Money's gone. What action can you take?

Constantine Katsoris in Washington Post, February 25, 2009

By CANDICE CHOI

NEW YORK -- Your money is gone. You're ticked off. You want to sue.

Even if your adviser wasn't Bernard Madoff, you might be wondering what action you can take after watching your savings take a clobbering this past year. You aren't alone.

Last year, the number of cases filed with the Financial Industry Regulatory Authority bolted 54 percent to 4,982. The non-governmental agency regulates U.S. securities firms, including online brokerages, and handles arbitration with clients.

Frequently cited examples of misconduct in filings included misrepresentation about investments and unauthorized trading. The number of cases involving mutual funds nearly tripled to 1,069.

Anyone registered with FINRA _ including most brokerages and any financial planner who is also a broker _ is subject to the agency's arbitration rules. Here's what you need to know about the process.

WHEN TO FILE A CLAIM

One common reason for filing a claim is that your broker knowingly invested your money in a way ill-suited for your financial situation.

For instance, retirees living on a fixed income shouldn't have their nest egg in speculative securities. Neither should parents who will soon have college bills or anyone else who can't afford to lose big chunks of money.

"It's really incumbent on the broker to know the customer and their needs and establish an appropriate portfolio," said John Singer, a partner of Singer Deutsch LLP, a securities law firm based in New York.

Other frequent reasons for claims:

_ Misrepresentation _ If a broker gives false or incomplete facts about an investment. This typically occurs with riskier securities.

_ Churning _ When brokers generate commissions through excessive trading.

_ Unauthorized trading _ Buying or selling securities without the investor's knowledge.

_ Cold-calling _ Unsolicited phone calls using high-pressure, persistent tactics.

If your losses were the result of the broader market plunge however, that alone won't sustain a case.

"Customer cases started streaming in after the fall when the market crashed," Singer said. "I had to turn most of them away."

No matter how angry you are, you have to be able to show your losses were the result of misconduct.

HOW IT WORKS

The first steps are hiring an attorney and filing a statement of claim with FINRA, which is based in Washington, D.C. It doesn't have to be on a special form, but be concise and professional in detailing the dispute. Include relevant names, account numbers and dates.

"It's your first chance to show the arbitrators what your case is about," said Linda Fienberg, president of FINRA's dispute resolution.

When naming a defendant, it's probably wiser to seek compensation from a firm rather than an individual broker. Your chances of getting an award from a firm are probably greater, Fienberg said. Including both could also complicate the legal issues.

Before proceeding to arbitration, you and the other party can seek a settlement through a FINRA-appointed mediator. You and your broker would work out how to split the fees, which can range between $50 and $300 for clients and $150 and $500 for brokers.

You may also be asked to pay other mediation charges, including travel expenses. Unlike with an arbitration, the mediator's findings aren't binding, but the majority of cases end in resolution.

If you proceed to arbitration, it takes an average of about 15 months from the time of filing for a decision to be issued. "That's extraordinary if you look at what happens in court," said Fienberg.

Claims for $25,000 or less are generally decided based solely on filed documents and are usually resolved much faster.

Otherwise, a hearing can take several days or even weeks, after which the panel has 30 days to render a decision. Awards must be paid within 30 days.

Either party can make a motion in court to vacate the panel's decision, but this rarely occurs and is granted even more rarely, Fienberg said.

WHAT IT COSTS

Taking your broker to arbitration won't be cheap.

First, you need to hire a lawyer. Bigger claims are usually done on a contingency basis, which can be as high as 30 percent of the award, said Constantine Katsoris, a professor at Fordham University Law School who specializes in securities arbitration.

You'll more likely be charged on an hourly basis for smaller claims of $25,000 or less.

The fee for filing a case ranges from $50 to $1,800 depending on the size of the dispute.

There's also a hearing fee. The daily rate for hearings ranges from $50 to $1,200 depending on the amount of your claim and whether your case requires one or three arbitrators. It's up to the panel to decide who pays the hearing fee.

Despite the costs, arbitration is quicker and more final than court proceedings. "It's also less punishing in terms of time and money," Katsoris said.

If you can't afford attorney or filing fees, you might be eligible for pro bono legal services. Run by select law schools, securities arbitration clinics assign students, under the supervision of faculty, to represent clients.

Only four states currently have arbitration clinics, according to FINRA: California, Illinois, New York, Pennsylvania.

If you don't live near one, you might still be able to get help by phone or mail.

Ultimately, filing a claim is worthwhile if you think you have a case. About 70 percent of the cases filed with FINRA are settled through mediation or directly between the parties. The assumption is that claimants get some type of compensation in those cases.
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"In almost all cases, the claimant gets some remuneration," said Fienberg, president of FINRA's dispute resolution.