed the so-called tech wreck, when a
rapidly rising stock market driven by investments in risky
Internet companies eventually tanked.
Investors who suffer the steepest losses during a market
crisis usually have concentrated a hefty percentage of their
assets in a security that fails, said Dev Modi, a securities
arbitration lawyer in Florham Park, New Jersey, who represents
investors. Some brokers may steer them to securities that are
unsuitable because the investor is elderly or otherwise not able
to take on the risk, he said. During the financial crisis, many
investors got stuck in securities that became illiquid or bond
funds that lost nearly all their value.
"You don't know what bad things are going on until the
market turns," Modi said.
Investors who have not tried to recoup their losses from the
credit-crisis era will likely find they are now too late. Claims
are typically eligible for FINRA arbitration if filed within six
years from the event giving rise to the case, such as misconduct
or the sale of stock, said Scott Silver, a securities
arbitration lawyer in Coral Springs, Florida.
The six-year rule "is becoming a key issue," Silver said.
Arbitrators can also apply shorter state time limits, he said.
BULL MARKET WARNINGS
As arbitration slows, what investing debacles will drive the
next round of cases?
Wall Street's recent bull run in stocks means that some
investors are more vulnerable to crooked advice, said Jenice
Malecki, a New York-based securities arbitration lawyer who
represents investors. "People hear on the news that the market
is rising and feel the need to get in," she said, noting that
scam artists often prey on that inclination to draw investors
into Ponzi schemes and other frauds.
Alternative investments also continue to be a concern as
investors chase yield in a low interest-rate environment.
Massachusetts Secretary of the Commonwealth William Galvin
subpoenaed top Wall Street firms last week, saying he feared the
elderly were being lured into high-risk, alternative products.
Galvin's concerns include oil and gas partnerships and privately
The bond market is another area of worry, especially if bond
values continue to plunge as interest rates rise and the economy
That may not be so bad for those who have invested in
individual bonds they can hold until far-off maturity dates. But
the situation could be different for bond mutual fund investors,
said Philip Aidikoff, a lawyer in Beverly Hills, California, who
represents investors. Bond funds don't mature, and rising
interest rates could push bond fund values lower.
Investors paying excessive markups on their municipal bond
investments could also be among those to file the next load of
cases, according to Craig McCann, founder of Securities
Litigation and Consulting Group Inc, an economics research firm
in Fairfax, Virginia.
A markup is the difference between what broker-dealers pay
to buy a bond and the price at which they sell it to investors.
Many investors do not know how much that is because brokers do
not disclose markups as they do commissions. Some that are too
high can effectively wipe out a chunk of an investor's interest
returns, said McCann, who also testifies on behalf of investors
in arbitration cases.
McCann's group recently studied markups using a sample of 14
million trades of long-term, fixed-rate municipal bonds between
2005 and 2013. Investors were charged nearly $10.7 billion in
markups. About 60 percent, $6.5 billion, stemmed from trades
with excessive markups.
Recent improvements to a database run by the Municipal
Securities Rulemaking Board, an organization that regulates the
U.S. municipal bond market, are making it easier for the public
and regulators to hone in on markups, McCann said.