Last March, SEC enforcement chief Bill McLucas told a compliance conference in New York that his agency doesn't regularly review arbitration cases for possible follow-up enforcement action, while admitting at the same time that arbitrations might be fruitful ground for enforcement leads.
Neither McLucas nor the NASDR would comment, but Paul Gerlach, associate director of the SEC's division of enforcement, now says the commission does sometimes investigate broker-abuse allegations.
"It is not at all uncommon for us to be alerted by investors who are going to arbitration," he says. The SEC also gets referrals from customers who are unhappy with arbitration awards, Gerlach adds. However, unless it's an extremely bad case or one that involves an entire firm taking part in wrongdoing, it's the SROs that investigate and sanction individual brokers Gerlach says.
Former SEC lawyers and arbitration specialists confirm that most arbitration cases are too small to interest the commission, which focuses on high-profile cases and brokerage firms that repeatedly break securities laws.
Last year, the SEC initiated 453 cases that involved 981 "respondents," meaning companies, brokers or individuals. Half the cases involved securities offerings and broker/dealers, but it's unclear how many, if any, were referred from NASDR or NYSE arbitrations.
Former SEC lawyers say chances are there weren't many.
"In terms of a formal review process, [the SEC] doesn't do that," says Carl Schoeppl, former senior counsel at the SEC's Miami regional office. "We did look at cases, but if it was an individual customer complaint, it usually wasn't enough to warrant an investigation."
Besides, "most NASD arbitrations are peanuts," says Mark Britton, a Seattle lawyer and former SEC staffer. "Most of the SEC's cases are driven by publicity. They cannot be chasing around every Tom, Dick and Harry."
The SEC has limited resources, former SEC lawyers note, and it cannot investigate the thousands of arbitration claims and complaints filed every year against brokers and their firms, or the relatively small handful of employment cases.
"All the things you hear about low budget and staff apply to the SEC," says Fort Lauderdale, Fla., attorney Allan Lerner, another former SEC lawyer. "There has to be some reliance on the SROs to police their own brokers."
However, if a case involves a large amount of money, or if there are numerous complaints against one firm, the SEC might investigate and prosecute, Schoeppl says. Otherwise, it would hand the case over to state securities regulators or the NASD.
The NASDR doesn't regularly scrutinize arbitration cases, either, although it does occasionally follow up on high-profile cases.
In the employment arena, NASDR investigators have looked into an arbitration case completed last May, in which the hearing panel stated that Prudential Insurance Co. of America "acted with fraud, oppression and malice" in terminating a whistle-blowing manager (see OddLots, August '97, RR, Page 36). The status of that investigation is unknown.
Arbitration panels do refer some cases to enforcement. A 1993 case in which a former Dean Witter branch manager won $1.5 million in a wrongful termination and defamation claim, was referred to NASD enforcement.
In a 1996 case against Prudential Securities, a broker won an order removing limited partnership complaints from his record; the NYSE panel in that case also referred the matter to NYSE enforcement (see "U-5 Lies," September '97, RR, Page 76). In both of these cases, however, neither the NYSE nor the NASD pursued the respective referral.
This past August, an NASDR panel referred to NASDR enforcement another case involving Dean Witter, in which the firm refused to process customer ACATs forms in a dispute with a departing broker (see "Indentured Servitude," November '97, RR, Page 90). The NASDR won't confirm whether an investigation is under way.