Alternative to lawsuits: arbitration

By Jonathan P. Decker | Special to The Christian Science Monitor
August 12, 2002

Investors have several choices to make if they fall victim to securities fraud.

They can do nothing and hope for automatic inclusion in a class-action lawsuit, seek out and join thousands of others in such a lawsuit, or hire an attorney and file for arbitration with the National Association of Securities Dealers (NASD) or the New York Stock Exchange (NYSE).

The third option is the one recommended by Bob Banks, a securities lawyer based in Portland, Ore.

"In my experience, plaintiffs in class-action lawsuits have no control over what happens to their case," says Mr. Banks. "In addition, in most instances, investors fare better financially bringing their own claims in arbitration."

The reason, according to Mr. Banks, is that even if there is an eventual settlement in a class-action suit, given the number of investors affected and the huge costs and attorneys' fees in such cases, the return to investors will be "de minimus."

Under arbitration, three arbitrators hear the claims made by an aggrieved investor. One of the members of the arbitration panel must be from the brokerage industry. Should either side lose in arbitration, there is a right to appeal.

The process for arbitration has gotten longer over the past year, as the NASD and the NYSE have been swamped with cases due to what some securities lawyers call the "tech wreck."

As a result, the amount of time from filing a claim for arbitration to a final decision can be 12 to 18 months.

For Robert Spitzka, a client of Mr. Banks's, the wait was worth it.

"After waiting about three years and dealing with an appeal from the brokerage firm Duke & Co., I finallyreceived most of the $110,000 I lost in the market," says Mr. Spitzka, an investor from Danville, Calif. "I couldn't be happier with my experience with arbitration."

The downside of going to arbitration, of course, is the possibility that the arbitration panel may rule against you.

"With a lost arbitration case, not only have you not recovered any of the money lost in your portfolio, but you are also now faced with paying a lawyer his sometimes substantial fees for taking on your case," says Steven Toll, a securities lawyer at Cohen, Milstein, Hausfeld & Toll in Washington.