Spitzer vs. the Little Guys
In obtaining a $1.4 billion settlement from the major Wall Street firms who peddled stocks using fraudulent or tainted stock research, Eliot Spitzer boastfully fashioned himself as a champion of individual investors. Even though the lion’s share of the collected monies went straight to the government’s coffers, he insisted that the settlement would enable investors to obtain “billions” in restitution by filing arbitration claims against their brokers.
While it certainly sounded good at the time, it has become apparent that Wall Street successfully played Mr. Spitzer as a sucker. And while he may be the one who took the punch, others bear the bruise: The hard truth is that investors who filed arbitration claims against their brokers because of compromised research have been overwhelmingly defeated. Merrill Lynch – who sponsored bad-research poster-child Henry Blodget – openly brags that it has “overwhelmingly prevailed” in arbitration cases brought against the firm. Overall, the few investors that have prevailed against them in these cases collected little more than a few cents on the dollar.
How could this happen? One primary reason is that Mr. Spitzer didn’t require the firms in the settlement to make admissions of liability, making it exceedingly difficult to hold them responsible for damages. So it shouldn’t come as a surprise that individual investors were the ones left holding the bag. The arbitration system has always been stacked against the “little guy.” It’s gotten worse since Mr. Spitzer announced his landmark settlement, and Wall Street is aggressively working to further rig the system.
Investors who’ve been wronged by their brokers currently have two venues to file arbitration claims: The National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE). In 2003, the percentage of arbitration awards in which investors recovered at least some money was 49% at the NASD and 48% at the NYSE. Last year, the percentages fell to 43% and 39%, respectively. Even these fortunate investors are rarely made whole for their brokers’ misdeeds. A 2001 study by the GAO showed that the amount awarded to customers who “won” their cases represented only about 27% of claimed losses. Here’s another way to look at it: A mere 13% of the billions in total losses claimed by investors in arbitration were awarded that same year.
Although investors only have a slightly better statistical chance of recovering some money by filing an arbitration claim with the NASD, they are steering clear of the NYSE when choosing their venue. Since Mr. Spitzer announced his landmark settlement, the NYSE share of arbitration claims has plummeted by more than 41%. While the gap may be dramatic, it isn’t surprising. Given that the NYSE has made no attempt to keep pace with NASD efforts to make its arbitration more diverse and user-friendly, it seems clear that the NYSE may be looking to phase out its arbitration system altogether.
The Securities Industry Association (SIA), Wall Street’s trade and lobbying association, would approve. After all, it’s advocating the creation of a single regulatory arm that would eliminate all NYSE regulation, reassigning it under the regulatory responsibilities of the NASD. John Thain, NYSE chairman and CEO, has supported a single regulatory authority. Merging the regulatory arms would invariably result in a single arbitration system, one that no doubt will be stacked with industry insiders and ultimately drop the total percentage of arbitration monies returned to investors to the single digits. Though other regulators have weighed in on the SIA’s sobering proposal, Mr. Spitzer has so far remained silent.
For all his bluster about “reform” and “restoring integrity,” what has he done to protect individual investors? Nothing of note. Such inaction, egregious under any circumstance, is all the more outrageous given where he’s focused his attention and taxpayers’ money – helping the millionaires behind the NYSE recover more than $100 million the exchange claims it overpaid Dick Grasso. If Mr. Spitzer were truly committed to reform, he’d insist the NYSE become more responsive to individual shareholders’s needs as a condition of his involvement in the pursuit of Mr. Grasso. After all, if Mr. Spitzer insists on fighting the NYSE’s battles, shouldn’t taxpayers get something for their money?