High Court Leaves Securities Industry Arbitration Intact


In a victory for the securities industry, the U.S. Supreme Court refused to hear a case that would overturn clauses in securities contracts that require customers to go to arbitration rather than court when they have a dispute with a broker or brokerage company.

The case, Michael J. Connolly vs. the Securities Industry Assn., also sought to require greater disclosure about arbitration agreements.

The case was filed by the State of Massachusetts, but attorneys general in 30 additional states, including California, supported the action with “friend of the court” briefs denouncing mandatory arbitration agreements as coercive and as a denial of fundamental rights.

By refusing to hear the case, the court let stand a law that upholds these contracts, which are becoming increasingly common, particularly with complex account relationships.


“Obviously, we are disappointed the Supreme Court is not going to hear the case,” said Martin Meehan, deputy secretary of state for Massachusetts. “We feel that the right to sue is a fundamental right and (brokerage customers) need to be aware of the fundamental right that they were giving up by signing binding arbitration agreements.”

The issue is a sticky one. In the past several years, more and more brokerage customers are requiring clients to sign agreements that would force them to bring disputes to arbitration panels rather than court. In arbitration, cases are heard by one- to five-member panels, made up of both securities executives and those outside the industry.

The reason brokers are requiring arbitration is simple economics, industry experts said.

Arbitration is relatively quick and cheap. Where it might take four years to take a suit to court, it takes an average of only 11 1/2 months to arbitrate, said William Bonilla, assistant director of arbitration at the National Assn. of Securities Dealers in New York. No average statistics are available for the cost of litigation. But Bonilla maintains that since arbitration takes less time, requires less disclosure and fewer legal motions, it is also substantially less expensive.

In fact, Bonilla said, some arbitrated disputes can be decided for as little as the $15 filing fee.

But some customers forced into arbitration believe that the deck is stacked against them because many arbitrators are closely affiliated with the securities industry.

“One of the real issues has been that very often the arbitration panels are drawn from people inside the securities industry,” said Ken McEldowney, executive director of Consumer Action in San Francisco. “One of the things plaintiffs have charged is they cannot get a fair arbitration panel, so the results end up being skewed toward the industry.”

Securities attorneys deny the panels are biased or that awards are unfair. If anything, they say, consumers are favored.

The few statistics that are available provide weak support for both sides.

Historically, consumers win more than half of the time, according to statistics compiled by the nation’s major stock exchanges. However, a “win” is when the consumer gets any award whatsoever. And, about 50% of these so-called winners were awarded only half of what they claimed they had lost, said Richard P. Ryder, editor of the Securities Arbitration Commentator in Maplewood, N.J.

The largest known punitive damage award to date was $1 million won by a 100-year-old woman in Scottsdale, Ariz., who maintained her broker “churned” her account--or bought and sold securities frequently in order to generate brokerage fees, Ryder said.

However, until a year ago, the value of arbitration awards was kept secret, so no one can guarantee that no bigger awards have been won.