How to Recover Your Money from Your Broker
BY YOUR BROKER?
by Martin D. Weiss Ph.D.
In late February 2001, a doctor in
Brooklyn filed an arbitration case against Merrill Lynch that was unique
in the history of such actions against brokers. According to his
securities lawyer, it was one of the very first arbitrations that not only
named the brokerage firm, but also named a research analyst.
The analyst was none other than the
Internet stock superstar Henry Blodgett, who had continually recommended
InfoSpace, even as it plunged from $160 to just $10 a share. Merrill
settled for $400,000, a landmark event that opened the door to a new wave
of similar claims.
Why was this so significant? In the
past, it was taken for granted that you could not blame Wall Street
analysts for being wrong because they expressed their opinions based on
Now, however, there is a new twist
in the way this situation is interpreted: If the research analyst was
unduly biased by serious conflicts of interest, you may have stronger
grounds for filing a claim against the analyst, the individual broker that
passed that advice on to you, and the firm they represented.
The Securities and Exchange
Commission’s (SEC’s) testimony before
Congress (directly implying that almost all major firms are guilty
of serious conflicts of interest) is your open invitation to proceed.
If you feel that you have been a
victim of the Great Stock Market Scam, and have suffered serious losses
that you can tie to the recommendations of an analyst at a major Wall
Street brokerage firm, you can file an arbitration claim against your
broker and get money back.
If that’s your decision, the
sooner you file, the better your chances for success. Otherwise, the case
and the evidence can go stale. Or worse, hundreds—perhaps thousands—of
other investors could file their claims before you do, possibly driving
the firm out of business.
Meanwhile, it will be almost
impossible for you to sue your broker in court. When you opened your
account with your brokerage firm, you signed a customer agreement, waiving
your rights to sue, and agreeing to submit to binding arbitration instead.
It will also be difficult to challenge the fine print of the customer
agreement because the U.S. Supreme Court has held that the arbitration
provisions you signed are binding and enforceable.
The arbitration system gives you a fighting chance of getting some
money back, but don’t count on getting all of your money back. Following
are the actual stats, based on a June 2000 study by the U.S. General
Accounting Office (GAO):
1. The good news is that your chances of getting a judgment in your
favor are better than 50-50. Considering all of the frivolous cases that
are filed, I don’t think that’s bad at all.
2. Now for the bad news—investors receive an average of only 22
percent of the amount claimed in compensatory damages.
3. A surprisingly large percentage, 49 percent, of the arbitration
awards were not paid at all. In addition, 12 percent were only partially
4. It gets worse. The GAO estimates that the amount of unpaid awards
was about $129 million, or a whopping 80 percent of the $161 million
awarded to investors during 1998.
5. Here’s the killer—the main reason awards were not paid is
because the broker-dealers went out of business, according to the GAO.
Put all of these stats together and
it becomes evident that the brokerage industry is paying out only a small
fraction of the amounts claimed, far less than they’d have to pay in
court. This is the dirty little secret about arbitration. It’s also the
reason the industry has been pushing so hard and so long for mandatory
Unfortunately, steps have been
limited primarily to educational programs to better inform investors.
These programs are positive, but they do little to correct the two
fundamental reasons brokers are defaulting on arbitration award payments:
(1) weak finances and (2) too many claims.
The GAO puts it this way:
Ultimately, recovering losses
caused by undercapitalized, financially irresponsible, or unscrupulous
broker-dealers is difficult, if not impossible, for investors.
Something obviously needs to be done
about this. However, don’t hold your breath waiting. Instead, be sure to
get your claim quickly. Critical steps in the process include:
1. Decide whether you will be using a lawyer. It’s not a
requirement, but you can be sure that the other side will have legal
representation, probably from in-house staff.
If you feel your losses are under $10,000, you won’t need an
attorney, not only because the potential rewards don’t justify the
costs, but also because there’s a simplified arbitra-tion procedure for
claims under $10,000. If you believe that you’ve lost more than
$100,000, you should probably hire a good attorney to help you, at least
at each major step in the process.
