FINRA’s Arbitration Statistics a Bad Omen for Brokers

by Jacob Zamansky on January 27th, 2009 at 3:47 pm : Comments 000

Earlier this month FINRA issued securities arbitration statistics for 2008 and, in my estimation, Wall Street should prepare for a wave of claims the likes of which we’ve never seen before.  This year marks the beginning of a ‘claim boom,’ resulting from the credit and housing crisis.  It is analogous to the spike in claims after the tech bubble rocked investors in 2000.  There are similarities between these two eras and there are also some stark differences; but the end result is the same: Wall Street’s incompetence, deceit, and outright greed manifested itself in the form of painful losses for investors.

Let me be clear, losses that investors have suffered as a result of the credit and housing crisis are dramatically worse than during tech bubble fallout.  And the number of investors who suffered losses is likely to be much higher too because the contraction occurred across nearly every asset class.

Therefore, based on how last year’s statistics relate to 2000, I fully expect that in 2009, the amount of claims filed will approximate 8,000. Not only that, the numbers will increase from there in subsequent years.

To wit, in 2007, 3,238 claims were filed.  Last year however, 4,982 investors filed claims, an increase of 35 percent.  Now, consider these statistics compared to the tech bubble era:

• 2000 (tech market begins to fracture): 5,559 claims filed
• 2001 (tech bubble collapses): 6,915 claims filed
• 2002 (investors begin to realize their losses and understand their rights): 7,704 claims filed
• 2003 (investor anger is at its apex): 8,945 claims filed
• 2004 (investors continue to lick their wounds): 8,201 claims filed

There is a six-year “eligibility” period during which investors can file arbitration claims against brokers.  This will give investors who currently don’t understand their full legal rights time to file claims.  In fact, we received calls from investors with losses in tech stocks as late as 2006.  Indeed, investors may still be filing arbitration claims related to the current crisis as late as 2014.

The Signs Were There

For me, the hardest aspect of the current era is that investment losses were easily foreseeable.  Brokers either turned a blind eye knowingly or were incredibly negligent. Either way, they failed their customers miserably. The list below reflects some huge red flags leading up to the credit crisis and throughout the past year. Any one of these events alone should have prompted brokers to adjust portfolios to minimize the destruction:

• Early 2007: Collapse of the sub-prime mortgage market surfaces with New Century and Countrywide facing bankruptcy
• June 2007: Two Bear Stearns hedge funds collapse - a seismic shock to the mortgage backed securities market
• September-December 2007: Financial services firms, including the nation’s largest brokerage and mortgage firms, begin writing down billions of losses due to exposure to failing mortgages
• March-June 2007: Wall Street firms tap sovereign wealth funds to shore up their battered balance sheets
• February 2008: The $330 billion auction rate securities market collapses, sending credit markets into turmoil
• March 2008: Bear Stearns collapses
• June 2008: Short seller David Einhorn publicly accuses Lehman Brothers of potentially fraudulent valuations of toxic debt
• August 2008: Fannie May and Freddie Mac enter into conservatership
• September 2008: Lehman Brothers collapses
• October 2008: The worst month in banking industry history

The point is, we were warned. Over this period the markets dropped an astounding 40-50 percent.

To be quite honest, I think my estimate of 8,000 arbitration claims is inaccurate.  The real number is likely to be much, much larger.

Filed under Financial Stocks, Institutional Investors, Investment Fraud, Subprime Crisis, Subprime Mortgages, Tech Bubble, Wall Street
and arbitration claims, credit crisis, Investment Fraud