Some may call it "chicken feed," but the global Wall Street settlement includes a $387 million restitution fund for investors who lost money due to fraudulent analysis. So how does one go about claiming one's share? And is this the only recourse? Here's a look at the basics, and a Q&A with a lawyer who represents investors.

Frontline (PBS) (May 8, 2003) -- No day in the past year has held as much potential for aggrieved investors as April 28, 2003, the day securities regulators unveiled a broad settlement with 10 Wall Street firms over alleged wrongdoing. In a crowded briefing room at the Securities and Exchange Commission, New York State Attorney General Eliot Spitzer announced reforms aimed at curbing conflicts of interest on Wall Street.

Meanwhile, far in the back of the room, staff members unloaded reams of documents collected during the investigations. This evidence was what investors and their lawyers had been anticipating for months -- the internal documents that would launch a thousand lawsuits.

"What we have done is create ... an opportunity, given the evidence that is being released, for every investor to make his or her case," intoned Spitzer.

With this chapter in the investigation of Wall Street closed, the onus now falls on individual investors to file claims to recoup their losses. The evidence released on April 28 will be a significant asset, but it will be up to investors to determine how they will use it. Many may be eligible to receive money from a $387 million restitution fund created as a part of the settlement. Investors can also file claims in securities arbitration, a process widely used in the securities industry to resolve disputes outside of the court system. Although many details of the restitution fund are still unclear, regulators have said that investors will be able to both file arbitration claims and receive payment from the fund.

For investors who would like to try their case in court before a jury, the prospects are dim. The fine print in the brokerage contract customers sign when they open an account usually includes a binding agreement to bring all disputes to arbitration, preventing the customer from bringing individual action in the courts.

"Most customers do not understand that they are agreeing to arbitrate," says James Cox, an expert in securities arbitration at Duke University. "They have a lot of faith in the person shoving this piece of paper under their nose. Otherwise they wouldn't be there."

One exception to the agreement is class-action. Investors can join a class-action complaint instead of arbitrating, but experts agree that class-actions usually return only 5 or 10 cents on the dollar -- much less than a customer might be awarded in a similar arbitration complaint. Since an investor cannot pursue both, most individuals stick with arbitration.

"Arbitration is a Completely Different Animal"

Regulators are bracing for an onslaught of new arbitration claims in the wake of the global settlement. NASD Dispute Resolution, a subsidiary of the National Association of Securities Dealers, which handles the majority of the claims, plans to hire more staff, rent more office space and recruit additional arbitrators to prepare for thousands of new claims arising from the settlement. Filings at NASD are already up 24 percent over the first quarter of last year.

Investors will have to become familiar with the process of arbitration, which differs markedly from the familiar proceedings of a court case.

"Arbitration is a completely different animal," said Tracy Stoneman, a Colorado Springs attorney who represents investors and serves as an arbitrator with both NASD and NYSE. Arbitration follows few of the procedural rules of court cases and relies very little on precedent. Both factors tend to make the system more reliant on the facts of a particular case, perceptions about who is telling the truth, and the gut feelings of the arbitrators.

Arbitration is typically faster and less expensive than trying a similar case in court. The phase known as discovery, where lawyers investigate the facts of the case, is scaled down, which has the effect of shortening the time needed to carry out the arbitration. The brokerage industry subsidizes the proceedings, further lowering the expense to investors.

About half of NASD cases settle, meaning that the parties are able to come to an agreement before the arbitration hearing. Others continue on to an arbitration hearing where the case usually is decided by a panel of three arbitrators -- two representing the public and one from the industry. Of the public representatives, about 60 percent are lawyers, 20 percent are accountants, 20 percent are academics and 20 percent fall into sundry categories -- teachers, retirees, dentists -- estimates attorney Seth Lipner, former president of the Public Investors Arbitration Bar Association. Industry arbitrators tend to be current or past employees of securities firms.

In the simpler proceedings of arbitrations, small investors may even be able to represent themselves. "Arbitrations are very informal, the rules of evidence do not apply," said Linda Fienberg, president of NASD Dispute Resolution. "If someone who is not an attorney wanted to represent herself, it's much less intimidating than being in court." For claims of more than $50,000, NASD recommends getting an attorney.

Fortunately, finding representation in arbitration is much easier than in similar litigation. Several groups of lawyers around the country, most notably Boyd Page in Atlanta, are bundling small claims together with the intention of sending them into arbitration en masse. Larger claims can be filed individually. Tom Ajamie, a Houston attorney credited with winning the largest securities arbitration award in history, says he is taking cases with losses of $300,000 and up.

The flood of new claims has attracted less experienced lawyers into the market as well. Seasoned securities lawyers caution investors to watch out for trial attorneys seeking to cash in on arbitration claims. Their experience in court may not translate into an effective strategy in arbitration.

The Fine Print

The binding arbitration clause came into widespread use following a Supreme Court decision in 1987. In the case of Shearson/American Express, Inc. v. McMahon, the Court reversed an earlier interpretation of federal securities law that granted all investors the right to a jury trial. Brokerage firms suddenly could insert binding arbitration agreements into the paperwork signed by investors.

"That opened the floodgates," says Cox. "Overnight we found every brokerage firm in America included in very fine print in the back of their contract a nonnegotiable arrangement that you agree to arbitrate any issue you have with your broker or brokerage firm."

The Court's decision was a victory for the securities industry. Investors would have to pursue action against their brokerage house through the industry's own self-regulatory organization, which operated under the oversight of the SEC.

Critics contended that the process was stacked against investors. Immediately following the Supreme Court decision, the SEC enacted reforms to make arbitration fairer to consumers. But by the mid-'90s, the process again needed revisiting. A panel headed by former SEC Chairman David Ruder proposed more than 70 changes, including beefing up the discovery phase and adding a fast, bare-bones procedure for small claims.

"I think that with the changes which have been put in since our report, that the NASD system is as fair as you could get to the small investors," says Ruder.

However, in spite of the reforms, many still find fault with the arbitration process, especially with the practice that the arbitrators state the amount of an award without explaining how they arrived at their decision.

"The parties deserve to know how the arbitrators came to their decision to see that there was a rationale behind it," said David Robbins, a partner in the New York City law firm of Kaufmann, Feiner, Yamin, Gildin & Robbins. "So even if you've lost, you know why you lost."

Another concern is the inadequacy of the discovery phase in which lawyers collect information pertaining to the case. If a brokerage firm does not cooperate with a claimant's request for documents, there is little an arbitrator can do. Unlike judges, they cannot levy fines or hold people in contempt. They are relatively powerless. As a result, claimants must often resort to other means to obtain useful documentation.

That's where the evidence released last week by regulators comes in handy. Spitzer and other regulators have done the legal legwork that will form the basis of many arbitration claims. "When the attorney general of New York went in, they said 'Give me all your e-mail records.'" recalls Ruder. "They spent hours and hours looking through all the e-mail records and finally they found what we sometimes call a smoking gun."