A recent state court ruling could allow some California investors to pursue legal claims against brokerages in court rather than before industry-sponsored arbitration panels.
The decision last week by an appellate court in Los Angeles marked the latest chapter in a battle between the state and the securities industry over ethics standards for arbitrators.
“For people who want to go to court, this could be their get-out-of-jail-free card,” said Jeff Riffer, a partner at Jeffer Mangels Butler & Marmaro in Century City.
The brokerage industry in 1987 won the right to force customer disputes into arbitration, denying aggrieved investors the right to sue. The arbitration process is managed by the NASD, formerly known as the National Assn. of Securities Dealers, and the New York Stock Exchange.
Because of a year-old fight between the state and the industry, however, some California investors have been unable to get hearings before arbitration panels. The ruling by the state 2nd District Court of Appeal opens the possibility that one such investor could have his case heard in court.
Investor attorneys have long complained that arbitration favors brokerages, and say investors stand a much better chance of winning cases in state and federal courts.
The court ruling could be welcome news to the scores of Californians pursuing claims against investment firms after the bear market and spate of Wall Street scandals.
However, the right to go to court, even if upheld for other investors, probably would last only until the larger legal battle between the state and the securities industry is resolved.
At the heart of that dispute is an ethics law passed by the state Legislature. It took effect last year, forcing arbitrators to give extensive disclosure of their financial dealings and other potential conflicts of interest. The goal was to give investors more information about the individuals chosen to sit on arbitration panels.
The disclosures exceed NASD and NYSE requirements, and the two organizations objected that the California standards were overridden by federal law. The high-stakes clash now is being played out in two pending federal court cases.
In the meantime, the NASD, which hears an estimated 90% of securities arbitrations, has required Californians who want in-state hearings to waive their rights to the new ethics law. Those who refuse can have arbitration hearings in other states.
Some California residents have filed legal challenges claiming that, in effect, the NASD has refused to provide hearings, thus giving them the right to go to court. In many cases, judges have ruled against investors, said Mark Borenstein of Overland & Borenstein in West Los Angeles.
That happened to one of Borenstein’s clients, Jordan Alan. The Los Angeles man filed a complaint in Los Angeles County Superior Court against UBS Financial Services (formerly UBS PaineWebber) after refusing to waive the California ethics-disclosure rules or agree to leave the state for a hearing.
UBS tried to force the case to arbitration, and a trial judge agreed in December.
But the appellate court last week overruled that decision, saying that, as long as California is the “proper location,” Alan’s case should stay in court.
The appellate court ruled that the dispute should be heard in a “reasonable and just” location. If an out-of-state location meets that criteria, an arbitration should be held there, the decision said. But if California is the proper location, the case should be in court, it said.
The appellate court sent the case back to the trial court to determine the proper location. UBS declined to comment.
An NASD spokeswoman said that because the NASD was not involved in the case, the decision applies only to Alan. She added that the appellate court said it was not dealing with the larger issue of whether California can force compliance with its stricter ethics rules.
Because Alan lives in Los Angeles and the alleged wrongdoing occurred there, the trial court is likely to say that’s the proper location, investor attorneys said.
That could set a precedent for scores of other Californians in similar circumstances, Borenstein said.