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If Your Portfolio Heads South Can You Sue Your Stockbroker?

  • March 2008

    If you ever lost money in the stock market and tried to sue your broker you were probably surprised to learn that you had waived your right to sue and instead agreed to arbitrate the dispute. Unless you combed through the fine print in your brokerage contract, you probably thought you could have your day in court. You can't.

    Since the 1987 Supreme Court decision, Shearson v. McMahon, which upheld pre-dispute arbitration clauses, most securities firms require customers to agree to arbitration at the time they open their accounts. If a customer questions the pre-dispute arbitration clause, most stockbrokers will say that it is a requirement to do business with them and if you don't agree, you can take your business elsewhere.

    If you have agreed to arbitrate disputes with your broker and you file an action in federal or state court, the brokerage firm will usually move to compel arbitration based on the pre-dispute arbitration agreement. Disputes are usually heard by the Financial Industry Regulatory Authority ("FINRA") which is the organization of the former enforcement and regulatory arms of the National Association of Securities Dealers, inc. and the New York Stock Exchange. FINRA has a set of rules called the Uniform Code of Arbitration Procedure.

    What are the advantages of arbitration?

    Many customers would choose arbitration over a court proceeding for the following five reasons:

    1. It is a shorter and less costly process

    While there are filing fees, the whole process- from filing a case until the decision is rendered-usually takes less than a year. A court case often takes three times that long and costs significantly more.

    2. There is limited discovery which limits the cost

    In a court case, the parties have the right to take depositions, to ask formal and informal questions, and ask for documents. In an arbitration, the parties have the ability to get documents from each other and from third parties, but cannot get any more information except in rare circumstances.

    3. You get a quick decision

    From the time the arbitration hearing ends, the arbitration panel is required to render its decision within 30 days. The decision can then be confirmed in a court.

    4. You get your award faster

    If the customer receives a monetary award, the brokerage firm or broker must pay within thirty days, or risk losing his license to sell securities.

    5. You have the right to a hearing

    Cases which might otherwise be dismissed as frivolous in a court would probably survive a motion to dismiss in the arbitration context.

    What are the disadvantages of arbitration?

    1. The composition of the panel

    The arbitration panel consists of two public arbitrators and one industry arbitrator. Many critics of the arbitration process claim that the required industry representative biases the FINRA arbitration process toward the broker. Another criticism of the process is that public arbitrators are often simply retired brokers, traders, branch office managers, and other industry members. This criticism has led to a change in the rules restricting the ability of retired brokerage employees from serving as public arbitrators.

    2. Limited right to appeal

    There is an extremely limited right of appeal from an arbitration panel's decision. Typical grounds for appeal include fraud or arbitrator bias or "manifest disregard for the law". It is extremely difficult to prove any of these claims and, there have been few successful appeals of arbitration panel decisions.

    3. Fairness decisions

    Arbitration panels often make decisions based on their perceptions of fairness which do not always comport with the law. Typical legal defenses which work in court are often lost on arbitrators who are not lawyers.

    4. No legal opinions

    Arbitrators are not required to render legal opinions when they decide the case. It was not until recently that they were required to decide in writing. Written decisions usually contain a simple statement of the award and little other explanation.

    5. Limited record of the proceedings

    Unless the parties choose to pay for a stenographer, the only record of proceedings is a tape recording. It is often unintelligible and of dubious worth in an appeal.

    6. Selection of the arbitration panel

    Both parties receive lists of potential panelists. They then cross out names they do not choose and rank the remaining members of the lists. The panel members chosen by FINRA are based on the highest ranking potential panelists on each party's lists. Often when the parties disagree about potential panelists the panel consists of individuals whom the parties did not consider.

    Can the customer win in arbitration?

    Despite much criticism of the system, customers do win in arbitration. Arbitrators respond to customers who have been cheated or are the victims of unscrupulous behavior. Reputable panelists generally cut through standard defenses and arguments and decide in favor of customers when the evidence warrants that decision. 


    While arbitration panels are supposed to provide a cheaper and easier way to resolve disputes than an over-burdened court system, in practice, they do not always provide a fair outcome for the customer or the broker. The arbitration process is far more complex now than it was in 1987 when the Supreme Court upheld pre-dispute arbitration clauses. Then, the Justices contemplated a half-day process where each of the parties told their story and the panel decided on the spot. With the year-long litigation process currently in place, it is an advantage to have experienced counsel to guide you through the entire FINRA process including the motions and discovery, the choice of arbitrator, and composition of the arbitration panel. If you are considering arbitrating a dispute with your stockbroker, look for an attorney who has significant experience arguing before arbitration panels and a track record of success.


    Richard Slavin is Chair of the Securities Group at Cohen and Wolf, P.C. He has years of experience in private practice and as a securities regulator. He has represented both broker-dealers and customers in securities arbitrations and has been a securities and commodities arbitrator since 1985. He frequently writes and lectures on securities law. Mr. Slavin can be reached at: or (203) 222-1034.

If Your Portfolio Heads South Can You Sue Your Stockbroker?

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