Ruling to Help Brokerages That Face Investor Lawsuits

Investors will have more trouble winning damage awards in disputes with brokers under a federal court ruling that strengthens the hand of the securities industry.

The U.S. 2nd Circuit Court of Appeals has ruled that arbitrators can’t award punitive damages in New York state. The decision is important because of a growing trend to penalize brokerage firms beyond just reimbursing wronged investors.

In the last four years, punitive damages totaling as much as $20 million have been awarded in about 70 arbitration cases, said Richard P. Ryder, editor of Securities Arbitration Commentator, a Maplewood, N.J., newsletter.

“There’s been sort of an unexpected proliferation of punitives,” said William F. Fitzpatrick, general counsel for the Securities Industry Assn., a trade group.

The court decision Monday was restricted to New York state law, which prohibits punitive damages in arbitration cases. Federal law permits punitive awards.

The court said that unless a brokerage contract specifically permits punitive damages, New York law applies.

It was unclear whether the decision would be appealed further.

Because most big brokerages are based in New York, the greatest percentage of cases are decided there. Also, many firms based outside the state require investors to sign contracts saying that arbitrations will follow New York law.

Punitive damages are awarded to punish defendants and deter them from future wrongdoing. They are issued in addition to compensatory damages, which repay actual losses.

The issue of punitive damages has dominated securities arbitration talk of late. Brokerage firms are upset about paying large awards in cases where investor losses are small.

The largest punitive award was for $1.7 million in a 1988 case in Florida against Dean Witter Reynolds Inc.