PaineWebber Forced to Pay $2.3 Million : Securities: Arbitration panel awards sum to five investors because investment firm failed to rein in one of its brokers.

An arbitration panel issued an exceptionally strong rebuke to PaineWebber Inc., ordering the brokerage firm to pay nearly $2.3 million to five investors because the firm failed to stop “egregious” conduct by a broker.

The award was unusual because it included punitive damages, more than $1.6 million, and because the arbitrators sharply criticized the firm and spelled out the reasons for the award. Arbitrators aren’t required to, and usually don’t, give reasons for their decisions in brokerage firm disputes.

The decision comes at a time when securities regulators and arbitration panels are beginning to take a harder look at top Wall Street firms that permit repeated misconduct by brokers.

A Times’ series in July disclosed that well-known firms continue to employ brokers who repeatedly cheat customers. Following the series, the Securities and Exchange Commission began an inquiry, now pending, into whether firms fail to weed out brokers who habitually violate securities rules.

The PaineWebber arbitration case involved allegations against Christopher Hodges, a broker in Sarasota, Fla., who was cited in The Times’ series. In a ruling disclosed Thursday, a National Assn. of Securities Dealers panel of three arbitrators in Tampa, Fla., found that Hodges, while at PaineWebber, printed and sent out false account statements to the five investors.

The statements were generated on his own personal computer, which Hodges used in the office, and hid losses from his improper trading in the accounts. Hodges allegedly had concentrated the investors’ holding in a single over-the-counter stock, Syntech, a stock in which he held a large position himself.

Hodges left PaineWebber in 1988 and now is a broker at Dean Witter Reynolds.

The award was the largest against PaineWebber since securities arbitration awards became public in 1989, according to the Maplewood, N.J.-based Securities Arbitration Commentator.

It was also unusual because the five investors are wealthy, relatively sophisticated investors. Arbitration panels often decline to give large awards to wealthy investors in the belief that they are savvy enough to have prevented their losses.

Stuart C. Goldberg, a lawyer in Austin, Tex., who represented the five investors, said “the significance of the decision is that wealthy individuals can recover in securities arbitration when they’ve been defrauded.”

The arbitrators said in the ruling that “Hodges committed an egregious breach of his fiduciary duty by self-dealing and providing fictitious and inaccurate reports.” The panel stated that PaineWebber “was grossly negligent in its failure to supervise Hodges in the course of this conduct.”

PaineWebber said it will appeal. Federal law, however, makes appeals from arbitration decisions extremely difficult. It generally limits the grounds for appeals to serious misconduct by arbitrators.

Robert Berson, PaineWebber’s general counsel, declined to say specifically what the appeal will be based on. But he contended the panel shouldn’t have awarded punitive damages and said it “did not consider the appropriate evidence.”

The arbitration ruling follows disciplinary action against the firm by the New York Stock Exchange in January. The exchange fined the firm and nine low-level managers $900,000 for allowing a variety of illegal activities by brokers in PaineWebber offices across the country.

A spokesman at Dean Witter, Hodges’ current employer, declined to comment on the ruling. Asked if Hodges will remain with the firm, the spokesman said: “We’re looking into the matter.”

Hodges said Dean Witter’s rules forbid him to comment. His lawyer, Terrance A. Bostic, couldn’t be reached on Friday.

Goldberg said he believes that the panel issued a large award because of testimony during the arbitration hearing, in which former Paine-Webber branch managers who supervised Hodges admitted violating the firm’s compliance policies. PaineWebber’s Berson declined to comment on the testimony.