Bloomberg (March 21, 2004) - Rick Tripi is a blue-collar worker who lives in a suburb of New York City and, like many small investors, he had high hopes of cashing in on the 1990s bull market. What happened next followed a typical scenario. His tech-rich portfolio plummeted as the decade ended, and Tripi blamed his broker for churning his nest egg into dust through unauthorized trading. He brought a claim against Prudential Securities Inc. (PRU) before an arbitration panel administered by the NASD, the forum investors are required to use in such disputes. The panel found Prudential liable but, without explanation, awarded just $25,000, or 3% of his $800,000 loss. Says Tripi's lawyer Neal Brickman: "I thought they accidentally left off a zero."

Brickman asked the arbitrators for an explanation. They refused. An appeal to the U.S. District Court in Manhattan followed, and what happened next deviated sharply from the usual pattern, in which arbitration awards are rarely overturned. Instead of swiftly upholding the panel's verdict, Judge Shira A. Scheindlin demanded to know the reasoning. Noting the "strong evidence" of Prudential's liability, the judge ordered the panel to justify its "incomprehensible" decision, which, she said, she would have tossed out if it were a jury verdict. Said Scheindlin: "Such a meager award shocks the conscience of this court." (A Prudential spokesman declined comment on the case, which is still pending before Scheindlin.)

The judge's blistering opinion, which has sent shockwaves through the securities bar since it was handed down last September, is but one example of mounting doubts about the fairness of securities arbitration. The grievances? Arbitrary, unexplained decisions. Biased arbitrators and pro-investor panelists unfairly kicked off the NASD roster. Stonewalling of document requests. Proceedings that drag on through many hearings held weeks apart.

Is the arbitration system meting out justice to investors? It is an issue that is likely to receive increasing attention in the months ahead, as claims against brokers set all-time highs. In 2003, investors filed a record 8,945 arbitration cases with the NASD -- 14% more than in 2002.

In theory, Americans have a constitutional right to demand a jury trial for any dispute involving $20 or more. But standard brokerage-account agreements require investors to bring any dispute with brokers to arbitration panels, most of which are administered by the NASD, which regulates brokerages. (A far smaller number of arbitrations are handled by the New York Stock Exchange.)

COLD COMFORT. Over the years, the arbitration system has been applauded by the securities industry as a cheap, quick way to adjudicate disputes. Securities industry lawyers note that the system is particularly efficient in quickly disposing of meritless cases, in which brokers are unfairly blamed by customers for their market losses. And in some high-visibility cases -- such as claims by some A.G. Edwards & Sons Inc. (AGE) clients -- investors have eventually gotten justice. But claimant lawyers complain bitterly that despite reforms in recent years, the deck is still stacked against investors in the vast bulk of cases. "There's an overwhelming industry bias," says Michael F. Bachner, a New York attorney who represents brokers and investors alike.

The NASD statistics offer cold comfort for investors. The regulator says arbitrators make at least some monetary award in 54% of cases. But claimant lawyers scoff at that figure, noting that cases awarding even a fraction of an investor's losses are counted as wins -- and the NASD doesn't publish data on the dollar value of awards as a percentage of the amounts claimed.

Indeed, one chronic beef raised by investor lawyers is that arbitrators rarely award the full amount even when the proof of damage is overwhelming. Barry D. Estell, a Kansas securities lawyer, says: "Arbitration panels don't care what the law is. There's an 'NASD common law' -- your client never gets over half his money back, even in the worst of cases." Linda D. Fienberg, president of the NASD Dispute Resolution, rejects such complaints and maintains that investors are fairly treated.

Wall Street has seen the arbitration system work to its advantage in cases arising from the analyst scandals. As recently as a year ago, lawyers and the NASD officials predicted that as many as 4,000 additional cases would be filed in 2003 alone as a result of the scandals. But brokerages fought the initial cases vigorously, declining to settle as had been widely anticipated, and won the first cases that went to arbitration -- thus discouraging further claims. "Wall Street's not going to roll over and play dead," says Charles W. Austin Jr., a Richmond (Va.) securities lawyer and president of Public Investors Arbitration Bar Assn., an organization of investors' lawyers.

