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IGNITES
NASD Records Drop in Fund Arbitration Cases Fewer investors complained about problems arising from the sale of mutual fund shares in 2004 than in the previous year. According to new statistics from the NASD, 28% fewer investor filed arbitration claims involving the products. But the drop in arbitration claims may be only temporary, some observers say. They believe the numbers will rise this year, and cite a one- to three-year lag between the time investors notice a problem and when they file an arbitration case. The mutual fund arbitration cases filed last year largely represent problems that occurred in 2001 or 2002. Of course, 2003 and 2004 were years in which the fund industry endured many problems, including unsuitable fund sales and breakpoint discount overcharges. The time lag occurs for a variety of reasons, says Investor Arbitration Associates attorney Fredrick Rosenberg. First, he says, it often takes investors a while to realize that a decline in investment value is more than just the result of normal market fluctuations. Brokers often try to buy time by calming down anxious clients, It's only after a year or more, Rosenberg says, that investors understand that their investment has permanently gone south. Then there's the process of preparing a case. Because of the nature of the arbitration process, attorneys try to prepare well-thought-out filings that present their client's case in the most detailed and accurate light, says Rosenberg. That usually takes several months, he says. Linda Fienberg, president of NASD dispute resolution, notes that overall arbitration filings decreased in 2004, as the self-regulatory organization had expected. She attributes the spike in 2003 filings to the stock market plummet of 2000 and 2001, when many high-flying Internet and other tech stocks suddenly lost 50% or more of their market capitalization. Even many fund investors found that the large-cap growth or value funds they owned were composed heavily of technology stocks, says Shepherd, Smith, and Edwards attorney Ron Thrash. “Average people were led to believe that their investments were being managed in a way that would get them through the ebbs and flows of the market, but the risks associated with their portfolios went steadily up,” he says. “The principles of diversification were ignored, and when the markets went down, those products crashed.” By 2004, however, few investors were still filing cases related to the tech crash, and overall arbitration filings fell 8.3%, to 8,201 cases, from 8,945 cases in 2003. The overall 2004 caseload represents a gain of just 6.4% over 2002 levels of 7,704 total cases. So the 1,221 mutual fund arbitration cases filed in 2004 are actually in line with the 2002 filing level of 1,249 cases. Some observers expect arbitration cases for mutual funds to rise again as investors who've become wise to breakpoint issues and other problems begin to file claims. Liam O'Brien & Associates senior counsel Harry Delagrammatikas, for example, believes that many customers are still not receiving the breakpoint discounts they're due.“I don't think the large brokerage firms have done an excellent job of combating breakpoint errors,” be says. “It's a significant investment to be able to track down that information.” Delagrammatikas says that brokers are also still putting clients into B shares instead of A shares to maximize their own commissions. Thrash says that brokers continue to give customers bad advice about asset allocation. “There is still a tendency for first-time investors to roll over 401 (k)s into equities instead of all asset classes,” he says. “That's an accident waiting to happen.” Fienberg, for example, says that most of the fund cases are situations that lend themselves better to class action lawsuits. That's because they pertain to large groups of investors instead of just a handful. And Rosenberg notes that it's tough to assess damages to individual shareholders from selective market-timing and late-trading activity. He also says that with more arbitration panels ordering that costs of legal expenses be divided between the parties, more attorneys are discouraging clients that don't have solid cases. // 1/28/2005 |
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