It’s getting more and more costly for investors with grievances against their brokers to take their claims to arbitration, some attorneys say.
Arbitration is usually the only option for investors whose broker or brokerage firm has committed such fiduciary sins as sticking their clients in a speculative small stock without permission or buying and selling shares solely to generate commissions.
But now, attorneys who represent investors in arbitration say they have seen a recent increase in the amount of money their clients must shell out to the primary arbitration system run by the National Association of Securities Dealers (NASD). And many of the new costs must be paid before the case is even heard, which could dissuade investors with little ready cash from pursuing legitimate claims.
Attorneys say their clients increasingly must pay their share of arbitration costs in one lump sum before the case begins–sometimes adding thousands of dollars to the process. Moreover, some report that arbitration panels seem more willing to split the cost of the program between the investor and the broker or firm. In the past, they say, the three-member panels would more often pin the full cost of sessions on the party who loses.
“The effect of all this is making it very expensive for an individual claimant to make it to a hearing,” says Mitchell Perlstein, a Boca Raton, Fla., attorney who recently wrote a letter of complaint to the NASD over some upfront charges levied on his client.
The NASD also wants to increase both the non-refundable filing fee that investors pay and the hearing deposit fee. For investors seeking from $100,000 to $500,000 in damages, for example, filing fees would rise to $300 from $200 and deposits for hearings with three-member arbitration panels would rise to $1,125 from $750.
Such increases are necessary to fund the system, which is being revamped to make it more responsive, says Linda Fienberg, executive vice president for dispute resolution at NASD Regulation. The fees on member firms are going up far more steeply, she points out, and firms, not investors, will continue to foot about three-fourths of the cost of the program. And even then, the program will still remain about $13 million in the red, she adds.
But even without the new fees, some lawyers say they are alarmed by some new policies at the NASD that are having the effect of raising costs for their clients. In Perlstein’s letter to the NASD, he tells of a client who he says was forced to pay more than $2,000 before his claim, for $50,000 in damages from an alleged unsuitable investment plan, was even heard.
The client went to an arbitration that Perlstein estimated to the panel would take two days and his opponent’s attorney said might take five. Projecting a five-day process, the panel asked for $4,400 of forum fees as a deposit, half from Perlstein’s client. And the regular $400 deposit his client had already paid didn’t count toward his $2,200 share.
“In order to get access to a hearing to enforce his statutory rights, our client, in addition to the administrative costs charged, is being required to post a bond in the sum of $2,600,” he wrote.
Fienberg wouldn’t discuss Perlstein’s case specifically. But she says that the NASD has indeed begun enforcing its right to get the fees upfront in more and more cases. And the customer could be repaid if the arbitration panel decides in his favor and orders the firm to do so. While the NASD can compel firms to pay their arbitration costs or risk losing their registration, it has no such sway over investors, who have stiffed the NASD for more than $740,000 in current receivables.
Others worry that the practice could easily be abused by firms highballing the number of days required for arbitration, forcing an investor to come up with thousands of dollars before the case is even heard.
“It’s outrageous,” says J. Boyd Page, a partner at Page & Bacek, an Atlanta law firm. The NASD move increases the “likelihood of totally frustrating small investors from bringing arbitration claims and effectively denying them due process,” he says.
Fienberg responds that the NASD would come up with preventive rules if firms began abusing the system that way.
Investors’ attorneys also report that their clients are getting slapped more frequently with half the bill for arbitration, even if the client is victorious. “I always tended to see some form of division; now I’m seeing a strict 50-50 split with no concept that none of it was my client’s fault,” says Ricki Ring, a Los Angeles attorney.
Ring says that in one case her client brought a claim for more than $100,000 against a small firm. After the firm proved completely unresponsive to requests for preliminary meetings, she asserted her client’s right for the firm to lose its right to a defense at the actual hearing. But that required her to have three prehearing discussions–while the clock was running–with the chief arbitrator. Even after her client won part of his claim, he was billed $8,000, of which $1,125 was for his half of the prehearing conferences.
“I think the other side should have borne all the costs of the prehearing conferences, because every one of them was occasioned by their failure to respond or produce discovery,” Ring says.
The trend toward equally dividing arbitration costs is exacerbated by another new NASD initiative that requires parties in larger claims to hold a prehearing conference to settle on dates, agree on discovery issues and other administrative matters. Most participants say the initiative itself has been successful at picking up the pace of arbitrations.
But some attorneys say it often puts yet another hurdle in front of clients, who often have to foot half the bill for the meeting.
Fienberg counters that greater efficiency is apt to lead in time to faster settlements and lower overall fees. Moreover, she says she hasn’t heard any complaints about fees getting split between parties rather than allocated.
Not everyone sees the burden increasing on the investor. Marvin Gersten, a New York attorney who frequently represents small-stock firms named in investor complaints, says his experiences have been almost the opposite and faults claimants for complaining.
“We’re not getting the postponements we used to get and we are often seeing the question of who is going to bear the cost of pretrial conferences being put off to the end,” he says. And, he says, the speedier process that seems to be emerging is almost always an advantage to those bringing the claims. “Time is on the respondent’s side, not the claimant’s side.”
