Complaints about botched trades are up 1,200% since ’97

BloombergBusiness (June 18, 2000) — Online brokers love to boast about the growing number of online trading accounts. But there’s one statistic the industry would like to keep secret: Investor complaints against online brokers are rising about four times faster than account openings. Last year, the number of online complaints skyrocketed to 3,000–a 200% hike over 1998 and a 1,200% jump over 1997, says the Securities & Exchange Commission.

The SEC says investors are unhappiest about tech glitches–the inability to gain access to accounts for long periods of time, or delays in execution because of system outages. But investors also are increasingly upset about lack of response from brokers when trading problems arise, and because of what they see as the failure of online brokers to get the best price on stock orders. With online trading systems straining under the weight of 15 million accounts, there are plenty of plain-vanilla errors in order-processing.

The latest wave of complaints concerns last April’s market meltdown. The rapid decline depleted the margin accounts of many investors who had borrowed from their broker to buy shares, prompting some brokers to sell the shares before investors had a chance to replenish their accounts. Steven Caruso, a New York securities lawyer, says he’s about to file 13 arbitration cases against online brokers for allegedly “selling out” customer accounts without their permission. For example, Caruso will charge that brokers sent midnight e-mails, warning customers they had to replenish their margin accounts. But, he alleges, brokers went ahead and sold the investors’ shares early the next morning before they had a chance to respond. In other cases, Caruso claims, customers received no notice at all. Caruso concedes that online brokers almost always obtain an agreement that allows them to sell out accounts to meet a margin call–often without giving notice–but he thinks arbitrators may side with his clients anyway because such clauses are “unfair and unreasonable.”WRITE PROMPTLY. These days, getting an online broker to listen to a complaint–let alone resolve it–can take hours, if not days. And once the process is rolling, many investors feel the scales of justice are tipped heavily in the broker’s favor. To open an account, customers must pledge to resolve disputes through mediation or arbitration panels, and not through the courts.

So what can you do if you’re losing money and think your online broker is at fault? Your chances of getting a satisfactory resolution improve greatly if you promptly file a written complaint (not an e-mail) with the broker. Give as much supporting evidence as possible, such as details about the trade, the date and amounts involved, and copies of any sales confirmation, monthly statements, or other correspondence. If you don’t get a response within two weeks, follow up immediately with a second letter.

At the same time, send your complaint to the regulatory arm of the National Assn. of Securities Dealers (NASDR). Use the Online Customer Complaint Form available on NASDR’s Web site (table). While NASDR might not be able to get your money back–its focus is mainly determining compliance with industry rules–it can investigate whether your broker violated the rules and whether to bring a disciplinary action.

Be sure also to send a copy of your complaint to your state securities regulator, which licenses brokers to do business in the state and can skip a lot of red tape. The North American Securities Administrators Assn. Web site maintains a list of state regulators and contact information. “We like complaints,” says Robert Terry, Georgia’s Securities Division Director and chairman of a NASAA electronic trading project. “Absolutely every complaint is investigated.”

If you can’t resolve the matter this way, or if you are seeking compensation or damages, the next step is mediation. This is an informal, voluntary process in which a neutral party helps both sides negotiate a mutually acceptable outcome. Mediators can be chosen by the disagreeing parties from a NASDR-approved list–there are about 850 mediators nationwide–or NASDR can appoint one based on qualifications you name. But investors have veto power over who the mediator is. Check the NASDR Web site for a list of regional offices and stock exchanges that offer mediation services. Mediators are usually professionals, such as accountants and lawyers, who undergo special training to handle securities cases.

Investors like the mediation process because they aren’t bound by the outcome. The process is meant to be non-confrontational, inexpensive, and quick. Of 5,500 claims handled by NASDR last year, about 20% went through mediation, says Kenneth Andrichik, NASDR’s director of mediation. “We designed it to be user-friendly,” he says.

Still, mediation won’t satisfy everyone. If you’re still at odds with your online broker, arbitration is your next option. This is a more formal means of dispute resolution that is used to determine liability and damages. An impartial person or panel,nagers have been hired since January, 1999, says John M. Renfro, senior vice-president of human resources. “It’s a completely different company,” says one former exec. “It has matured.”

Since then, Waitt and Weitzen have worked as a tag team. Waitt handles long-term strategy and chairs the board of directors. Weitzen handles execution. Each has his areas of expertise. Waitt knows more about Internet content and e-commerce. Weitzen understands more about communications and big-time dealmaking. Day toiling fee and a $750 hearing fee for a panel of three arbitrators. But arbitrators can require one side or the other to foot the whole bill.

Arbitration is coming under scrutiny from Capitol Hill lawmakers. Representative John Dingell (D-Mich.) is awaiting the results of a General Accounting Office report, due in mid-June, on whether investors are treated unfairly in arbitration proceedings.

Because arbitration is adversarial, it’s a good idea to have a lawyer represent you. The Public Investors Arbitration Bar Assn. has a list of lawyers who specialize in this area. Look for one who will take your case on a contingency-fee basis.

If you don’t want to hire a lawyer, and your claim is below $50,000, consider a securities arbitration clinic. Cases are handled mostly by New York-based law students working under the supervision of law-school faculty. The New York courts authorize the clinics to operate, but even non-New Yorkers can request help.

If all else fails, litigation is a last resort. But getting your case heard by a judge or jury isn’t easy because of the arbitration clause in account agreements. Lawsuits are possible if you allege broker fraud. Just be aware that federal securities law requires you to bring a court action within one year of the date you should have discovered the alleged wrongdoing.

The deck may seem stacked against investors, but investors aren’t powerless. They just need to know when and where to apply the pressure.