Wall Street Arbitration or ‘Puttin in the Fix’?

How would you like to bring a case in which the counterparty is not only defendant, but judge and jury as well? Probably not, right?

Welcome to the world of Wall Street arbitration.

Investors, when opening an account with a bank or broker, are compelled to sign an agreement stating that any dispute will be adjudicated via an arbitration process. On its surface, arbitration is not a bad process. It is utilized in many industries. That said, for arbitration to be uniformally fair the arbitrators must be disinterested parties. Does that happen on Wall Street? Come on, be serious!! The deck is stacked against investors in arbitration. Why?

Arbitrators obviously need to have a thorough knowledge of the financial industry in order to pass judgment. Beyond that, though, Wall Street arbitrators and arbitration has lots of issues and embedded conflicts.

Let’s take a harder look at the arbitration process. The Wall Street Journal provides a brief overview, Securities Arbitration Is Faulted.

Attorneys who represent investors have asked the Securities and Exchange Commission to drop a requirement that a securities-industry representative sit on arbitration panels.

Yes, that statement right there highlights the embedded conflict in the arbitration process. Let me simplify. Say for example, an investor brings a complaint against his Morgan Stanley broker. On the arbitration board will sit a representative from Goldman Sachs. Simultaneously, right down the hall an investor brings a complaint against his Goldman Sachs broker. On the arbitration board sits a representative from Morgan Stanley. Level playing field? Come on.

Investors who open a brokerage account generally sign away their rights to sue the broker or the firm for bad advice. They have to settle disputes through arbitration run by the Financial Industry Regulatory Authority, which is funded by the industry.

What do we learn here? The case obviously will not be arbitrated in your lawyer’s office and similarly not in the offices of the broker’s attorney. Who holds court? The Financial Industry Regulatory Authority, Finra, which is funded by Wall Street. Conflict of interest? At least on the surface it would appear as such. For those unfamiliar with Finra, this is the organization which has yet to issue their 2008 Annual Report and dumped $647 million in Auction Rate Securities either shortly before or as the ARS market was failing. Feeling confident yet? Me neither.

Cases where the amounts in dispute are at least $100,000 are heard before a three-person panel, one of whom must be an industry arbitrator. The other two are independent arbitrators. The proposed rule changes — put together by the Public Investors Arbitration Bar Association — resemble a pilot program Finra started last year that will let some investors choose a panel of three independent arbitrators.

I will believe it when I see it.

A spokesman for the Securities Industry and Financial Markets Association says PIABA’s petition is premature without waiting for the pilot program’s results. Finra and SEC Representatives declined to comment. Brian Smiley, the lawyer group’s president, says, “The perception of people who go through the arbitration process is that they don’t get a fair shake.”

Bill Singer said as much in my interview with him on NQR’s Sense on Cents with Larry Doyle on Sunday evening June 14.

Sense on Cents: Bill, this has been fabulous. I thank you profusely for coming on.

How about the arbitration process used in the industry? Is it fair and useful?

Bill Singer: The feeling’s mutual.

Arbitration tends to be a relatively fair process. That being said, I don’t believe in arbitration. It’s a mandatory system with no real option for investors. It is not set up in a fair fashion because the customer gives up the right to go to court and has to go through the industry arbitration process. Wall Street should no longer be allowed to use this process.

In summation, if Wall Street feels compelled to adjudicate disputes via arbitration, the arbitrators should ALWAYS be totally independent and unbiased. Otherwise, the perception of an unfair process will persist. As such, Sense on Cents recommends investors be triply careful in selecting and engaging financial representatives.

The best defense is always a good offense and vice versa!!

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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