Small Investors Smacked Down, One More Time

In what looks like an “inside baseball” dispute between the Financial Industry Regulatory Authority, which regulates all Wall Street brokerage firms, and Charles Schwab Corp. (SCHW), one of the leading firms with whom small investors invest their money, a big dispute is brewing that could further trample the rights of small investors.The potential outcome of the dispute, the inability for investors to band together to participate in class action lawsuits, could be a disaster for small investors across the country.

Under the FINRA ruling, which was issued last Thursday, Schwab is now permitted to require investors opening accounts to waive their right to bring these class actions. That means Schwab and other Wall Street firms may escape meaningful financial responsibility for their actions.

The rest of Wall Street is licking its chops and patting Schwab on the back for steamrolling over investor rights. The decision helps Wall Street at the expense of Main Street.

This fiasco got its start last year, when Schwab inserted in its standard customer arbitration agreement a provision that any investor who opens an account with Schwab is giving up his right to bring a class action against Schwab. He or she must arbitrate any individual dispute, rather than go to court as a part of a class action.

The significance of this case is that there are some instances when arbitration is not appropriate for investors. One example involves Schwab and its infamous Yield Plus Fund, in which Schwab sold risky funds under the guise of a “conservative” investment to thousands of investors. However, the losses for some investors were relatively small, with some losing as little as several hundred dollars.

No individual investor would ever have the financial incentive or wherewithal to bring a complicated case showing that Schwab had loaded its Yield Plus Fund with high-risk bonds. That would require an enormous effort and cost to prove the wrongdoing.

Investors under these circumstances could have joined a class action where they would band together with thousands of other investors to pool their resources to bring one big case to bring Schwab to justice.
This has been the best approach with consumer cases where the individual harm is small, but egregious, so a class action was necessary to right this wrong.

Let’s hope that FINRA and the SEC stand up to Schwab and their partners and restore the investors’ right to bring a class action.

If not, the decision by the FINRA hearing panel could be doomsday for investors, the very group that FINRA claims it protects and defends.

In a report in Sunday’s InvestmentNews, reporter Dan Jamieson shows how Wall Street will pounce on this new found ability to cut investors’ ability to participate in a class action.

“More brokerage firms are expected to follow the lead of The Charles Schwab Corp. and demand that customers give up their right to file class actions against them,” Jamieson wrote. “A legal door for the industry to kill class actions was cracked open last Thursday when a hearing panel of the (FINRA) upheld Schwab’s use of arbitration agreements that force customers to bring all disputes into Finra-run arbitration forums.”

Jamieson noted: “FINRA brought charges against Schwab a year ago, claiming that Schwab’s arbitration agreement violated its rules. The hearing panel agreed, but said the Federal Arbitration Act prevented FINRA from enforcing those rules. FINRA does not allow class-action claims in its arbitration system, and so precluding customers from pursuing class claims in court effectively kills them.”

We see this case heading up to the Supreme Court. Will it spur Congressional hearings on new legislation to prevent Schwab and the rest of Wall Street from trampling on investor rights? We certainly hope so, particularly with the likes of Massachusetts Senator Elizabeth Warren on the hill. If not, this is another blow to investor protection in our country.

Disclosure: Zamansky & Associates ( are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions, including Charles Schwab and other brokerage firms.

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About Jacob H. Zamansky 58 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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