A recent study of securities arbitration raises some disturbing questions about industry-sponsored arbitration panels. A review of 14,000 NASD and NYSE securities arbitration awards for the period from 1995 through 2004 shows that individual investors are faring worse in cases decided by arbitration panels than they once did. This is particularly true when investors brought their claims against one of the larger brokerage firms. This study, among other complaints, has resulted in challenges to the fairness of securities arbitration, challenges to the inclusion of securities industry arbitrators on panels, and an array of similar issues.
Fortunately for investors, the study does reflect the overall success realized by investors who file securities arbitration claims. As is the case in court proceedings, many arbitration cases (including many of the strongest arbitration cases) are settled by the parties or in mediation. None of these cases or their results are considered in the study. The bottom line is that investors bringing arbitration claims, as a whole, recovered money many more times than the study would suggest.
Nevertheless, the study raises viable questions about what has caused the change in panel decisions. These questions need to be addressed in order to maintain integrity in the arbitration process.
The report, “Mandatory Arbitration of Securities Disputes: A Statistical Analysis of How Claimants Fare” authored by Edward S. O’Neal and Daniel R. Solin, shows that the win rate for investors has dropped from a high of 59% in 1999 to 44% in 2004. The win rate drops to 39% if the claim was brought against one of the three largest brokerage firms that do business with the largest numbers of investors.
Award percentages that had reached a high of 68% in 1998 fell to 50% for the years 2002 through 2004.
In 1998 investors were awarded 38 cents on the dollar (as a percentage of the amount claimed); by 2004 this number had fallen to 22 cents on the dollar.
Interestingly, even though the average of relief requested increased during the period of time reviewed, the average awards stayed nearly constant. For instance, the average relief requested in 2004 was $540,000 versus an average of $168,000 in 1998. Yet the average award in 2004 was $59,000 versus $56,000 in 1998.