If Investors Have No Recourse in Class Actions, Will They Turn to Advisors?

If Investors Have No Recourse in Class Actions, Will They Turn to Advisors?

Last week, a FINRA panel threw out a complaint against Charles Schwab, upholding the brokerage firm’s language in customer agreements requiring customers to settle disputes via FINRA arbitration. The decision, if not appealed by FINRA, could mean the end of class action lawsuits against brokerage firms, if others follow suit and draw up similar customer agreements.

My question is, if small, individual investors cannot seek recourse from the deep-pocketed brokerage firms in class actions, where will they turn? Does this make advisors their only recourse? 

Andrew Stoltmann, an attorney with The Stoltmann Law Offices in Chicago, says the panel’s decision will have a massive impact on investors:


First, within months, every brokerage firm in America will change its customer new account agreement to prohibit class actions. This means massive class actions against brokerage firms will be banned. This is incredibly great news for brokerage firms. Major cases in recent years like those against Oppenheimer for the Champion Income Fund, Morgan Keegan for the James Kelsoe bond fund implosions and Schwab for its Yield Plus mutual fund would not be possible. This is why brokerage firms are euphoric about this decision.  

Second, along with the AT&T Mobility v. Concepcion Supreme Court decision decided last year (permitting contracts that exclude class actions), investor rights to sue brokerage firms will exclusively be decided in FIRNA arbitration (Wall Street's self created forum for adjudication).  Given smaller scams based on amounts scammed per client (like the revenue sharing scam 8 years ago) brokerage firms will effectively insulate themselves from massive liability since most clients who only lost $100, $1000 or $10,000 will not take the time to individually join in a group FINRA arbitration claim to sue a brokerage firm.  Even in large scams, many victims are reluctant to come forward, thinking the losses sustained were simply caused by the market when in actuality often they are caused by brokerage firm negligence or fraud (the Morgan Keegan bond fund implosion is the perfect example).  If you think brokerage firms have engaged in scummy practices in the past, just wait until what the next 10 years will bring if brokerage firms are allowed to ban class actions by its clients.  


Sure, it’s bad for investors, but it’s also good for brokerage firms, in that they can protect themselves from large, costly class action suits involving investment blow-ups. Take the Medical Capital and Provident Royalties scandals; the sales of those allegedly fraudulent private placements brought down several broker/dealers. Such legal liability is putting a kink in the profitability of independent b/ds, especially the small ones that cannot afford the large settlements.

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