TAG | disputes on Wallstreet
William D. Cohan, a former investment banker and author, for the Bloomberg View, recently wrote that there has been a fair amount written recently about various institutional cartels that are thriving in the U.S. despite antitrust laws designed to prevent their existence.
Unbeknownst to the millions of people who interact with Wall Street every day — either as brokerage customers or as employees of Wall Street firms — there is a price of admission to this world tucked deep inside the boilerplate documents that one must sign to open an account or to get hired says Cohan. This catch is a nonnegotiable agreement for when disputes arise, for example, about a bonus promised but not paid, or about a rogue broker who sticks his client’s money in a synthetic collateralized debt obligation that goes bust. The only venue to litigate the claim is a mediation or arbitration process overseen and administered by the Financial Industry Regulatory Authority, Wall Street’s powerful self- regulatory organization.
Cohan goes on to say that Finra oversees some 4,460 brokerage firms and 630,000 registered representatives, mostly brokers, traders and bankers. By signing the initial agreements — and if you don’t, you can forget about working on Wall Street or having a brokerage account with a Wall Street firm — you agree not to pursue any future monetary claim against Wall Street in the U.S. court system.
This requirement, which affects millions of people, may be the largest ongoing abdication of legal rights in America today. And there is not even the slightest effort being made to change this injustice, although there certainly should be.
How does arbitration work? Cohan writes that once a grievance has been filed with Finra, generally speaking, a three-member panel is convened in selected cities to hear the facts and circumstances around the dispute over a period of months. Unlike in a court setting, the hearing is not continuous until completion, but proceeds in fits and starts and can take longer than a year to be resolved.
Cohan writes that most of Finra’s almost $1 billion in annual revenue comes from fees paid by its Wall Street members related to regulatory, contract and dispute-resolution matters. In brief, Finra exists for the benefit of Wall Street and to advance Wall Street’s complex agenda — one component of which is disposing of nasty financial claims against it as painlessly as possible.
These arbitrators are often retired Wall Street brokers — although anyone can become one with Finra’s approval. They are paid an “honorarium” that can run into thousands of dollars per case. (No one is getting rich being a Finra arbitrator.)
The Bloomberg View article goes on to say that the arbitration process is designed to resolve disputes in a theoretically impartial way, as long as those forced into the process recognize that normal rules of evidence and procedure that exist in a courtroom are not allowed and that the arbitrator’s judgment is final and binding (except in highly unusual circumstances).
“Arbitration of disputes with broker/dealers has long been used as an alternative to the courts because it is devised as a prompt and inexpensive means of resolving complicated issues,” its website says. “Most importantly, perhaps, is the fact that an arbitration award is final and binding, subject to review by a court only on a very limited basis. Parties should recognize, too, that in choosing arbitration as a means of resolving a dispute, they generally give up their right to pursue the matter through the courts.”
Left unsaid is that monetary disputes generally must be arbitrated, leaving few other matters — such as sexual or age discrimination — to be resolved by the court system.
If you bring a complaint, what are the odds of success? From January through November 2011, a total of 4,359 cases came before Finra’s arbitrators, down from 6,601 in 2009. On average these arbitrations, if there was an actual hearing, took almost 16 months to resolve. Of the 629 cases of broker malfeasance arbitrated in 2011, Finra says 279, or 44 percent, resulted in “monetary or non-monetary recovery for the investor.”
According to a lawyer who represents plaintiffs in their battles against Wall Street, the success rate for former Wall Street employees in arbitration against their firms has been declining in recent years, with arbitrators now awarding a recovery in only about 37 percent of cases. Of those who win arbitrators only award around 13 percent of the damages sought. The majority of the cases end in no recovery whatsoever for the plaintiff. (Meanwhile when a member firm sues an employee — for, say, recovery of a loan made to finance a stake in an in-house private-equity fund, arbitrators have been rewarding more than 100 percent of the money sought, by including legal fees and overdue interest.)
Few Americans today are going to shed a tear for fired Wall Street bankers and traders. But it just isn’t right that the only way the millions of people who work at banks or do business with them can resolve their disputes is through a kangaroo arbitration system overseen by Wall Street itself.
(This very interesting article is paraphrased from the article written by William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” also a Bloomberg View columnist. The opinions expressed are his own.)
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