“Stung by massive stock-market losses and emboldened by the intense regulatory attack on Wall Street, investors are expected to file a record number of arbitration claims against brokers this year,” writes Ruth Simon in today’s Wall Street Journal.

“The average payouts going to miffed investors are getting higher, too. Stockholders typically win only slightly more than half of the cases that go to arbitration. But the amount being awarded investors is soaring — $69 million in just four months this year, compared with $139 million for all of 2002. The size of arbitration disputes also has risen, with some attorneys saying that many more million-dollar-plus claims are being filed.”

“Arbitration hearings, not lawsuits, are the usual remedy for investors when they feel wronged. When investors open a brokerage account, they generally waive their right to sue and agree to arbitrate any complaints against the broker. The hearings are conducted mainly by panels administered by the stock exchanges.”

“The recent wave of Wall Street scandals is expected to spur an even more dramatic increase in investor complaints. Ten of the biggest brokerage firms on Wall Street recently settled a $1.4 billion case with state and federal regulators over analyst conflicts of interest surrounding stock recommendations. Regulators have voiced encouragement for aggrieved investors to file claims and have placed key e-mails and other documents for building a case against the brokers in the public domain.”

“The surge in arbitration is a byproduct of the collapse of the bull market, which has bled some $6 trillion in paper wealth from investors since early 2000. Investors poured into technology stocks when stock prices were climbing and suffered huge losses when share prices collapsed. Accounting fraud at companies such as WorldCom Inc. magnified investors’ losses. Now many are blaming brokers for putting them in technology stocks or not getting them out before the bubble burst”

“For years, arbitration panels had the reputation of being stacked against investors, in part because the panels include securities-industry representatives. Plaintiffs historically had a difficult time getting documents from securities firms. Even when successful, plaintiffs often received relatively small awards.”

“Now, the string of revelations about Wall Street misconduct may be contributing to a shift in the attitude arbitrators bring to the process. ‘It no longer stretches possibility that the brokerage firm did wrong,’ says Robert Uhl, an attorney in Beverly Hills, Calif., who represents investors.”

“Some plaintiffs attorneys say arbitrators are increasingly willing to award investors the full amount they lost, rather than a portion of their losses. At the NASD, arbitration panels have awarded investors an average of $241,000 in the first four months of this year, compared with $104,000 in all of 2000. The figures don’t include payments made as part of settlements, which is how more than 60% of all arbitration cases are resolved.”