Dear Dagen: Reader Advises Hiring a Lawyer for Securities Disputes

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Last week's column on the confusing world of securities arbitration prompted readers to send in their own words of advice for investors venturing into this dispute-resolution system.

With NASD Regulation, an arm of the National Association of Securities Dealers and the primary forum for securities arbitration, "it is usually an extremely poor idea to come before a panel without qualified, legal representation," writes Dean Parisian, who identifies himself as an arbitrator.

"Do your readership a favor, let them know to what standards panelists are held to uphold in an arbitration proceeding. Let them know that case law is not precedent. Arbitration is not like the legal system most people are familiar with. There are so many variables," he adds.

Indeed, a study by the Securities Arbitration Commentator, published in February 1997, indicated that "investors win more frequently when represented by counsel in every dollar category" that the newsletter tested. Moreover, investors with legal representation who win received a significantly higher recovery rate than investors who represented themselves.

Parisian also makes another valid point: "You have to wonder what will happen to the forums when the market takes a major hit over a prolonged time period. The exponential number of suits should keep panelists busy for years!"

The number of arbitration cases could indeed surge when the market takes a dramatic turn, especially with complaints against online brokerages. Until June 30 of this year, only 22 cases specifically related to online trading have come into the arbitration forum at the NASD Regulation. That's a small number given the fact that there are between 3 million and 5 million online accounts.

Relying on a Regulator

In my column about how to take on your broker if you have a complaint, I said that writing to one of the securities regulators, such as the Securities and Exchange Commission or the National Association of Securities Dealers, won't help.

The organizations are there to regulate the securities industry, not solve individual problems.

But reader Jeff Withem takes issue with that comment.

"You seem to imply that if a broker doesn't fix the problem, the only solution is to go directly to arbitration. In my humble opinion, arbitration is not a useful vehicle for the vast majority of problems that individual investors face," Withem writes.

"I just recently resolved a problem with Datek Online thanks to NASD Regulation. I opened an account with Datek in early December (after it placed first in TheStreet.com survey!). I encountered repeated problems throughout December and never was able to successfully place a trade. As a result, I asked for all of my money to be returned to me. I ended up writing three formal letters to Datek over the course of five months, including a letter to its CEO, seeking return of my funds," he says.

"In late June, after receiving no response from Datek, I finally filed a complaint online with NASDR. They wrote a letter to Datek. Datek responded. It was a pathetic letter, but they did send me a check for my funds. I am totally convinced that without NASDR's involvement, I never would have seen my money," Withem adds.

"With real brokerage firms, even discount firms like Charles Schwab and Fidelity, I have found that making a complaint directly to the company usually fixes a problem (at least when it's clear who is at fault). Unfortunately, with the new breed of deep-discount online brokers, a well-timed complaint to NASDR and/or the SEC may make all the difference," concludes Withem.

From an investor's mouth to the ears of a brokerage firm's general counsel.

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