A Pace Law School professor, financial industry arbitrator and former New York City attorney handling white-collar criminal cases, Jill Gross has seen securities law argued and enforced both in the courts and in alternative dispute resolution forums. She thinks small investors like the ones represented by Pace law students in the clinical program she directs are better served by the securities industry”™s arbitration and mediation system than by litigation in the courts.
Gross joined the Pace Law School faculty in White Plains in 1999, two years after the school was the first in the nation to start a Securities Arbitration Clinic, the result of a series of town meetings with investors held by former U.S. Securities Exchange Commissioner Arthur Levitt.
Now called the Investor Rights Clinic, the Pace teaching program in an academic year takes on five to 10 cases in which investors, often senior citizens on fixed incomes, claim fraud or other misconduct by their securities brokers.
Virtually all brokerage firms in their customer agreements include clauses requiring that legal disputes be resolved by binding arbitration in the industry”™s own regulatory system. Though the Dodd-Frank Wall Street Reform and Consumer Protection Act allows the SEC to prohibit those mandatory arbitration clauses in agreements, the private alternative system has not yet been dismantled. The SEC, already pressed to meet deadlines for other financial reform mandates in the Dodd-Frank bill, is not likely to tackle it soon, Gross said.
When the campus clinic was started, “There was nothing at the time in the arbitration forum that would give small investors access and guidance to legal representation,” she said.
The Investor Rights Clinic only represents clients whose annual household income and claims do not exceed $100,000. Clients must be New York state residents or have lived in the state when the disputed deals occurred. Disputes are heard by arbitrators and mediators assigned by the private Financial Industry Regulatory Authority (FINRA).
Gross would like to see more cases worked out in nonbinding mediation to which the disputing parties voluntarily agree. “Eighty percent of mediations resolve the dispute,” she said.
At the Pace clinic, “We have not been as successful as we would like getting the parties on the other side to agree to mediation. Other clinics and other lawyers have been more successful, anecdotally. We don”™t know why that is.”
Gross said investors”™ claims against brokers rise as prices fall in a volatile stock market. “As the stock market goes up, there are no damages,” she said. “Even if there is misconduct by a broker, everyone is making money.”
“The stock market over the past 10 years has been relatively flat,” Gross noted, and investors have fewer claims of losses that require arbitration. Disputes spiked in the dot-com bubble of 2000 and during the credit crisis in 2008, she said.
This year, the clinic received “a flood of inquiries” in the wake of the “Facebook IPO disaster,” Gross said. Investors tried to buy small amounts of Facebook shares in the initial public offering “and their orders weren”™t executed.”
“As the price of Facebook stock dropped following the IPO, they weren”™t as upset about their trades not being executed.” Some of the frustrated Facebook investors”™ claims are viable, she said.
In recent years, “We have seen a lot of product cases where unsophisticated, risk-averse, conservative investors with a small portfolio were sold a highly sophisticated” financial product by far more risk-tolerant brokers. In some cases, the sold product was “not suitable for any investor,” she said.
“Fifty years ago, the market was not open to general investors,” Ross said. But with changes in law and the proliferation of 401(k) retirement investment plans, the stock market has opened up to small, less savvy investors “and that is what has led to abuses.”
Disputes often occur when retiring workers are convinced by brokers to transfer their employee retirement plans to the brokers”™ control and management. “I have seen that scenario described over and over again since 1997,” Gross said. “That transfer of a 401(k) plan has led to a lot of abuses.”
The Investor Rights Clinic can be an invaluable training ground for law students to hone essential legal skills while working with “real clients,” she said. “The purpose of the clinic is to educate law students. The fact that we”™re helping out investors who are members of our community is an incredible bonus. But without the educational mission, the clinic wouldn”™t exist.”
“There are flaws in the (arbitration) system but it”™s a better alternative than courts,” Gross said.
