LA QUINTA, Calif. (TheStreet) -- The bar association for lawyers who represent investors in Finra arbitration met in La Quinta, Calif., last week to discuss regulatory trends, litigation tactics and strategies to better protect investors. TheStreet Foundation's Susan Antilla spoke with Joseph Peiffer, incoming president of the Public Investors Arbitration Bar Association (Piaba).
Question: Piaba lawyers hear about broker abuses even before the regulators do in some cases. What are the biggest abuses your members are seeing?
Q: The Securities and Exchange Commission recently released statistics on enforcement actions for the most recent fiscal year. They say they brought a record number of cases. Are you seeing any sign on your end that it's having an impact on investor safety?
A: Presumably they're having some impact and no doubt they're doing the best with the resources they have. I feel the same way about Finra. I will have cases that I bring to Finra. The times I've seen Finra do something helpful is when the cases brought to them were packaged and ready to go with all the evidence and testimony.
Q: When an investor brings an egregious case to you, how often do you discover that the SEC is already on the scene?
Q: The SEC has been talking a lot about its new so-called "broken windows" strategy of taking action even against the smallest infractions, such as corporate officers who file their stock ownership information late. Do you see any sign that the rogue brokers you deal with from the retail side are aware of this strategy, or that they feel threatened by it?
A: It could be that the broken window theory works in policing in New York City. It seems to have made a difference there. I'm not sure that going after people who make a mistake on a form has a similar impact on people who are running a Ponzi scheme.
Q: Are the securities regulators on balance helping the public? If the regulators are taking a side, whose side are they taking in the battle between Wall Street and the investing public?
A: I think the regulators are sort of doing the best with what they've got. They're generally well-meaning people. The problem is they have two constituencies: the broker-dealers and brokers, and then the investor constituency.
Q: Since you see so many abuses against retail investors, what is your best advice to them? How can they best protect themselves against financial people who are looking to take advantage of them?
A: My very best advice to people is that they should first of all look at their broker on Finra's BrokerCheck. If you have a broker with three complaints or more, that's a lot of smoke. Also, you should not be afraid to ask a broker how he gets paid so that you can understand what his incentives are. And you can ask whether they have a fiduciary duty to put your interest ahead of theirs. Most people are floored when they realize that brokers don't have a duty to put the customer's interest ahead of theirs. They can't believe it.
Q: A big theme at this meeting and at the meeting of the state regulators at the North American Securities Administrators Association last month was the financial abuse of seniors. Are Piaba's members seeing more cases that involve brokers defrauding seniors?
A: The majority of my cases involve seniors. The sad thing is that the seniors I see for the most part are the people who have done what America asked them to do: They've raised a family, put 10% of their salaries away in a 401(k). They get to the end of their working life at, say, 65 years old, and they turn their money over to somebody and it can evaporate in a couple of years.
Q: How often do you get involved in those cases only to find out that it's too late to help those investors?
A: There is almost a one-to-one correlation between how bad the behavior is and whether there's money left. Meaning if the behavior is very bad, a lot of times there is no money. I had a case with a 54-year-old lady who retired from BellSouth on a broker's advice. She had $450,000 and the broker sold her $400,000 in private placements, paying him an 8% to 10% commission right away. Six months later they blew up completely. She called the corporate headquarters and the general counsel got on the line with her and said: "Do you think I care about your $400,000 claim? I only have to have $250,000 in net capital." It just makes me crazy. You should not get to have only $250,000 in the bank when you're managing $250 million in people's life savings.
Q: I know you're pushing the idea of making brokerage firms buy insurance to cover losses like your client's, but Finra has said that the cost would be too high.
A: You have to have car insurance to drive a car because you can hurt somebody with your car when you're driving. Also, when you're managing somebody else's money, you can hurt them. I see people come in to my office who lost their life savings and they wish they instead had lost a leg. They look back at their whole life's work, and it's gone.
Q: How might insurance work?
A: I think you should require firms that can't self-insure to be insured. You can require them to get insurance. Finra has the power to do that and I think they should do it. I know Finra has said it's too expensive. But I frankly think my car insurance is too expensive, but I need it to drive. If I had a brother-in-law who got three DUIs and car insurance became too expensive for him, well that's probably for the best, isn't it?
Q: So this idea of yours might cause some brokers to have to go out of business, right?
A: Yes and I think that's probably a perfectly good thing. If the insurance companies think it's too expensive to insure these guys, what's that say about the risk to the investing public? The insurance companies are in the best position to evaluate risk. It's sort of chilling in a way. That they can be too expensive to insure but still be allowed to go out there and invest people's money. This is my number one issue. It's been an ongoing problem forever. I think the time is right to solve it.
Q: How often do you turn away a client because you can see in a firm's financials that they won't be able to pay an award?
A: Fairly often -- several times a year. Sometimes I take the cases anyway because I feel bad for people. So then I get settlements where you get some money back for the people and you can't take a fee because it's just not enough money to compensate them. I got a Harley one time from a broker, because that was the only thing he had. I still have it -- a 2005 Harley Road King with only 4,000 miles on it. It's a fun bike. I cut my fee significantly and got the Harley instead. It was a great result for everybody. The clients got more money back from their losses in a private placement and I got a Harley.
Q: In one of the panel discussions this week, several arbitrators were saying that clients should take some responsibility for getting into bad investments.
A: Every single client that comes in tells me "I trusted him," and I say "Of course, you trusted him." Some arbitrators want to see the customer take responsibility for the investments. But you know what? When I go into the dentist and sit in the chair and he says, "You have a cavity," I don't say, "Do you mind pulling out another mirror please, because I'd like to have a look?" And then Google up what a cavity looks like on my phone. And then say "OK, good, go ahead and drill." I say "drill," and if there wasn't a cavity there and he causes me to lose a tooth, it's not my fault. It's the dentist's fault.
Q: There's been a lot of talk among investor advocates about the idea of giving investors a choice between arbitration and litigation in the courts. Is that likely to happen?
A: I think the more people that understand they're forced into a forum run by broker-dealers, the better the chance a bill will pass. There are three things that people are shocked at when they come into my office: The number one thing is that brokers don't have a fiduciary duty to them. Number two is that brokers don't have to have any insurance. And number three is that they have to go to something called arbitration that's run by broker-dealers. I'd say 95% of the investing public has no idea they signed an arbitration agreement.
Q: Would the option to go to court disrupt the lock that Piaba lawyers have on investor cases in Finra's forum?
A: I don't care, frankly. The "I" in Piaba stands for investors and we've got to put investors first. This organization exists because we have to put investors first. If we don't do that, we're in the wrong line of business.
Q: What are the negatives for investors if they had the option to go to court?
A: You have an appellate process that's lengthier. Some people think it's more expensive, and it can be. But it's a tradeoff. You get more discovery, you get depositions, and you don't have to pay for the forum in court.
Q: Once an investor has been fleeced by a broker, the last thing they need is to get connected with a lawyer who isn't a good advocate. If an investor has suffered losses and checks the Piaba site for lawyer names, what should they be asking those lawyers?
A: It's interesting with these clients. It's like dating someone who had a really bad boyfriend before you. They've already been burned by one professional. They're very, very, very wary. They should be. They should know there is no question they can ask that's rude or off-limits about how I'm getting paid.
Q: I understand that you're an ordained minister. Is that your backup in the event the SEC wipes out financial fraud with its new broken windows policy?
A: It's not my backup plan, but I'm available for weddings and I'll even do bar mitzvahs.