Stockbroker Arbitration: Changes in the Wind

Chicago, ILWhen a trusted stockbroker simply misfires when managing your investment, or worse—suddenly turns into a thieving, conniving and untrustworthy thorn in your side, stockbroker arbitration is a good way to ensure that your interests are protected, and that losses incurred as the result of alleged mismanagement of your portfolio are recoverable.

After all, few people invest just for fun. If it were fun, then you wouldn't be the type of person who derives much enjoyment from taking vacations with the family, taking time off to really get to know your kids, traveling to where the sunsets are plentiful and the life serene.

Most invest because they have to. Because the traditional retirement pension plan at work has gone the way of the dinosaur, and the only way to properly fund your retirement is to maintain and hope that your 401(k) plan is flush with enough equity at the end of the day to keep you going at the end of your work life.

Try not to remember that most of us are living a lot longer, too. Thus, those investments have to go farther, and work harder. Most of us (the last time we checked) are not financial experts. Sure we can balance a checkbook, but the subtleties and strategies of the investment world is a mystery to most. That's why we put our trust in stockbrokers, financial planners, and the people charged with the responsibility of making the various decisions that will affect our 401(k) plans, and to that end our ability to eat after 65.

There are as many types of stock fraud, and investment misdeeds threatening that capacity to enjoy a decent and comfortable retirement, as there are diseases. Badly placed stock. Biased investments. Kickbacks. Mismanagement, or simply not paying attention.

However, the result is the same: pain, fear, panic, despair and in some cases complete financial demise.

Take a guy named Vinny. He started working at the old New York Telephone Company in 1970 delivering equipment. After 29 years of faithful service and painstaking investment, his 401(k) plan was worth $800,000. Needless to say, he felt both elation, and relief at the same time. $800,000 was a kingly sum. But beyond that, the then-50-year-old looks at his portfolio and breathes a sigh of relief. Facing retirement in a little more than a dozen years, he looks at that $800,000 portfolio and savors the feeling of quiet contentment, that sense of safety that suggest, "I'm going to be okay..."

But back to reality. Vinny's division at New York Telephone had been in a state of flux over those 29 years. First it was acquired by AT&T in 1984, after which it was spun off as Lucent Technologies in the mid-1990s. In 2001 it was sold to Expanets, based on Denver, Colorado.

And so it was in 1999 that Vinny and his wife inspected the value of their portfolio and marveled at what 29 years had built: $800,000. Cut to 2001, when that same portfolio—invested entirely and completely in Lucent stock—was suddenly worth a paltry $58,000.

Whomever it was who decided to invest Vinny's entire nest egg in Lucent stock, and therefore putting all of those eggs into one basket, is subject to conjecture. Perhaps Vinny picked his own stock. Perhaps a stockbroker advised him. Perhaps those managing his 401(k) through his employer botched the job. Whatever the reason, Vinny was soon part of a class action lawsuit alleging that Lucent possessed information pertaining to the increasingly perilous nature of its position, but failed to warn or inform investors and 401(k) retirement savers.

As for stockbroker arbitration, the avenue of response open to investors who feel their stockbroker has wronged them in any way is itself potentially in a state of flux.

It was just a couple of weeks before Christmas last year that the North American Securities Administrators Association (NASAA) appeared before the Senate Judiciary Constitution Subcommittee and called for a voluntary securities arbitration system.

With the current mandatory system, most brokers are required to include a pre-dispute arbitration provision in its customer agreements requiring that public investors having any disputes with a firm or its associates submit those disputes to an arbitrator.

There are some, including Illinois Secretary of State and Securities Director Tanya Solov, who believe that the mandatory system is unfair to investors, given the make-up of arbitration panels which include one mandatory securities industry rep, and public arbitrators who may have connections to the securities industry.

The concern is that even though independent arbitrators are supposed to be conflict-free, such individuals cannot help but bring their own experiences, and therefore their own bias, to the issue. Solov is also reported to have made the point that even though an investor has recovered funds, the amount may pale to the actual loss in dollars, and therefore the recovery did not constitute a 'win.' It's for that reason that Solov has called on regulators to revise statistics pertaining to arbitration outcome.

The proposed legislation, among other provisions, would allow a court rather than an arbitrator to determine an agreement's validity, or enforceability.