Wall Street Meets the Wild West: Bringing Law and Order to Securities Arbitration
71 Pages Posted: 30 Sep 2005
Abstract
Recent allegations of manipulation and corruption in the investment community have tested the public's faith in the integrity of the U.S. capital markets. Bombarded daily with tales of corporate fraud, we now learn that investment firms, that provide the portal for public investors to enter the market, may be corrupt as well. Many public investors are surprised to learn that they have no right to litigate disputes with their brokers in court. Instead, the mysterious process of securities arbitration is the vehicle through which the vast majority of individual American investors intersect with the laws designed to protect them from fraud and malfeasance.
In spite of Congressional directives that courts should adjudicate disputes arising from the securities statutes, since 1987, virtually all investor claims against brokers have been subject to mandatory arbitration. The current rhetoric of the Supreme Court is that arbitration is an entirely appropriate forum in which investors can vindicate their rights under the securities laws. The validity of this principle rests upon the fiction that the arbitral forum presents only a procedural departure from adjudication The Court's view stems from the myth that arbitration provides securities experts who will expeditiously render reasonable and fair decisions. In practice, decisions in securities arbitrations are usually rendered by non-experts who may not apply or even understand the securities laws. Moreover, the decisions, once made, are virtually insulated from judicial review.
The National Association of Securities Dealers (NASD) handles the vast majority of securities arbitrations in the United States today and insists that its arbitration forum is fair and functions smoothly. This claim is difficult to substantiate however, as NASD awards remain shrouded in relative mystery and anonymity. Utilizing empirical data obtained from a review of all NASD arbitration opinions from 2003 and 2004, this paper attempts to demystify NASD securities arbitration and suggests that serious reforms are necessary before one can support the claim that this system provides a principled alternative to adjudication.
Keywords: Securities, arbitration
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