Taking on the securities industry requires brawn, but usually a brand that's more fiscal than physical.
In the case of Californian Robert Bennett, though, it was inner strength that toughened him for the year it took to prepare and represent himself in a legal battle against
Datek Online Brokerage
In the end, a
National Association of Securities Dealers
arbitration panel sided with Bennett and ordered New Jersey-based Datek to pay him $100,000. The case, the second recent award against an online broker, hit on two key liability issues: ensuring clients the best execution price for trades and the suitability of certain investments for certain clients.
Bennett, 29, says he took a leave of absence from his computer science studies at
California Polytechnic State University
in San Luis Obispo to prepare his case. Sifting through library law books and through the NASD regulatory arm's Web site and manual, he figured out how to proceed.
The crux of his case rested on trade execution. Bennett alleged that Datek held on to his order and eventually executed it on the trading system it owns,
, rather than sending it out to another marketplace where it could have traded sooner.
"I haven't seen any cases like that," said Morgan Bentley, an attorney in Newark, N.J., who represents investors and brokers. "However, I would suspect that they are going to happen more. When a broker accepts an order, he has a duty to execute at fairest price. If he's favoring his in-house system over handing it out, he's breaking his fiduciary duty to his client,"
In December, about one year after having first filed his claim, Bennett packed his car and drove, with his mother, 200 miles north to San Francisco. Using a small red wagon that once belonged to his sister, he hauled into the hearing a television, video cassette recorder, overhead projector and four boxes of documents. For three days, he argued his claim before the three-person NASD panel.
By deciding in Bennett's favor, the arbitration panel rejected Datek's defense that the risks Bennett took were in line with his suitability profile, which the brokerage asserted was that of an institutional investor. Despite some of the quirkier aspects of Bennett's battle, the panel's award shows the once impenetrable position of online brokers in client lawsuits has weakened.
Datek denied the allegations and company spokesman Michael Dunn said the firm didn't agree with the arbitrator's decision, which is binding. "We thought it was outside industry norms," he said. "We think the customer did get the best execution."
According to the NASD arbitration award document, Bennett sent an order on Nov. 25, 1998 to sell 5,000 shares of
(since absorbed by
) at 53. Datek received the order but held it for four minutes at the order facilitation desk, not communicating it to any markets.
Bennett alleged in his suit that Datek, neglecting its fiduciary responsibility to get the best price available, didn't sell the stock at 55 in the broader market when it could have. Instead, Datek eventually executed the trade at 53 on Island, its electronic communication network, or electronic order matching system.
Datek's use of the Island ECN is increasingly common across the brokerage industry; many firms own pieces of such electronic trading systems to conduct less expensive trading. It's a situation that has caught the eye of regulators.
Securities and Exchange Commission
Chairman Arthur Levitt has also made securities firms' obligations to get the best execution possible for their customers a common topic in recent speeches. He's questioned how
internalization (when brokerages execute trades in-house) and payment for order flow (the money brokers receive in return for orders) might affect the customer's ability to get the best trade.
The document says that Datek, in its defense, argued that Bennett was making institution-quality trades and therefore should have known the inherent risks of his trades. The panel reasoned that Datek knew Bennett wasn't an institutional investor and that his trading patterns and turnover ratio didn't match that suitability profile. Ironically, despite the award's focus on suitability, Bennett himself hadn't introduced the issue.
Suitability has come up again and again as a hot-button issue in recent months. And while arbitration awards don't legally act as precedents for future cases, it was only a few months ago that Datek competitor
paid out $40,000 after an arbitration panel said it allowed a customer to make unsuitable investments.
Levitt has had his eye on suitability guidelines, in which the brokerage firm must determine if an investor has the financial means for his investments. Because online brokerages traditionally haven't given investment advice, they usually don't worry about suitability. But with increasing amounts of investment advice available on their online sites, these firms are under more scrutiny about suitability.
The $100,000 award was substantially less than the $353,647,147.78 Bennett was seeking in actual and punitive damages. The requested amount represents just under 10% of the $4.1 billion in total arbitration awards in 1999, says Richard Ryder, publisher of the
Securities Arbitration Commentator
newsletter in Maplewood, N.J. "Claims don't often reach that kind of level," he says, adding that when they do a customer typically will use a lawyer.
Bennett, whose individual damages were in the $300,000 range, says that as he prepared arbitration, he became aware of other similar complaints by Datek customers and was acting on their behalf in seeking such a large figure -- 95% of which he says he would have donated to charity. "The amount I requested," he says, "was an amount I could justify."