Securities Arbtration Part I: a Hypothetical Securities Arbitration Case

• Publication year: 1998
• Pages: 61
• Citation: Vol. 27 No. 9 Pg. 61

27 Colo.Law. 61 Colorado Lawyer 1998.

1998, September, Pg. 61. Securities Arbtration Part I: A Hypothetical Securities Arbitration Case

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61

Vol. 27, No. 9, Pg. 61

The Colorado Lawye
September 1998
Vol. 27, No. 9 [Page 61]

Specialty Law Columns
The Civil Litigator
Securities Arbtration Part I: A Hypothetical Securities Arbitration Case
by Tracy Pride Stoneman

Column Ed

Richard L. Gabriel of Holme Roberts & Owen, Denver - (303) 861-7000

Those wishing to submit articles for publication are encouraged to call the column editor. This month's article was written by Tracy Pride Stoneman, a sole practitioner in Colorado Springs, (719) 540-2211

Editor's Note:This is the first part of a two-part article on the basics of securities arbitration. This Part I discusses the various types of securities arbitration cases how to spot them, and the causes of action alleged in them. It then describes the arbitration process, including the role of arbitrators, the arbitration award, and the expert witness. Part II, to be published in the November issue, will present the nuts and bolts of a securities arbitration case - the preliminary groundwork, deciding where to file the claim, choosing the arbitration panel, conducting limited discovery, and the arbitration itself.

Since 1987, when the U.S. Supreme Court deemed it acceptable to require every customer who opens a brokerage account to sign away his or her right to a jury trial,1 an entire practice of law has emerged: securities arbitration. With the emergence of this new practice came an attorney organization for the practice (the Public Investors Arbitration Bar Association, or "PIABA"), a detailed publication that assimilates and analyzes arbitration awards (the Securities Arbitration Commentator, or "SAC"), and a plethora of non-attorney organizations promoting customer representation in arbitrations.

Types of Securities

Arbitration Cases

Securities arbitrations are either between the stockbroker and the brokerage firm2 or between the customer, on the one hand, and the broker and firm, on the other.3 At the most elementary level, typical complaints or concerns that may be voiced by clients or potential clients are:

"I was sold an investment that did not work out."

"My brokerage account keeps going down and I don't know why."

"Someone is managing my money and I don't feel comfortable with it."

"I am getting confirmations of trades, but my broker never calls me."

"There seems to be an awful lot of activity in my account."

Comments such as these may be an indication of securities fraud. Additional "red flags" include:

Losses - Attorneys should be wary of large losses in the accounts of clients who have limited assets, who are recent widows, or who recently inherited funds. They also should be alert to a client who expresses surprise at losses because of the broker's continuing assertions that the client had been making money.

Return of Principal - The broker may have led the client to believe that the client's principal is safe and intact when, in fact, it is being depleted through distributions that the client believes are income. The brokerage statements will not reflect this fact; only the 10Ks and annual reports of the investment will.

Large Amounts of Capital Gains - The broker may be actively trading the account, thereby creating capital gains that are unnecessary. The client may be unaware of the tax ramifications of this practice because the taxes paid are not taken out of the brokerage account. Large amounts of capital losses also can be a red flag.

High Concentration in Certain Types of Investments/Lack of Diversification - A large percentage of funds in any one investment or type of investment increases the risk of the portfolio. The saying "Don't put all of your eggs in one basket" generally holds true.

Major Shift in Investments - If the client is in municipal bonds and suddenly begins trading index options, this, too, may suggest a problem. When such a major shift occurs, there should be a corresponding change in investment objectives.

Allegations made in a securities fraud arbitration are no different than those that could be alleged if the case were in court, namely, fraud, negligence, breach of contract, breach of fiduciary duty,4 violations of the Colorado Consumer Protection Act ("CCPA"),5 and violations of state and federal securities acts.6 Three of these causes of action - fraud, negligence, and breach of contract - are discussed below.

Fraud

Allegations of fraud are common in securities arbitrations. Interestingly, the majority of arbitrations alleging fraud revolve around omissions by the stockbroker, as opposed to outright misrepresentations. Stockbrokers often overlook the necessity of revealing the downsides to an investment for fear that the risks will dissuade the customer from authorizing the purchase. Because stockbrokers are paid solely on commissions from buys and sells, an inherent conflict of interest exists: if the customer does not authorize the buy, the broker does not make the commission.

The anti-fraud provisions of the federal securities laws require a stockbroker to apprise a customer...