What should you do if your losses
are between $10,000 and $100,000? An initial consultation with an attorney
is still recommended to
put you on the right track. Any further involvement will depend on
what you and your attorney decide from there.
If your existing attorney does not
have securities experi-ence, get his or her recommendation for a
securities lawyer in your area. To find an attorney with experience in
arbitration claims, call the Public Investors Arbitration Bar Association
at (888) 621-7484, or go to their Web site at www.piaba.org,
go to the top of the left column, click on “Find an Attorney.” Then,
click on the red words at the top of the page, “Find an Attorney Now.”
You can search either by your zip code or state.
2. If you can afford it, a straight fee-for-time arrangement with an
approximate estimate of the full costs discussed ahead of time is
recommended. If that is not within your budget, you may find an attorney
who will be willing to represent you on a contingency fee (i.e., a
percentage of the proceeds). However, these attorneys tend to use a
cookie-cutter, one-size-fits-all approach, which could ultimately be
3. Don’t try to base the claim exclusively on a bad rating or on bad
advice alone. If applicable, seek to strengthen your claim by showing that
a high-risk investment was unsuitable to your investment guidelines, or
that there was evidence of churning, misrepresentation, or a fraudulent
omission. Furthermore, don’t exaggerate the losses. Stick with the
4. Get all your facts
together up front. This may sound like a trivial statement, but it
isn’t. In a court of law, you have multiple opportunities to gather
facts after you file the original complaint. In arbitration, you don’t.
It’s very difficult—if not impossible—to overturn an arbitration
Another reason to have all of your
facts in hand before starting is that the exchange of exhibits requires
customers to identify documents and witnesses ahead of time, whereas
rebuttals and witness lists are not required in advance from the brokerage
firm. It is not fair, but it’s the reality of arbitration.
When the authorities set up this
system, the basic idea was to help cut through the red tape that bogs down
the courts. In the process, however, the authorities also put a heavier
burden on you to produce the facts up front. The following list details
what you’ll need:
All agreements with your brokerage
firm. All documents you
provided to the broker or the broker-age firm, showing your investment
objectives, investment history, and net worth.
All monthly account statements with
all brokerage firms.
All confirmation slips, whether to buy
or sell securities. Any
year-end transaction and portfolio summaries; tax returns for all
Any letters between yourself and the
broker or brokerage firm, including all correspondence reflecting
complaints or any wrongdoing.
All other mail or letters sent to you
or sent by you to the brokerage firm.
Plus, if you’re going to target the
research analysts, get as complete a record as possible of their ratings
for your stocks. Even though you may be able to get a more complete record
of these directly from the brokerage firm later, I recommend you start
with information you can gather independently. Use Web sources, such as http://www.alert-ipo.com,
which will give you a complete initial public offering (IPO) history on
stocks. Then use either www.edgar-online.com or www.bigcharts.com
and look under “Analysts” to see how analysts changed their minds on
Also, find out if your firm was one of
the underwriters for those same companies. If so, that helps to pin down
the conflicts of interest. You can find out by using http://www.alert-ipo.com
to see the original IPO data and the name of the underwriting firm. Check
to see if the analysts at that company recommended buying the stock.
5. Go to your broker to get any additional
information that you can. Get as much as you can before you even mention
your desire to file a claim because brokers are widely known to routinely
ignore deadlines on the production of documents, and often make it
virtually impossible for you to thoroughly check information.
6. To start the process, you will have to submit a statement of claim
and demand for arbitration. You can simply type a letter with the words Statement of Claim at the top.
Then, mail it to the brokerage firm itself, via certified mail,
with a return receipt requested.
Set out the relevant facts, the
basis of the claim, and the damages sought. Then attach relevant documents
in support of your claim. This is where the initial consultation with an
attorney will be very helpful to make sure you’re on strong footing from
the very beginning.
At the same time, you will have to
include a submission agreement, in which you agree to submit to the
arbitration and to be bound by the outcome.
