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Recovering Your Investment Losses; A Primer On NASD Arbitration
Consider the following all-too-familiar scenario. You, the investor, receive
a telephone call from your trusted stockbroker. His voice is tentative. He
rattles off some economic figures, mentions something about Japan, and says that
institutions took their profits. Then comes the bad news: your account is down
20%!
Brokers can easily blame the market and the economy to shift your attention
away from themselves. Often, we find that investors blindly accept those excuses
instead of focusing their attention upon the real cause: negligent advice.
Investor Rights
As an investor, you have certain rights. For example, you have the right to
be placed in a suitable investment, given your investment objectives and
particular level of risk tolerance. Also, you have the right to be told how much
risk you will assume in any given investment recommendation. Likewise, you have
a right to best efforts management and advice. This means that your broker must
work in your best interest, and not in his best interest through misbehavior
such as excessive trading or recommending high commission investments without a
reasonable basis.
Among all of your investor rights, the right to arbitrate is most important.
This right gives you a remedy to recover your investment losses, including
attorneys' fees, interest and costs, from the stockbroker and his brokerage
firm.
Commencing Arbitration
Most arbitrations take place at the National Association of Securities
Dealers (NASD). Although once perceived to be pro-securities industry, today the
NASD stands out as an arbitration forum fair to investors. My opinion is based
upon years of representing investors as an attorney and serving as a mediator
and an arbitrator at the NASD.
A case commences with the filing of a claim. Claims to recover $10,000 and
under can be filed in a simplified fashion, and without an attorney. Investors
simply describe why they ought to recover, submit appropriate documentation, and
await a decision by an arbitrator, without the need to appear in person. Claims
seeking to recover greater than $10,000 should be filed through an attorney
(among other reasons, the broker and brokerage firms will be represented by
counsel).
Exchange of Information
Parties in NASD arbitration do engage in discovery. Typically, customers
produce copies of account statements, notes and correspondence. Brokerage firms
produce documents such as personnel records, other complaints, compliance
manuals, commission runs, and new account forms. The ability to know where the
skeletons lie in the brokerage firm closet (and to obtain those documents in
discovery) is the single most important factor separating the occasional
securities arbitration lawyer from the specialist.
Unlike normal litigation, arbitration discovery does not (with rare
exceptions) include depositions. This fact alone quickens the process, and
reduces its cost to all parties. Another benefit of arbitration is that
discovery disputes are resolved by way of pre-hearing telephone conferences.
Hearing
A panel of three arbitrators usually decides the merits of the claim,
defenses raised and the amount of any recovery. The average length of
arbitration is 2 1/2 days. Arbitration venue typically is closest to the
investor's residence.
Similar to normal litigation, there are opening and closing statements,
witness and party testimony as well as documents admitted into evidence. Though
adversarial, the atmosphere is courteous and professional. Arbitrators
frequently pose their own questions to witnesses to improve their understanding
of various matters.
Award and Appeal
Arbitrators endeavor to reach a decision within thirty days of the close of
the arbitration hearing. Seldom does this happen, but the arbitration process
certainly is faster (and less expensive) than normal litigation. Investors
should expect the entire process to be concluded in less than one year!
Another advantage to arbitration is that there only is a limited right to
appeal (for such matters as arbitrator misconduct). As a result, awards are paid
without the kinds of delays that often result in litigation. Without filing an
appeal, moreover, NASD regulations require brokers and brokerage firms to pay
the awards in full within thirty days of receipt. The penalty for failing to do
so is fine, censure, suspension or expulsion from NASD membership.
Mediation Option
The NASD also has a relatively new mediation program designed to settle
claims. Unlike arbitration, mediators do not rule. Instead, the parties
themselves control the process, the costs and the outcome. A mediator assists
the parties by opening a dialogue, providing a dispassionate, objective view of
the case, and sometimes finding creative solutions that the parties cannot see.
Importantly, most mediations result in settlement! As a result, mediation is a
viable, if not desirable, alternative to arbitration.
In conclusion, investors can recover their investment losses in a fast and
relatively inexpensive manner in cases where their broker, and not the market or
the economy, is to blame.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment advisor when building and protecting your wealth.
All content Copyright © 2005-2007 FinancialCounsel.com, Inc. except where noted. All rights reserved.
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