(May 10, 1997) -- I keep hearing from readers _ some livid, some anguished _ who say they've been abused by the securities industry.

First, they lost serious money because their stockbrokers misled them in some way. When they took their complaint to arbitration, they say they were bullied by arbitrators who treated their losses as all their fault.

I haven't been able to witness a securities arbitration. The industry keeps the press and other outsiders away. Two friends who have served as arbitrators think the cases they heard were handled fairly, impartially and with respect.

But these readers tell me quite different stories. I hear about cruel questioning, arbitrators who nap, arbitrators who refuse to examine evidence, and panels that are openly biased in favor of the brokerage firm.

They're a minority but they're there. ``We see repeated appointment of arbitrators who are domineering and obnoxious,'' says attorney David Shellenberger. ``These people continue to serve despite negative evaluations by lawyers and fellow arbitrators.''

Industry officials treat these as exaggerated tales by customers who are sore because they lost their case.

But maybe they have a right to be sore. Arbitrations are secret trials before judges who aren't publicly accountable for what they do.

Customers of brokerage firms almost always have to agree to take disagreements to arbitration. In most cases, you'll have to use an industry-sponsored forum. The vast majority go to the National Association of Securities Dealers or NASD.

A panel of one or three arbitrators hears the dispute. Each side tells its story, offers evidence and presents witnesses. Several months later, the NASD announces the decision, without explaining why the panel reached that conclusion. In most cases, you cannot appeal.

Arbitration panels, by the way, can and do ignore sections of the securities laws that were written to protect consumers. They often take the attitude that it's ``buyer beware.''

By the industry's count, customers ``win'' in arbitration about half the time. But what's a win? Consider the following real case:

An investor opened a brokerage account through an independent investment adviser, stating his objective as capital appreciation, not speculation. The adviser sank all the money into options and lost around $500,000. The brokerage firm had spotted the problem but didn't tell the investor about it.

The arbitrators agreed that the brokerage firm was negligent. But, blaming the victim, one panel member said that the investor ``just wanted to get rich.''

The investor was awarded $100. Because he received that paltry sum, the industry called the case a win. In a report released in January 1996, a commission headed by former Securities and Exchange Commissioner David Ruder recommended more than 70 reforms. The NASD is moving ahead on several of them.

But none is more important than reforming the system for picking arbitrators, says attorney Rosemary Shockman, president of the Public Investors Arbitration Bar Association (888-621-7484).

Although many fair-minded people serve as arbitrators, the panels are often perceived as tilting toward industry. Shockman says she has presented cases before arbitrators so bad that ``we walked into the room every day in a cloud of bias.''

A Massachusetts stockbroker and arbitrator, who doesn't want to be identified, says he knows arbitrators who deliberately try to limit customer awards so the industry will keep asking them to serve.

To reform this process, NASD would maintain a list of potential arbitrators. When a case came up, the NASD would give the parties the next 15 names on the list. The parties could strike as many as they want and rank the rest in order of preference. If a panel couldn't be created from this list, the NASD would appoint one.

That worries the consumer lawyers, who don't want the NASD to have any discretion over who's on the panel.

That wouldn't happen, says Linda Fienberg, the NASD's chief hearing officer. The people appointed would be the following three on the list, so no preference could be shown.