The analyst cases to date, like most arbitrator rulings, have resulted in terse decisions that give little clue to the reasoning behind them. No wonder: The courts have long held that arbitrators need not explain their decisions, which are subject to reversal only if they make gross legal errors -- "manifest disregard" of the law. Lawyers say the ruling in the Tripi case, if upheld on appeal, could give lawyers new grounds to force arbitrators to justify their rulings and open the door to legal challenges of awards if they cover only a portion of proven losses.

ACCUSATIONS OF BIAS. Any change that encourages appeals is anathema to defenders of securities arbitration, who favor its informality and low cost. However, critics note that such traits have already been eroded by defense-lawyer tactics. In theory, claimants benefit from an absence of legal technicalities. But Austin and other investor lawyers complain that brokerage lawyers frequently file pre-hearing motions that are not authorized by the rules, driving up investors' legal bills.

The NASD's Fienberg acknowledges that abuses occur and says the NASD is working to put a stop to them. But she vigorously denies defense-lawyer accusations of unfairness and maintains that participants in arbitrations are generally satisfied with the process.

One common complaint of attorneys for investors, concedes Fienberg, is that brokerages frequently stonewall investors in their requests for documents that they need to pursue their cases. Fienberg, however, says the matter is well in hand. She notes that on Jan. 12, the NASD issued a public notice reminding arbitrators that they can impose sanctions for failure to comply with the NASD discovery rules. Austin says it's too early to say if the notice will have any effect. Investor lawyers say sanctions are only rarely imposed -- and brokerage attorneys know it.

Also vexing to investor lawyers are arbitration hearings that drag out over a large number of separate sessions, sometimes weeks or months apart. That can have the effect of wearing down investors and ratcheting up their legal bills, as well as the $400-per-session fees for each arbitrator -- defeating the supposed speed and low cost of arbitration. Fienberg, however, maintains that adjournments can be required for legitimate reasons, and she does not believe excessive numbers of sessions are a serious problem.

The NASD is also seeking Securities & Exchange Commission approval for rules addressing another investor-lawyer beef. Motions to dismiss claims are frequently sought by brokerage firms as a way of short-circuiting the arbitration process completely. These motions are not specifically addressed in the current rules. The new rules would allow them under rare circumstances. But some investor lawyers say the NASD should ban such motions.

A new and troublesome entry to the litany of complaints about the system goes to the heart of how arbitrators are hired -- and fired. A handful of the 7,000 NASD arbitrators have publicly complained that they have been stricken from the rolls of potential panelists because they have a pro-investor bias or otherwise have antagonized the NASD. The claims were first reported in the newsletter Securities Week, which, like BusinessWeek, is published by The McGraw-Hill Companies (MHP).

WHO GETS TO BE A PANELIST? One ex-arbitrator, Florida investor attorney Allan J. Fedor, says that he was removed from the NASD arbitration roster without explanation after he sat on a panel that criticized the NASD for not complying with a subpoena. Other arbitrators have publicly complained about being arbitrarily yanked from the rolls, with one saying he was pulled from the roster after he complained about the pro-industry bias of another arbitrator. Fienberg says she cannot comment on any specific arbitrator's removal but adds that the NASD "reviews arbitrator rolls constantly" and weeds out arbitrators only for just cause -- such as rudeness or being chronically late to hearings.

Where does the truth lie in the war of words between the Wall Street arbitration system and its critics? Perhaps, as is so often the case in arbitration decisions, somewhere in between. But if even half of the accusations against the arbitration system are correct, Wall Street's preferred system of justice is in pretty sorry shape. By Gary Weiss, with David Serchuk, in New York