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Challenging a Broker

With advent of Internet trading 
brings serious problems

Steven A. MacHutta, left, and Joseph E. Meyer of Meyer & Associates discuss arbitration in disputes between investors and stock brokerages.  Arbitration is used as a way to speed up resolution of disputes and avoid protracted court battles.

  In MacHutta's case the problem related to "puts and calls."
  Meyer explained that puts and calls are "the right to purchase a given number of shares of a stock for a specific price for a designated period of time."  The difference is call rights "appreciate as the value of the stock goes up and puts increase in value as the stocks go down," Meyer said.
  MacHutta said the wrong symbols were used and puts were listed as calls, which led to further problems, and eventually to a substantial loss.
  William Cole, vice president and investment sales manager at SunTrust Securities Investment Department in Daytona Beach, agreed that the advent of Internet trading has brought problems.  He also said some novice investors do not have a good understanding of the market or clear expectations from their investment.
  "What has caused most of the problems, with the advent of the Internet, people feel they have educated themselves, but they don't know what to do with their information," Cole said. "They go off on their own and attempt to invest."
  In some cases, expectations are unrealistic, Cole said.
  "On a long-term historic basis, the most you can expect is 10 to 12 percent on equities.  People in the last 10 years have seen returns in the market of between 18 and 20 percent on an annual basis, but we haven't had any corrections.  They have an expectation that is unrealistic, and they need to understand that 10 percent is not bad.
He suggested that investments should be considered part of an overall investment plan with long- and short-term goals.
  "Before you do anything, listen to what is being told to you," he said. "Do you trust and believe in this person?  Don't make the decisions at the initial meeting.  Listen and gather information, and then go home and sift through it -- read through it and discuss with a confidant. Do business with someone you know and trust."
  Unauthorized trading, where a broker trades in an account without the

customer's consent, or without regard to the investment objectives set out by the customer, is one of the controversies often raised in arbitration, Meyer said.
  "Even if you authorize your broker to do discretionary trading, you still have confirmations of all the transactions.  It's the customer's responsibility to scrutinize and see if you see anything you don't agree with," he said.
  A variety of complaints brought before national association and the stock exchange arbitration boards have involved unauthorized transactions, including brokers purposely churning accounts.
  "Churning is excessive activity in a customer's account without any underlying investment objective," Meyer said.  "You notice it when activity in the account is diverting away from the objectives--for example, if you are retired and buying income-producing utilities, and your broker begins to suggest selling the securities generating income."
  One such case involves Tom Harvin of Orlando, who turned over his Raleigh, N.C., produce business to his son, and then discovered his retirement plan with an investor wasn't what he had understood it to be.  The plan hadn't produced any growth, but lost $40,000 of principal, so he moved the balance to a new broker.
  "The new broker said, 'You really have been messed over,'" Harvin said. He decided to have an audit by a certified public accountant and discovered stocks purchased in his account with the old broker had been held only one to 30 days.  In some instances, stocks were sold then repurchased.
  In addition to a loss of about $40,000, he had been charged about $48,000 in commissions over one year.
  Like MacHutta, Harvin is seeking re-imbursement by filing his complaint with the National Association of Securities Dealers Board of Arbitrators.  In both cases, Meyer is not the arbitrator but a consultant to the complaining parties.
  "If you look at the paperwork necessary to file the claim, it takes seven Ph.D.s to do it, and the road blocks are mind-boggling.  You get shamed and you feel embarrassed," Harvin said.


 

  Meyer said that despite the difficulties, filing an arbitration claim of substance can bring satisfactory results.
  "If you look at the disciplinary history of the NASD, you can see they will step in and take decisive action if they feel there's any wrongdoing," Meyer said.
   Another investor who sought Meyer's help as a consultant was Elizabeth Pecoraro James of Ormond Beach.
Meyer said she believed she lost $10,000 because of her broker's poor investment choices for her conservative needs.  With Meyer's help and the law firm of Wickersham & Bowers of Daytona Beach, James filled out forms and filed her complaint with the association.
  The case went before the Boar5d of Arbitrators, and on June 23, an award was made public.  The binding decision by the arbitrator awarded her not only $10,000 she lost, but 10 percent annual interest, accruing from Jan. 1, 1998, to the date of payment, and the return of $425 in filing fees she paid to the association.
  "She recently did recover an award based upon the claims made by her," said a spokesman for Wickersham & Bowers.
  Meyer said it has been his experience as an arbitrator that both sides in disputes are respectful of the process.
  "These arbitrations are run very similarly to a trial in a civil court.  Arbitration, from the standpoint of how quickly a case can be put into the process and hopefully resolved, is an expedient one.  Most arbitration cases are completed in nine months," Meyer said.
  The arbitration process for claims of more than $25,000 begins with a suit filed by a securities attorney, but those who have complaints that involve lesser amounts can file a simplified arbitration, without an attorney, Meyer said.
  Simplified arbitration forms for claims lass than $25,000 are available from the National Association of Securities Dealers Board of Arbitrators directly by calling (212) 858-4400 or on the Web at www.nasdadr.com.  Call Meyer locally at (904) 677-8642 or toll-free at (877) 439-1575 or visit his Web site at www.meyerassoc.com