There’s also a filing fee and an
initial hearing deposit, which varies on the forum and the size of your
claim. With claims from $50,000 to $100,000 before the NASD, figure about
$500 to $750. In any event, request that the arbitrators take these fees
into consideration when they decide on an award.
7. The primary advantage of arbitration is that it’s quicker than
most court proceedings, but it’s often still too slow. Fortunately, the
New York Stock Exchange (NYSE) and NASD give your broker only 20 days to
respond with their answer to the statement of claim. This is the document
that’s going to have all of their defenses and counterclaims.
8. Now, both sides have their one chance to ask
for relevant documents that they want from each other. Although you can
expect them to object to some of your requests, you can do likewise,
especially if the production of documents places an unreasonable cost and
time burden on you.
9. Next, arbitrators are appointed and the case is set to be heard. If
your claim is for less than $30,000, it will be just one arbitrator. If
it’s for more than $30,000, you will get three. If you have reason to
believe that one or more of the arbitrators may be less than impartial,
you should object. A strong ground for objecting would be if the
arbitrator has been in a previous hearing involving either you or the
brokerage firm in the past.
10. Here’s where the big delay sets in. You will probably have to
wait from 6 to 12 months before your case is heard. If the backlog of
cases begins to pile up in the wake of the tech wreck, it could be longer.
Nevertheless, it’s still much faster than the courts, where cases can be
bogged down for years.
Your hearing will take place in a
large conference room, which will look and feel like a formal courtroom
setting. This is where you
get your chance to present your case and put forward your evidence.
However, be ready for cross-examination by the attorneys who are
representing the brokerage firm. As in any court, on the one hand you lose
points when you show anger with outbursts. On the other hand, you get
sympathy when you demonstrate, calmly and methodically, how you’ve been
hurt financially or in any other way.
As with court proceedings, you can
also call on expert witnesses to analyze the events and estimate the
damages. Also, you will have
your chance to make closing arguments to the panel. Unlike a courtroom,
however, there is less pressure on you to have the legal knowledge you’d
need before a judge and jury. In fact, at least one of the arbitrators
will not be an attorney. So you are in good company.
Still, as you can plainly see,
presenting a case logically, cross-examining witnesses, and making closing
arguments are not exactly the types of things that we can do in our sleep.
As untrained lay people, we sure could use an attorney’s help.
Your arbitration hearing should last no more than a day, but, unfortunately, that has not
been the case. Two-day hearings have become more common.
11. You can expect a decision within about 30 days. Don’t expect a
detailed explanation. It is what it is. Then, it will take another 30 days
for the panel to review it and finalize, and still another
30 days for your award to be paid.
12. Suppose the firm doesn’t pay on time? A
recent NASD rule states that brokers who fail to pay within the 30 days
could lose their license. Mark your calendar, and if you don’t get your
money within the time frame, take action immediately. In your file, you
should have the name of the case administrator at the NASD who handled
your case. Send him or her a
letter saying that you haven’t been paid, requesting that the NASD
revoke the broker’s license. Then you could also send a copy of this
letter to your broker, via certified mail with a return receipt requested.
That should put the fire under your broker to send your check right away.
In spite of the many steps and
waiting periods, this process isn’t as hard as it may seem. Just
remember—more than one-half of the claims are decided in favor of
investors, and with what you know already, your chances are likely to be
One last point is settlement. At
almost every stage of the process, there will be an opportunity for you to
settle with your broker. You can get your attorney’s help in weighing
the pros and cons, but there is no 100 percent “right” course. The
final decision on settlement is yours and no one else’s.
This gives you a chance to get money
back. Your primary focus, though, should be on the future—safety, yield,
and profits—not on lawyers and courts.
The Ultimate Safe Money Guide, How
Everyone 50 and Over Can Protect, Save, and Grow Their Money.
Copyright © 2002 Martin D. Weiss Ph.D. Excerpted by arrangement with John
Wiley & Sons, Inc. $24.95. Available in local bookstores or call
800-225-5945 or click here.