Wall Street arbitration stacked against investors: study

By Joseph A. Giannone

NEW YORK (Reuters) - Investors have their ups and downs in the market, but when it comes to resolving disputes with Wall Street brokers, they seldom win, according to a critical study to be released next week.

For years investors and their lawyers have complained the little guy doesn't get a fair shake from the arbitration system, blessed by the U.S. Supreme Court two decades ago, when pursuing complaints about faulty research, unauthorized trades and other claims against brokers.

Next week Daniel Solin, a lawyer who represents investor cases against brokers, and Edward O'Neal, an assistant finance professor at Wake Forest University's Babcock Graduate School of Management, will unveil the results of a study that they say shows investors have not fared well when taking on brokers.

The duo reviewed 14,000 cases between 1995 and 2004 against brokers that were submitted to arbitration panels convened by the NASD or the New York Stock Exchange. On average, investors recovered about 34 percent of their claims, they found.

"The vast majority of cases are getting a tiny fraction of what they are entitled to," Solin said. "In my view, the NASD is largely in the business of protecting the rights of industry members."

Under U.S. law, people opening accounts sign an agreement not to sue their broker in court, but instead to take disputes to three-person panels.

Solin spoke with Reuters about the study in March, but has declined to comment further ahead of its June 13 release.

"The NASD works to continually improve our forum and the services we provide to our constituents," a NASD spokeswoman said on Thursday. She said she had not seen the study but was responding broadly to criticism about arbitration. About 94 percent of the cases were filed with the NASD last year.

She said there had been a steady decline of cases going through any actual ruling as more brokerages aim to settle. Since 1991, there has been a 30 percent rise in the number of cases in which cash was paid through settlement, she said.

The NYSE declined to comment on the study.

The Securities Industry and Financial Markets Association said government and independent studies have shown arbitration to be fair and efficient. The industry lobbying group also knocked the objectivity of Solin, a lawyer, and O'Neal, who has testified as an expert witness in suits against brokerages.

"When all you have is a hammer, everything looks like a nail; when you're a trial attorney, everything looks like a profitable lawsuit," SIFMA spokesman Travis Larson said.

But arbitration already faces scrutiny. Massachusetts Rep. Barney Frank, the House Financial Services Committee chairman, said in February the fairness of the system was on his agenda.

Frank's committee is "closely monitoring the issue," both on its own and as part of its review of the pending merger of NASD and NYSE Regulation regulatory bodies, a spokeswoman said on Thursday. No hearings or bills are imminent.

FLAWED or FAIR?