A new study of securities arbitration cases in the United States finds that individual investors who are compelled to rely on industry-run securities arbitration to resolve their claims against stockbrokers are winning fewer cases and recovering less money in the process.

The study looked at 14,000 National Association of Securities Dealers and New York Stock Exchange securities arbitration cases from 1995-2004. It concludes that individual investors fare particularly poorly if they have major claims and/or are customers of large brokerage firms. The raw win rate for investors in arbitration has dropped from a high of 59% in 1999 to 44% in 2004, including a lower win rate (39%) at the three largest brokerage firms that do business with the largest numbers of investors.

Also, it found, that award percentages reached a high in 1998 of 68% and have steadily declined to stabilize at approximately 50% in the 2002-2004 time period. Investors in arbitration were awarded 22¢ on the dollar in 2004 (as a percentage the amount claimed) versus 38¢ on the dollar in 1998.

The larger the award and the brokerage firm involved, the smaller the recovery, it also noted. “Claimants in arbitrations against top 20 brokerage firms face an expected recovery percentage that is approximately 28% in claims under US$10,000. The expected recovery percentage plunges to approximately 12% in claims over US$250,000.”

Finally, it found that award requests increased significantly over the entire period while average awards remained nearly constant. In 1998, the average award was US$56,000 while in 2004 it was US$59,000. “This 6% increase in real awards is dwarfed by the difference in award requests, which rose over 300% from US$168,000 in 1998 to US$540,000 in 2004.”

“This study paints an alarming picture of a steadily worsening situation for investors who have no alternative to securities arbitration administered by the very industry that they are suing. This process clearly does not have the perception of fairness. There may be innocent explanations for the fact that the chances of an investor recovering significant damages from a major brokerage firm are statistically small in mandatory arbitration. However, our data clearly indicates a decline in both the overall win’ rate and the expected recovery percentage against major brokerage firms, at a time when the misconduct of these firms reached its apex with the analyst fraud scandal,” says report co-author Daniel Solin, senior vice president of Index Funds Advisors, Inc.

“We believe that this study may provide the best window yet to see what actually happens in arbitration,” adds co-author Edward O’Neal, who was a faculty member with the Babcock Graduate School of Management, Wake Forest University when the study was compiled and now is a principal with Securities Litigation and Consulting Group, Inc. “Crude win rates and the percent of amount claimed that was awarded are an inaccurate and misleading basis for assessing the impact of the mandatory arbitration system. Win rates alone do not give an accurate picture of how investors or brokers fare in the arbitration process. In a US$100,000 claim, a win with an award of US$5,000 (or even less) is far different than a win with an award of US$100,000. However, both are counted as wins when win rates are analyzed on a crude basis. Our analysis considers the amount awarded and the size of both the claim made and the firm against whom the claim is made. As a result, our study presents a far more accurate basis with which to assess the mandatory arbitration process.”