Brokerage customers winning more Finra arbitration cases

Losing money in a bull market is 'red meat' for arbitrators

Aug 13, 2019 @ 2:26 pm

By Mark Schoeff Jr.

The number of Finra arbitration cases has declined through the first half of the year, but customer victories have increased.

Financial Industry Regulatory Authority Inc. arbitration statistics posted on the regulator's website show there were 1,799 new arbitration cases filed through June, a 21% decline compared to 2,273 at the same point last year.

But brokerage customers who do file claims against their registered representative or firm are faring better in the process this year. So far in 2019, 176 cases have been decided, and 44%, or 78 cases, resulted in the customer being awarded damages.

That's an uptick compared to recent history. For the full years from 2014 through 2018, damages awarded ranged from 38% of the cases in 2014 to 43% in 2017.

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"The quality of cases has likely increased because people who are losing money in a bull market is kind of red meat to Finra arbitrators," said Andrew Stoltmann, a Chicago securities attorney and former president of the Public Investors Arbitration Bar Association. "It sticks out like a sore thumb, so arbitrators are whacking firms more aggressively than in years past."

Securities that are designed to chase yield are increasingly being cited in arbitration cases. For instance, the number of cases this year involving options and real estate investment trusts are outpacing the numbers recorded at the same time during the previous four years.

"These derivative instruments are often tied to investment strategies, like naked puts, writing options, and others, that arise from a search for greater yield," wrote Rick Ryder, president of the Securities Arbitration Commentator, in a recent blog post. "In the same vein, REITs, private equities and variable annuities stand out from the rest of the pack."

Mr. Stoltmann said the increase in claims involving private equity is related to that investment being more commonly used in retail portfolios.

"We've seen the retailization of these products and because of that we've seen a wave of customer abuses and Finra arbitration claims," Mr. Stoltmann said.

The overall decline in the number of Finra arbitration cases filed is not surprising given the years-long bull market, according to Adam Gana, managing partner at the law firm Gana Weinstein.

"Markets are cyclical, and so are filings," Mr. Gana said. "People are less likely to sue their brokers when the markets are good. But bad markets expose bad portfolios."


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