A group of investors, claiming they were bilked out of more than $4 million by a

Merrill Lynch

(MER)

broker in New Hampshire, recently won what some legal experts say was a significant concession in their case: Merrill agreed to let a court decide its responsibility.

While that simple decision may not seem like much, investors suing brokers typically don't get to have their cases heard by a jury of their peers. Instead, their complaints are judged by three-member arbitration panels run by securities industry organizations such as the

New York Stock Exchange

or

NASD

.

With a

U.S. General Accounting Office

report on arbitration now circulating in the legal community, and a record number of individuals involved in the securities markets, the arbitration process is likely to be thrust into the Washington limelight during the next few months.

A draft of the GAO's soon-to-be released, two-year study of the securities arbitration system has found that a substantial portion of securities-arbitration awards go unpaid, according to people familiar with the document. Combine those findings with longtime investor concerns that panels are biased toward the brokerages, and it's likely politicians will have plenty to rail about.

"They've concluded that there was a big problem," says Mark Maddox, a former state securities regulator and now an attorney in Indiana representing investors. "I think it's going to be significant because Congress is looking."

Securities Arbitration Case Filings

The GAO report, however, comes at a time when the agencies that run arbitration also are in the midst of a re-evaluating how they operate.

In two weeks, the NASD is to begin a pilot

program that will allow investors to bring claims against their financial advisers and brokers before a single arbitrator that they can choose. NASD panels hear about 90% of the securities arbitration cases.

That coincides with another pilot program a group of seven retail brokerage firms, including Merrill Lynch, began in January, which will give investors in 100 cases the opportunity to pick arbitrators from organizations outside the securities industry, such as the

American Arbitration Association.

Linda Fienberg, executive vice president of the NASD's office of dispute resolution, won't comment on the pending GAO report, but says investors have a misperception that NASD arbitration cases favor industry insiders. She believes the pilot programs will dispel that.

Congress wants to make sure. "Now that you've got almost two-thirds of Americans in the market, things such as arbitration assume greater importance," says a spokesman for Rep. John Dingell, (D., Mich.), the ranking minority member of the

House Commerce Committee

, who requested the GAO report.

The numbers back him up. At the NASD, the arbitration claims climbed to 5,600 last year from 1,400 in 1985.

Arbitration moved to the forefront in securities disputes when in 1987, the

Supreme Court

decided in

Shearson/American Express vs. McMahon

that investors who sign arbitration agreements with brokers could be blocked from suing in court over alleged securities law violations.

The NASD has seen a sharp increase in investor complaints during the past several weeks of high volatility in the markets, and such arbitration claims can be expected to follow, Fienberg says.

Arbitration Secrets

Brokerages prefer arbitration, partly because the proceedings are more secretive than civil court cases, say Maddox, and Jonathan Kord Lagemann, a New York securities lawyer. Claims, depositions and affidavits that are part of the public record in civil cases are not disclosed in arbitration.

"They (brokerage firms) will spend $200,000 to keep a $30,000 case in arbitration," Lagemann says.

"It is very, very rare for a brokerage firm that has a mandatory arbitration clause" to waive arbitration in an investor dispute, Maddox says. "Securities firms believe that arbitration is cheaper for them in the long run."

Lagemann won an exception to the arbitration rule in March when Merrill agreed to waive arbitration. He filed the case against the firm for investors who claim they were defrauded by former Merrill broker John E. David.

A Merrill spokesman says it isn't unusual that the firm decides to take a case to court instead of arbitration, "particularly in situations where there are multiple claims."