The Securities Industry and Financial Markets Association released a “white paper” today about how well the mandatory arbitration system works. The system, you’ll recall, was established 20 years ago and forces customers to resolve disputes relating to their brokerage accounts rather than fighting it out in court. (For details, see Registered Rep.’s January 2007 cover story, Fix Arbitration Now.)
SIFMA is trying to steal the thunder of the plaintiffs’ bar, which is pushing Congress to nullify agreements to arbitrate in customer contracts, including the more than 111 million brokerage accounts in the U.S. The lobbying group unveiled the report today, because tomorrow, on Capitol Hill, legislators will take up the “Arbitration Fairness Act of 2007,” a bill that would void pre-dispute agreements to arbitrate. Theodore G. Eppenstein, a lawyer for investors who argued and lost the McMahon case, will testify at the hearing before the House Judiciary’s Commercial and Administrative Law Subcommittee. SIFMA will file written testimony but not appear at the hearing tomorrow (Oct. 25).
In a conference call with reporters today, SIFMA president, Marc Lackritz, repeated the same arguments that Wall Street has intoned against arbitration critics for the past two decades, ever since the U.S. Supreme Court gave the green light to mandatory arbitration clauses in brokerage contracts in the 1987 case of Shearson/American Express Inc. v. McMahon. “It’s proven time and time again, to be fairer, faster and cheaper for investors than other alternatives, such as litigation,” said Lackritz.
Of course, critics argue that it is no longer fair (too often former industry people sit on arb panels), and it takes far longer and costs far more than it used to—to the extent that the system is only cheaper for the firms.
For the white paper, SIFMA’s outside counsel looked at arbitration cases and found:
n Arbitrations were 40 percent faster in a 12-month period ending August 2007, concluding in an average of 13.7 months versus 22.2 months in civil litigation filed in federal court.
n Arbitration claims are heard on the merits 20 percent of the time, while litigation goes to trial before a judge or jury about 1.5 percent of the time.
n In 2006, investors recovered through an award or settlement 66 percent of the time.
n A review of 2005 and 2006 arbitration cases found that the presence of an “industry” arbitrator has “no material impact on customer wins.”
“The trial lawyers and PIABA [the Public Investors Arbitration Bar Association] are always wonderful about touting” the arbitration case in which the result “doesn’t make a lot of sense,” Lackritz said, “There’s a lot of errant nonsense out there about this system.”
If the arbitration system is working so well, and investors are so happy with it, why not give them the choice to opt for it, rather than forcing it on them? Lackritz says a choice would create a two-track system, one that would serve “wealthy investors,” and another for “everyone else.” Such a duel system, he said, would be “incredibly expensive” and “impose huge a huge transaction cost on the industry,” he said.
SIFMA included cases in which customers settled their claims in the 66 percent recovery rate for investors, even though settlements are confidential. Calling himself a “recovering lawyer,” Lackritz said, “I know that when plaintiffs settle cases, they settle cases for amounts that they think are reasonable.”
Steven Caruso, a New York lawyer and PIABA’s president, balked at the 66 percent case, first, because it includes recoveries in “intra-industry” disputes that do not involve customers, and secondly, because there is no information of the terms on which litigants settled. “It could have been for a penny on the dollar or a hundred cents on the dollar. They just don’t have any empirical data to justify that those settlements were favorable to investors,” Caruso said.
SIFMA did not consult or interview any investors for the white paper, but cited two previous studies that included investors, which found arbitration cases were handled “fairly and without bias.” Caruso, for one, says it’s rare that his clients who came away from their experience with that view. “I have had very few clients make that statement,” he said.