So he followed standard operating procedure for investors who think they’ve been ripped off – he brought an arbitration claim against the broker. But to his surprise, Merrill Lynch counterattacked, filing a lawsuit claiming that his time to act had run out. A judge agreed; the rules say DeChaine should have complained within six years of making his investment. Too late. DeChaine, now 58, disabled and living in Maine, spends his days writing to Congress and waiting for a last-chance appeal. If it fails, “I’ll cry a lot,” he says. “There’s nothing else I can do.”
DeChaine isn’t the only one crying. His case has become a landmark in the continuing battle between Wall Street brokers and clients who feel burned. For investors, it’s a dangerous precedent; for brokers, it’s something to celebrate. Either way, the DeChaine case has increased the flow of cases into court – and damaged the very system that was supposed to keep such cases out of court. Since a Supreme Court ruling in 1987, virtually all customer complaints against brokers have gone to arbitration, a process designed to avoid high costs and long delays. But now arbitrators’ dockets are clogged, lawyers on both sides are questioning the fairness of the system, and even some of its biggest fans say it’s time for reform. Last week the National Association of Securities Dealers, the biggest arbitration forum, disclosed that it’s forming a blue-ribbon panel to study whether investors get a fair shake.
Securities arbitration must have seemed wonderful to the folks who dreamed it up. The idea: a quick, cheap resolution of disputes, kind of like The People’s Court for Wronged Investors. Instead of Judge Wapner, there’d be three average citizens deciding cases based on common sense. Now comes the wake-up call. As arbitration moves into adolescence, its growing pains are apparent. In 1981 the average case was heard in an afternoon; today it takes three days. Last year 6,561 claims were filed, up from 2,464 a decade ago. And, thanks to increasingly arcane securities, the cases are more complex.
Some critics blame investors for gumming up the works. In pursuit of fairness, their lawyers are hauling into arbitration a lot of their courtroom tools – motions, briefs, pretrial conferences – and in the process slowing it down. But many plaintiffs’ lawyers say the playing field is still uneven. With no judge to lay down the law, they say, brokerages stonewall requests for documents. And the system’s rules on privacy – barring public access to hearings or transcripts – hide wrongdoing. “It sweeps under the rug what can happen to you when you entrust your money to a firm with a good reputation,” says attorney Theodore Eppenstein. Perhaps the worst problem: since most arbitrators lack legal training, decisions can be unpredictable or just plain wrong.
That’s one reason Wall Street is almost as unhappy as investors. Merrill Lynch had to go to court to get justice in its case against DeChaine because a judge would better understand the issue of time limits, believes Merrill’s attorney, Lawrence Fenster. (He calls DeChaine’s latest suit “meritless.”) Other brokers’ lawyers say arbitrators have become unduly sympathetic to customers. Recent scandals, like the one at Prudential Securities, have further tarnished brokers’ images, they say. “It’s a tough time to be a stockbroker,” says attorney Theodore Krebsbach. “You’re never going to have anybody’s sympathy.”
Sympathy may be the last hope of Ray DeChaine, whose latest lawsuit will be argued before a New York judge next week. “He’s basically cooked,” says his lawyer, Seth Lipner. “But I’m still trying to pull one more rabbit out of a hat.” The more difficult magic trick faces David Ruder, the for-mer Securities and Exchange Commission chairman who’s heading the arbitration-reform panel. It’s his job to make people happy with a system designed to sacrifice perfect justice in favor of speed and efficiency. And in arbitration, those sacrifices have names and faces . . . and lawyers.
