They're often tougher on bad actors than public panelists are, they say

Investment News (October 22, 2007 11:01 pm) --  Industry arbitrators say the claims raised by some that they're biased against customers are just plain wrong. Critics have it "exactly backwards," said Joseph Stineman, principal of Consolidated Research LLC in New York, who is also an industry arbitrator. "I'm much more concerned [as an arbitrator] that if someone [in the industry] has engaged in malfeasance, it reflects badly on me," he said. Industry arbitrators do sometimes fight for customers, but "we think that's the exception, not the rule," said Karen Tyler, president of the North American Securities Ad-ministrators Association Inc. in Washington, which represents state and provincial regulators. Bad actors "stand out like a sore thumb" to people in the industry, said Lisa Roth, president of NRS ComplianceMAX Financial Corp. in San Diego. They come across as "arrogant, unschooled and unprofessional," said Ms. Roth, who is also an arbitrator. People in the securities business have an incentive "to get [those people] out of the industry," she said.

I certainly don't want to have someone ... tainting me with his misconduct," said Moe Jacobson, a Petaluma, Calif.-based industry arbitrator and a rep with Raymond James Financial Services Inc. of St. Petersburg, Fla.

"Until the industry arbitrator is removed, [the system will be] inherently unfair," said Ms. Tyler, who is also North Dakota's securities commissioner.

NASAA and the Public Investors Arbitration Bar Association of Norman, Okla., have been lobbying the Financial Industry Regulatory Authority Inc. of Washington and New York to stop using industry arbitrators, who are technically classified as "non-public" arbitrators.

PIABA has also proposed the idea of making use of industry arbitrators optional.

By eliminating industry influence, "we think we'd get a panel of truly neutral arbitrators who would provide investors with a fair and unbiased forum," Steven Caruso, a partner at Maddox Hargett & Caruso PC in New York and immediate past president of PIABA, said in a statement.

"FINRA fully supports industry arbitrators on the panels," said spokesman Herb Perone.

FINRA administers nearly all industry arbitrations. The "vast majority" of decisions are unanimous, Mr. Perone said, which shows that industry and public members rarely disagree on the outcome of cases.

Some public panelists don't have basic business knowledge, let alone an understanding of the securities business, according to several industry arbitrators. Nor do public members understand the more complicated products and operational issues that are often the subject of disputes, they say.

In one complex case on which she worked, Ms. Roth said, "one of the [public] panelists completely disengaged." One of her roles, she said, "is to help them stay focused."

Plaintiff's attorneys who support getting rid of industry panelists say the answer to those shortcomings is to screen and train arbitrators better. And plaintiff's attorneys say panels can get industry specifics from expert witnesses.

But not all investors can afford to bring in expert witnesses, Mr. Perone said. Other industries use experts on arbitration panels, so FINRA isn't alone in the practice, he added.

Ms. Roth said that experts from both sides inevitably disagree. "So who's going to decide?" she said.

Ms. Roth said industry panelists can help judge the credibility of expert witnesses.

If that is the dynamic, it "demonstrates the influence [industry arbitrators may] have," Ms. Tyler said. "If panelists are relying on industry arbitrators for knowledge, intentionally or not, [industry panelists] may influence them."

Others contend that they merely educate panelists. "I don't try to sway them, but I do try to educate," Mr. Jacobson said. Public members "don't come equipped with an understanding of some of the nuances and guidelines we operate under."

At least one public arbitrator likes the current setup.

"I think if you're going to have public arbitrators like myself, [industry arbitrators are] imperative," said Rita Schuman, a real estate lawyer at Greene Radovsky Maloney Share & Hennigh LLP in San Francisco. "Unless you've worked in the industry, you don't have a level of knowledge of issues that could come up," she said.

One case she sat on, for instance, revolved around the transfer of securities and dividend record dates, where it was helpful to have an industry panelist.

Ms. Tyler said that investors have been "prevailing less frequently" in arbitrations, and that is "not supporting the notion" that industry arbitrators benefit public customers.

Customers won in 42% of FINRA-run cases last year, meaning that they were awarded some money, though not necessarily the amount they had requested. That rate dropped about 10 percentage points between 2002 and 2003.

NASAA recently finished its own database of arbitration awards, and plans an "ongoing analysis" of trends, Ms. Tyler said.

Many plaintiffs' attorneys say the falling win rate may be due to the large volume of research cases that tort lawyers filed after the research scandal of 2002 broke.

Securities lawyers say that those cases tended to be weak and were smaller cases heard by one arbitrator without hearings — a format where investors tend not to do well. Nearly 9,000 cases were filed in 2003; last year, just 2,400 were filed.