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Bubble Burst, Someone Must Pay. Will It Be You? NASD Arbitration Filings Continue to Rise

Bubble Burst, Someone Must Pay. Will It Be You? NASD Arbitration Filings Continues to Rise

If you thought the Merrill Lynch settlement would put an end to the conflict-of-interest scandal, think again. Besides civil class action lawsuits against Merrill—and possibly other firms—individual brokers may be named in civil suits or, more frequently, in arbitration hearings before the NYSE or Nasdaq.

Indeed, already there are around 28 civil cases pending against Merrill. And the number of arbitration cases filed with the NASD through the first quarter has risen by 16 percent from the same time last year, when a record 6,915 cases were filed, according to the NASD. Of course, not all of these NASD filings are related to the Internet-hype scandal, but there most certainly will be an uptick, experts say.

“Everyone and their mother who’s lost money in this market is filing a claim, hoping they’ll get something back. It’s crazy,” says a Merrill Lynch producer.

So far this year, 60 percent of clients have won their arbitration cases, up seven percent from all of last year. Brokers fear it may get worse.

Among the 10 types of controversies listed by the NASD, negligence, breach of fiduciary duty and misrepresentation were among the biggest complaints. Most complaints revolve around common stock and mutual fund holdings, according to NASD records.

How can brokers prevent arbitration cases filed against them?

“Disclosure is one way,” says the Merrill Lynch producer. “You should always be telling clients what can go right and wrong and what the costs are. I do that, and I find that clients are less likely to complain or file a claim simply because they remember that I informed them of the risks.”

Other ways to avoid claims, according to reps: diversify, screen clients and document everything.

“The majority of suits usually occurs when a client is concentrated too much in one position,” says the Pru broker, “so I stay away from that. The industry as a whole has been moving away from that for a while now. Diversifying goes a long away in preventing claims.”

Documenting communication is essential. “I document every phone conversation, every face to face meeting, every letter and note,” says the Pru producer. “And I follow that up with the client, letting them know that I documented our conversation or meeting.”

Arbitrators awarded damages in 2001 totaling $97 million compared to $76 million in 2000. However, more than 60 percent of all claims were resolved between parties before reaching an arbitration award. This year, the total amount awarded was $40 million (through March 2002) The number of claims involving mutual funds increased in 2001 over 2000 by more around 100 percent. So far in the first quarter of 2002, cases involving mutual funds have already surpassed the total number in 2000; and NASD officials say they expect last year’s total to be eclipsed in 2002, possibly by a large amount.

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