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Crush of arbitration cases from financial crisis eases


The surge of securities arbitration cases provoked by the worst financial crisis since the Great Depression is coming to an end.

Cases by investors seeking to recover losses tied to the 2007-2008 crisis are down to a trickle, lawyers say. Thousands have now wound their way through the Financial Industry Regulatory Authority’s (FINRA) arbitration system or been settled.

While some cases are still in play, the worst is over, lawyers say.

FINRA’s arbitration unit received roughly 1,190 arbitration claims from investors this year through June, according to an estimate from the regulator. If the current pace continues, about 2,400 investor cases could be filed in 2013.

As a result, the total number of cases filed by investors this year would be less than half of the 5,200 such cases that flooded the system in 2009, a post-crisis peak for such filings.

FINRA’s statistics do not reveal how many of its cases are specific to the financial crisis.

Investors, historically, file more cases when markets slump. For example, FINRA statistics show a wave of claims between 2002 and 2004. That period followed the so-called tech wreck, when a rapidly rising stock market driven by investments in risky Internet companies eventually tanked.

Investors who suffer the steepest losses during a market crisis usually have concentrated a hefty percentage of their assets in a security that fails, said Dev Modi, a securities arbitration lawyer in Florham Park, New Jersey, who represents investors. Some brokers may steer them to securities that are unsuitable because the investor is elderly or otherwise not able to take on the risk, he said. During the financial crisis, many investors got stuck in securities that became illiquid or bond funds that lost nearly all their value.

“You don’t know what bad things are going on until the market turns,” Modi said.

Investors who have not tried to recoup their losses from the credit-crisis era will likely find they are now too late. Claims are typically eligible for FINRA arbitration if filed within six years from the event giving rise to the case, such as misconduct or the sale of stock, said Scott Silver, a securities arbitration lawyer in Coral Springs, Florida.

The six-year rule “is becoming a key issue,” Silver said. Arbitrators can also apply shorter state time limits, he said.


As arbitration slows, what investing debacles will drive the next round of cases?

Wall Street’s recent bull run in stocks means that some investors are more vulnerable to crooked advice, said Jenice Malecki, a New York-based securities arbitration lawyer who represents investors. “People hear on the news that the market is rising and feel the need to get in,” she said, noting that scam artists often prey on that inclination to draw investors into Ponzi schemes and other frauds.

Alternative investments also continue to be a concern as investors chase yield in a low interest-rate environment. Massachusetts Secretary of the Commonwealth William Galvin subpoenaed top Wall Street firms last week, saying he feared the elderly were being lured into high-risk, alternative products. Galvin’s concerns include oil and gas partnerships and privately traded securities.

The bond market is another area of worry, especially if bond values continue to plunge as interest rates rise and the economy recovers.

That may not be so bad for those who have invested in individual bonds they can hold until far-off maturity dates. But the situation could be different for bond mutual fund investors, said a lawyer in Beverly Hills, California, who represents investors. Bond funds don’t mature, and rising interest rates could push bond fund values lower.


Investors paying excessive markups on their municipal bond investments could also be among those to file the next load of cases, according to Craig McCann, founder of Securities Litigation and Consulting Group Inc, an economics research firm in Fairfax, Virginia.

A markup is the difference between what broker-dealers pay to buy a bond and the price at which they sell it to investors. Many investors do not know how much that is because brokers do not disclose markups as they do commissions. Some that are too high can effectively wipe out a chunk of an investor’s interest returns, said McCann, who also testifies on behalf of investors in arbitration cases.

McCann’s group recently studied markups using a sample of 14 million trades of long-term, fixed-rate municipal bonds between 2005 and 2013. Investors were charged nearly $10.7 billion in markups. About 60 percent, $6.5 billion, stemmed from trades with excessive markups.

Recent improvements to a database run by the Municipal Securities Rulemaking Board, an organization that regulates the U.S. municipal bond market, are making it easier for the public and regulators to hone in on markups, McCann said.