Arbitration Needed in Investment Fraud Suits, Justices Hold
The Supreme Court ruled today that disputes between investors who allege fraud and their brokers must be resolved by arbitration, not in court suits.
By a 5-4 vote, the justices overturned a 1953 high court decision that permitted lawsuits under an anti-fraud provision of the Securities Act of 1933.
In its history, the high court has reversed itself fewer than 200 times.
Justice Anthony M. Kennedy, writing for the court, said the 1953 decision “has fallen far out of step with our current strong endorsement” of federal laws that favor arbitration.
“Our conclusion is reinforced by our assessment that resort to the arbitration process does not inherently undermine any of the substantive rights afforded (investors) under the Securities Act,” he said.
Unwarranted Activism
Justice John Paul Stevens, in a dissenting opinion, accused the court of unwarranted judicial activism that ignores the will of Congress.
Joining Kennedy were Chief Justice William H. Rehnquist and Justices Byron R. White, Sandra Day O’Connor and Antonin Scalia. Dissenting with Stevens were Justices William J. Brennan, Thurgood Marshall and Harry A. Blackmun.
The case stems from a challenge by 17 first-time investors to standard brokerage contracts that order arbitration to settle all disputes.
Today’s ruling affirms a decision by the U.S. 5th Circuit Court of Appeals, which reversed a ruling by a lower federal court in Brownsville, Tex.
The investors, some of whom could not understand English, included minors, widows and people dying of cancer.
Mismanagement Claimed
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 that Deaton mismanaged separate accounts totaling $190,000 and conducted unauthorized transactions to generate commissions and profits.
Shearson went to federal court to enforce the arbitration agreements in the contracts. But the lower court cited the Supreme Court’s 1953 decision against arbitration that permitted a court suit.
The company then appealed, citing a 1987 high court ruling that said claims against brokers made under the federal Securities Exchange Act of 1934 should be arbitrated.
Kennedy said today that the 1933 and 1934 laws should be in harmony to discourage investors from manipulating complaints--allowing them to go to court if they invoked the earlier law.
