Stockbroker Arbitration Gives $40 Million Award

Utica, NYWho says you cannot recover a lot of money through stockbroker arbitration? People who think that, may just want to take a look at a recent ruling against Merrill Lynch. Turns out, those who believe their financial advisor is engaged in stock fraud or other evil misdoings with their money might just stand a chance of winning their case at arbitration. That is because your money is protected in circumstances involving stockbroker fraud.

If you believe your money has been lost due to the unethical dealings of your stockbroker, you generally only have the option of filing a Financial Industry Regulatory Authority (FINRA) arbitration. That is because most contracts with financial advisors contain a clause that essentially forces you to go through arbitration. But, while it may seem that the arbitration is set up to help the brokerage firms, some large awards have been given to investors.

How big are those awards? Last month, a FINRA arbitration panel doled out one of the single largest securities arbitration awards ever: $39.8 million. The award was given to the Trustees of the Masonic Hall and Asylum Fund, which runs a nursing home in Utica, New York. Of the almost $40 million, $30.6 million was awarded in compensatory damages with another $9.2 million awarded in interest.

According to the complaint, Merrill Lynch, along with a subsidiary broker-dealer called Advest Inc., allegedly committed negligence, misrepresented information about an index fund and breached their contract and fiduciary duty. The fund in question was the Sphinx Managed Futures Index Fund LP, a privately held fund that promised returns tied to Standard & Poor's Hedge Fund Index. The fund filed for bankruptcy protection in 2007.

The specific actions on the part of the brokers that led to the filing of the arbitration have not been made public. Merrill Lynch has defended itself by saying that the investments pre-dated the company's acquisition of Advest.

Stockbroker arbitration can be a way to recover money, but in this economic climate, more and more arbitrations are being filed. According to The Wall Street Journal, through March 31, 1,264 arbitrations were filed, which is up 114 percent from the same period a year before. That means that there could be a bit of a wait before your arbitration is heard.

That said, it is important if you believe your financial advisor has acted improperly to contact an attorney and discuss your legal options. The sooner your file your arbitration, the sooner your case will be heard. Delaying only puts you back further in line.

Furthermore, the same article in The Wall Street Journal reports that at least 60 percent of cases that are filed for arbitration are actually settled before the hearing—the sooner you file your arbitration, the sooner it becomes possible for a settlement to be discussed. Most companies will not make any offers unless an arbitration is filed.

It is important to remember that in order to recover your money, the broker must have been involved in unethical activity, such as not following your investment instructions or opening you up to risk you could not tolerate. It is not enough to have lost money—after all, given the market these days, pretty much everybody has lost money. You must be able to prove that the losses were the direct result of your broker's negligence.

If you do think your broker acted improperly, it is a good idea to discuss your situation with a lawyer who is experienced at dealing with FINRA arbitrations. Although an arbitration may not seem as complex as a lawsuit, there is still paperwork that must be filed and deadlines that must be met. An experienced lawyer can help you navigate the stockbroker arbitration process.