Stockbroker Arbitration: When Your Stockbroker Stiffs You

Marion, OHIt might make for good laughs on late-night television, as fans of Late Night with David Letterman on CBS saw Wednesday night with his Top Ten List (Signs You Have a Bad Stockbroker), but stockbroker fraud is no laughing matter—especially when you have your retirement nest egg on the line.

Stockbroker arbitration is a means by which bilked investors can seek restitution for any instances of stockbroker fraud, and there can be many. While individual stockbrokers can find themselves called to the carpet for unethical conduct, entire companies have had to answer for unsavory practices that take advantage of their investors.

Some of these companies are blue chip, with names that are household words.

Just this past Wednesday (which may explain Dave's Top-Ten List that night) it was announced that five well-known firms were held accountable to pay combined fines of $2.4 million for mutual fund abuses. Among the dubious practices uncovered by the Financial Industry Regulatory Authority (FINRA) were various supervision violations and improper mutual fund sales to thousands of investors.

Among the violations attributed to the At-Fault Five include unfair sales of load securities to investors who were eligible to make fund exchanges without paying commissions on "Class B and Class C mutual fund shares," states a FINRA news release, "and failure to have supervisory systems designed to provide all eligible investors with the opportunity to purchase Class A mutual fund shares at net asset value (NAV) through NAV transfer programs."

The identities of the five brokerage firms might surprise you: Prudential, Merrill Lynch, UBS Financial Services and Wells Fargo. Pruco Securities was levied a relatively small fine of $100,000—but the others had bigger bills to pay: Prudential was slammed with an $800,000 fine, and UBS was hit with $750,000. What's more, Prudential, Merrill Lynch and UBS were each fined $250,000 over their failure to reasonably supervise and offer opportunities for investors to obtain sales charge waivers through NAV transfer programs.

For Prudential and USB, those fines amount to a cool million each. Plus, all five firms have to pay their clients back. Total remediation is expected to exceed $25 million.

With the advent of 401(k) plans and the gradual decline of heritage, old-style retirement plans sponsored by employers, many workers are just now discovering the complexities of the stock market. This is where the unethical stockbroker can have a field day, if given money to invest by a client with little knowledge (or appreciation) of the stock market, and virtually zero intuitiveness when it comes to volatile investing. Such an investor puts his or her implicit trust in the broker.

That's when it can go very wrong, especially for retirees on fixed incomes, or those close to retirement who can ill afford to have their life savings and retirement nest eggs invested into high-risk products. A well-known case in the Midwest from 2002 underscores that point. A group of 300 retirees from Marion, Ohio were forced to take legal action after their lump-sum retirement benefits were invested by an unscrupulous broker with Prudential and sold without their knowledge. The class-action jury awarded the retirees $262 million, including $250 million in punitive damages.

This past year has been especially hard after the bull morphed into the bear and was chased into hibernation by the sub-prime mortgage mess. Millions, if not billions of dollars worth of invested wealth disappeared with it. While corporations may be on the hook through company-sponsored 401(k) retirement plans, over which the sponsoring corporation has fiduciary duty through ERISA to manage and administer prudently on behalf of its investors, the broader picture shows thousands of vulnerable investors with little or no working knowledge of the stock market, putting their trust and considerable savings into the hands of sometimes untrustworthy brokers.

The last quarter of 2007 wasn't much help, as brokers struggled with a market that suddenly wasn't co-operating, and an economy that appeared to be sliding into recession.

The unscrupulous broker will take the trust, and the money and invest imprudently in order to maximize the potential for fees and commissions.

And you know, maybe it isn't all fraud. Sometimes well-meaning brokers make mistakes. Taking your eye off the ball ever so briefly can result in all kinds of consequences. However, the investor pays the broker not only for his or her expertise, but to also keep that eye on the ball, and for heaven's sake keep the best interests of the client, including the appropriate risk profile, at heart.

Somehow, "I'm sorry" does not do justice to the loss of a retirement nest egg.

Stockbroker arbitration is a process whereby bilked clients can pursue restitution from losses through an arbitration process governed by the National Association of Securities Dealers, or the New York Stock Exchange. This process is generally followed when there are claims against stockbrokers, financial advisors or consultants. Hearings can be heard across the country, and the process generally takes about a year to complete.

Top Ten Signs You Have a Bad Stockbroker, #2: "A few years back told Martha, 'Sure it's legal...'"

Sure, it may be funny. But it's no laughing matter.