Obama Fails to End Kangaroo Courts for Investors
Requests for arbitration hearings are up 85 percent so far this year at the Financial Industry Regulatory Authority...Too bad it’s just as likely that the same chumps who fell for Wall Street’s array of misleading products are headed straight into a justice system that will take them for a second ride.  More than half the investors who go through a Wall Street arbitration get nothing at all, and those who do win get about half what they claim to have lost. Once they are in a hearing room, investors typically face a panel of three judges that includes someone from the very industry that got them into the mess in the first place -- Wall Street.

Obama Fails to End Kangaroo Courts for Investors
 Commentary by Susan Antilla

June 25 (Bloomberg) -- Financial crises have a way of jolting investors into seeing that perhaps their brokers weren’t such trustworthy advisers after all.

Requests for arbitration hearings are up 85 percent so far this year at the Financial Industry Regulatory Authority, the only place investors can go when they think they have been fleeced. Going to court isn’t an option for the aggrieved investor because no brokerage firm will open an account until a customer gives up the right to trial.

Considering all the new complaints, it would be comforting to think that a little justice might be done. With luck, we might demand restitution from a few auction-rate securities hawkers here and punish a few Ponzi schemers there. Too bad it’s just as likely that the same chumps who fell for Wall Street’s array of misleading products are headed straight into a justice system that will take them for a second ride.

More than half the investors who go through a Wall Street arbitration get nothing at all, and those who do win get about half what they claim to have lost. Once they are in a hearing room, investors typically face a panel of three judges that includes someone from the very industry that got them into the mess in the first place -- Wall Street.

People would ask what you had been smoking if you said you were involved in a medical malpractice trial where four doctors on a 12-person jury were deciding the case. On Wall Street, though, all trials have a representative of the defendant’s industry among the decision-makers. It’s a mandatory trial with a stacked jury.

Giving Up Rights

All those issues and more inspired Democratic Senator Russell Feingold to introduce on April 29 the Arbitration Fairness Act, a bill that would make it illegal to force investors and other consumers to agree to give up their rights to go to court before they even buy a product, whether it be a cell phone, a refrigerator or some sketchy merchandise packaged as a risk-free investment.

Considering Feingold’s bill, Wall Street’s shame and Washington’s new vigilance about financial regulation, you might figure that President Barack Obama’s regulatory overhaul unveiled last week would include some tough talk about killing off mandatory arbitration. But you would have figured wrong.

Obama’s plan devoted a single paragraph to what happens to investors once they realize they got shafted.

The Securities and Exchange Commission “should study the use of mandatory arbitration clauses in investor contracts,” and then pursue legislation if appropriate, it says.

Study Hard

We have two decades of studies showing that securities arbitration forces investors to give up rights, favors the industry and shortchanges the investor who already has been worked over. It’s time to kick Wall Street arbitrators off these juries, and offer arbitration only as an option, not a requirement. The study-and-delay dance is a copout.

If the president is aching to read a study, though, he might get his hands on one released by Jill Gross and Barbara Black last year. The two academics surveyed 3,000 investors, lawyers and securities employees and discovered that only 28 percent of wronged customers who got involved with arbitration thought the process was fair. Only 25 percent were willing to say their private judges were impartial. How many versions of “We don’t think this is fair” do we need at this point?

And More Studies

On June 11, the Public Investors Arbitration Bar Association, or Piaba, a lawyers’ group representing investors, filed a petition with the SEC asking that the agency nix the practice of reserving a spot for a brokerage industry representative on arbitration panels. Smart money says the petition will lead to a couple more studies.

SEC spokesman John Heine declined to comment on the proposal. Travis Larson, a spokesman for the Securities Industry and Financial Markets Association, said his group instead is supporting a stalling tactic -- sorry, I meant to say “pilot program” that allows a test group of investors to arbitrate without a Wall Street judge.

A pilot program? Are you getting that deja-vu feeling?

The petition, in any event, “will eventually end up in a trash heap” at the SEC, said Los Angeles lawyer Herbert Leslie Greenberg in a June 20 letter to the SEC. Greenberg should know. His own petition for an arbitration overhaul in 2005 landed in the SEC’s circular file.

The securities industry argued in a 2007 white paper that it was fine to have a Wall Street representative involved because they could help educate fellow arbitrators about such thing as “industry customs and practices.” Right. Like, say, the customary way to market auction-rate securities that leave investors empty-handed.

That argument is more bogus today than ever, because cases increasingly involve the mass-marketing of financial products by multiple brokerage firms.

“The concern is that the industry arbitrator could be on a panel telling others that ‘everybody does it,’” says Brian Smiley, the president of Piaba.

And in a closed justice system where nobody can come to court and watch, who would ever know?

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Susan Antilla in New York at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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