by Brian Wolfman
Michele Singletary reports in today's Washington Post about a study of securities arbitrations conducted mainly under the auspices of the National Association of Securities Dealers (NASD). The study looked at arbitrations from 1995 to 2004. (Most investors are subject to mandatory arbitration and cannot go to court to litigate their individual securities claims.) During that 10-year period, both the win rate for investors and the amounts recovered as a percentage of the claim dropped fairly dramatically. The entire study is available here.
The Post article discusses a number of possible reasons for these results, including most prominently that three-person NASD arbitration panels include someone who is working for or has ties with the securities industry. One of the authors of the study, Daniel R. Solin, a securities arbitration attorney and registered investment adviser, is quoted as saying that "[t]his study paints an alarming picture of a steadily worsening situation for investors who have no alternative to securities arbitration administered by the very industry that they are suing."
Here's a synopsis of the study's findings from the Post article:
[T]he win rate for investors in securities arbitration cases dropped to 44 percent in 2004 from a high of 59 percent in 1999. When it came to their claims for damages, investors were awarded 22 cents on the dollar in 2004, as a percentage of the amount claimed, compared with a high of 38 cents in 1998. (Ninety percent of the cases reviewed went through the NASD arbitration process.) The recovery percentage plunged to 12 percent for claims of more than $250,000. The larger the award and the bigger the brokerage firm, the smaller the recovery . . ..