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Legal Claims by Online Traders Are On the Rise as Market Turns Stormy

Wall Street Journal

Lots of Internet traders complain about their online broker’s service: balky Web sites, poor trade executions. Now investors are doing something about it.

Lawyers and others familiar with brokerage-industry disputes say legal claims by customers are on the rise. This year’s market turbulence may spur even more.

Linda Fienberg, president of dispute resolution at the National Association of Securities Dealers, says the number of claims tends to spike six months to two years after the market hits a rough patch. “In rocky times, people make less money and they look for someone to recompense them for their losses,” she says.

About 90% of online traders’ cases relate to technical problems customers have when trying to place a trade, says Samantha Rabin, vice president of Securities Arbitration Commentator, a Maplewood, N.J., newsletter. Some other claims are tied to so-called suitability issues: assertions by online traders that firms allowed them to take on too much risk.

Caught Off Guard

Still, despite more claims, many investors are caught flat-footed when they take legal action. Many are unaware that their online broker — like the rest of the securities industry — requires them to make their case in arbitration rather than in court. Others don’t keep the detailed records they may need to prove a case.

Deep in almost every brokerage-account agreement is a stipulation that clients must waive their right to take their broker to court if they have a dispute. Instead, all claims must go to arbitration, most often sponsored by the NASD, the parent of the Nasdaq Stock Market, or by the New York Stock Exchange. Large claims, those involving a dispute over at least $50,000, are heard by a panel of three arbitrators, including one panelist who is affiliated with the brokerage industry.

Some people have concerns about going before an arbitrator instead of a judge — and about the brokerage industry’s involvement in the arbitration proceedings. But there are advantages to staying out of court. Cases typically are resolved more quickly in arbitration (small claims often are resolved in well under a year) than in court, which can reduce the expenses you incur fighting your case. In fact, many people, particularly those with small claims, opt to pursue a case in arbitration without the help of an attorney.

Constantine Katsoris, a law professor at Fordham University in New York, says scholars and lawyers unaffiliated with the securities industry monitor the arbitration process to help make it fair for investors. Overall, 60% of cases considered by NASD arbitrators go in favor of customers and against brokers, Ms. Fienberg says.

Lawyer vs. Lawyer

Many investors, though, would be wise to hire an attorney to handle their arbitration, Mr. Katsoris says. In every case that a customer brings, the brokerage firm will be represented by a lawyer. “No matter how good you are, if you are up against a skilled attorney you really are at a disadvantage,” Mr. Katsoris says.

There are other things investors can do to improve their chances of winning a claim, and many must be considered even before they realize that they have suffered a loss. For instance, Ryan Bakhtiari, an attorney in Beverly Hills, Calif., says investors should develop a habit of printing out the information on their Web browser screen when they place an order with their online broker.

“It creates a large volume of paperwork for the customer, but that is insurance. It proves that you placed an order at that time” and at a specific price, Mr. Bakhtiari says.

If you do encounter a problem — say a technical glitch that causes a trade to go through even after you’ve canceled it (a problem many investors have had during hectic trading) — you should complain immediately, securities lawyers say. Stick with it, even if you find customer-service lines jammed, to try to be sure that your complaint is recorded. You should also complain in writing, via electronic mail and regular mail, and you should keep copies of all correspondence, lawyers say.

At the same time you are trying to get satisfaction from your online firm’s customer-service department, you may consider taking action to mitigate the effects of the technical glitch, Ms. Rabin says. In the case of the trade that was executed against your wishes, you may want to sell the stock immediately, even if that means taking a loss. Arbitrators may rule that you bear part of the responsibility for losses on the trade if losses continue to mount because you didn’t act when you discovered the mistake.

Keeping Track

Other types of printed records may be useful to you in an arbitration case. For instance, a telephone bill may help you document the amount of time that you spend waiting on hold while trying to place a trade or complain about a problem.

A good paper trail could help you resolve a case even before it reaches arbitrators. “It improves your settlement value,” Mr. Katsoris says. If a brokerage firm knows that you have done your homework and have solid evidence to pursue a case, they may offer to settle without a fight. Indeed, statistics from the NASD show that 70% of cases are settled before arbitrators make a decision.

Just because you lose money trading, of course, doesn’t mean you have a legal claim against your broker. For instance, if you lost money on a trade because your broker’s Web site was down, you may have a more difficult time winning a case if the broker can show that its telephone order lines were operating normally, Mr. Bakhtiari says. Moreover, you could have a hard time convincing arbitrators that you aren’t responsible for your own bad stock pick, even though that may be your first instinct. Says Ms. Rabin: “The last person you ever point your finger at is yourself.”