Investors Challenge Binding Arbitration : Supreme Court to Hear Brokerage Contract Case

The Supreme Court on Monday agreed to hear arguments on whether all investors’ claims against brokers must be settled by binding arbitration.

Seventeen first-time investors brought the case to challenge standard brokerage contracts that order arbitration to settle all disputes. Unless the clauses can be enforced, investors could sue their brokers in court.

The U.S. 5th Circuit Court of Appeals upheld the arbitration language, a decision that reversed a lower federal court in Brownsville, Tex. The lower court said some of the claims could not be arbitrated.

The investors, some of whom could not understand English, included minors, widows and people dying of cancer.

They opened securities accounts in 1982 and 1983 with the Shearson Lehman Hutton office in Brownsville, doing business with account manager Jon Grady Deaton.

The investors claimed thta Deaton mismanaged separate accounts totaling some $190,000 and conducted unauthorized transactions to generate commissions and profits.

Shearson filed a motion in federal court to enforce the arbitration agreements in the contracts. But the district court cited a 1953 case in which the Supreme Court ruled that an agreement to arbitrate certain claims was unenforceable under a 1933 securities law.

The company appealed, on ground that in a 1987 case, the high court ruled that claims against brokers could be arbitrated in a 1934 law. The appellate court agreed with Shearson.

The investors then appealed to the Supreme Court. Shearson agreed that the high court should hear the case to clear up conflicts among appellate courts on the issue.