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Securities: Who Really Benefits from Industry-Run Arbitration Practice? Two New (Web)

On June 13, 2007, two sources cited the inadequacy of consumer securities arbitration.

Neither disparaged arbitration processes, but both reports criticized securities industry arbitration–principally by the National Association of Securities Dealers and the New York Stock Exchange–for creating inequitable outcomes for aggrieved parties' disputes with their brokers.

In a press release, veteran New York arbitration practitioner Theodore G. Eppenstein, who heads his own firm focusing on securities fraud, proposes five steps to improve securities arbitration. First, Eppenstein believes that the public should be given back the right to file suit in court rather than be forced into compulsory arbitration. Thus, the investor should retain his or her freedom of choice: trial by jury or arbitration.

Second, Eppenstein says that there should be an option of a “non-industry forum.” This proposal would permit investors to seek an independent forum for arbitration of their disputes, though Eppenstein states that the Securities and Exchange Commission would still retain oversight.

Third, Eppenstein wants to eliminate the industry’s arbitration requirement that an industry arbitrator appear on the panel. The requirement, Eppenstein notes, doesn’t benefit investors, but rather creates the “appearance of potential bias and conflict of interest.”

Next, Eppenstein states that he believes that new guidelines should be drafted on requirements for qualification as a “public” arbitrator for panelist purposes. Those who have had ties to the securities industry should not be included, in order to keep the panel with a person who is “pure public.”
Finally, the “abuses aimed at the victims of investor fraud” need to be curtailed. Steps, such as prohibiting motions to dismiss, need to be taken to return the process of arbitration to its roots: an “equitable tribunal to provide justice for all.”

Eppenstein concludes: “[R]eform is long overdue[–]it's time to restore choice to investors and fairness to the system”
The release is available at

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A study published by Edward S. O'Neal, a principal with Securities and Litigation and Consulting Group, a Fairfax, Va., financial economics consulting firm, and Daniel R. Solin, a New York City securities and arbitration attorney, found that individual investors “who are compelled to rely on industry-run securities arbitration to resolve their claims against stockbrokers are winning fewer cases and recovering less money in the process.”

The study, “Mandatory Arbitration of Securities Disputes: A Statistical Analysis of How Claimants Fare” (available at:, examined 14,000 NASD and NYSE securities arbitration cases in the 1995-2004 period. A press release is available at

The authors’ conclusions paint a grim picture for investors who are faced with compulsory arbitration. The findings include a claimant “win rate” that has steadily declined since 1999.
Also, the larger the case, the lower the award as a percent of the amount claimed, according to the findings.

Perhaps the most disconcerting finding for investors is that “claimant win rates are lower against larger brokerage firms,” with the “average amount an investor can expect to recover going into arbitration against a large firm in a large case (over $250,000) is 12%.”

Although the authors acknowledge that the findings may have “innocent explanations,” they believe that their data “clearly indicates a decline in both the overall ‘win’ rate and the expected recovery percentage against major brokerage firms, at a time when the misconduct of these firms reached its apex with the analyst fraud scandal.”

In a follow-up to the study’s release, coauthor Solin wrote an editorial for the Web blog Huffington Post, titled, "The Only Thing They Have to Fear Is . . . A Level Playing Field" (available at:

The editorial took a frank look at the study and the state of affairs of securities arbitration for investors, noting Congress’s concern. Solin discussed the moves by Senate Judiciary Committee members in recently asking SEC chairman Christopher Cox to make arbitration optional instead of mandatory.

Barney Frank, the chairman of the House Committee on Financial Services, has indicated an interest in holding hearings on this subject, which likely will call Cox to testify, perhaps as soon as next week. Once set, the hearing will be posted here:
Concludes Solin in his Huffington Post piece, “Of course, the securities industry is adamant in its view that there is nothing wrong with this process. They may be right. If you are a broker or a brokerage firm, it is working really well for you.”

--Carol Bahan, CPR Intern