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Battling Your Br0 Ker? Tell It To A Mediator

Personal Business: INVESTING


When your broker sold you on that limited partnership, he was saying something about 20% annual returns. Now, you see your $55,000 has shrunk to $25,000, and naturally, you're upset. In fact, you think you might have a legitimate claim against the broker.

If you feel like fighting for your money, the standard approach is to hire a lawyer and file a claim for arbitration with the National Association of Securities Dealers (NASD). Some 6,000 disgruntled investors and brokers took this action last year, and most of them are facing, on average, a nine-month battle that can get nasty, complicated, and expensive.

Now, the NASD is pushing mediation as an alternative. Under the new procedure, approved last August by the Securities & Exchange Commission, the two parties sit down with a mediator. Forget formal pleadings and witnesses, and don't worry about discovery. In the anything-goes world of mediation, you simply talk--with an expert shuttling between the two of you, ironing out the differences. The process has already proved to be efficient and quick. The NASD reports that 85% of its first 125 cases resulted in a settlement, mostly within a one-day session, says the NASD's mediation director, Kenneth Andrichik.

Mediation takes some getting used to. First of all, you don't get the satisfaction of staking out your turf on the side of the angels and vilifying your opponent, as you would in arbitration. Instead, you have to agree to sit down with this person and concede that perhaps things aren't as black and white as those bleak numbers on your monthly statement. What's more, with mediation, you're not likely to get 100% of your claim or punitive damages.

NO RECOURSE. But in the U.S. securities industry, plaintiffs have few choices. The only alternative to mediation is the NASD's binding arbitration. This is the dispute-resolution method that is stipulated in brokerageaccount contracts. Arbitrators award punitive damages in only 2% of cases, and once their decision is made, claimants have no chance for appeal. "It's binding--even if the arbitrator's dead wrong on the facts or the law," says Cliff Palefsky, a San Francisco lawyer who is an outspoken critic of mandatory binding arbitration.

Arbitration usually costs more. Though filing fees start as low as $125 (and average $450), claimants must also put up a minimum $500 deposit for a half-day hearing session--and more if the hearing drags on into the afternoon. Mediation, by contrast, costs $150 for NASD filing fees, plus a minimum of four hours with a mediator at $150 per hour. The two sides often agree to split these expenses. But the bulk of the cost for both methods comes from lawyers' services, and since arbitration is a longer, more complicated proceeding, the legal bills mount much higher.

Another big drawback to arbitration is that it's impossible to calculate your chances of winning. With mediation, you have some control over the outcome: If you don't like the settlement on the table, you can always walk away and push ahead with arbitration instead. "People are finally waking up that they can get a better result without beating each other into submission," says Roger Deitz, a New York lawyer who serves as a part-time mediator.

Here's how you go about it. The first step, and perhaps the most difficult one, is to persuade the other side to agree to mediation. This can be tough, since people often fear that to negotiate is to surrender. You can remind your adversary that if the mediation is unsuccessful, the two of you can always resume the legal war. Once you agree to go forth with mediation, you call one of the local NASD offices (New York, San Francisco, Chicago, Fort Lauderdale, Los Angeles, Washington) and ask for the necessary forms.

Following payment of the $150 fee, both sides receive a list of mediators, along with short biographies. Usually, mediators are lawyers who specialize in conflict resolution and have special NASD training. The two sides either choose someone together or rank their picks and leave the final decision to the NASD. This selection process can take a month or two as the NASD is still putting together mediator lists across the country. Consumer advocates stress that the success of mediation hinges on the mediator chosen. Customers should investigate the candidates, calling the references they provide and asking if the parties were satisfied. "Make sure they have a record of successful mediation," says James Henry, president of the CPR Institute for Dispute Resolution, a New York-based think tank.

As the mediation begins, the two sides, each usually accompanied by a lawyer, present their cases. Then, the mediator separates them for what are known as caucus sessions. Here, the parties can speak more freely about their cases than they can in the legal battleground of arbitration. In these confidential meetings, the mediator pushes "reality checks." He or she asks the parties to speak frankly about the strong points and vulnerabilities of their case and what their chances of winning would be if they went to arbitration. And what, the mediator asks, are the strengths of their opponents' case?

SOFTENING. In discussing the facts in this manner, the mediator often finds that the parties are ill-informed. Many come to the table believing their case is stronger than it is. "Sometimes, the client and the attorney have pumped each other up," says Andrichik. And sometimes, there's simply a communications glitch between the investor and the broker. Under the mediator's guidance, they communicate better and gradually come to terms with the weaknesses of their own cases. Once they begin to see this, their rock-solid positions often soften, and the movement toward a settlement commences. In a second round of caucuses, the mediator begins negotiating by shuttling back and forth. Usually, an agreement is reached within a day. Under the mediator's guidance, the parties put down at least the basics on paper and agree to come up with a definitive settlement document within a number of days.

If the two sides don't reach an agreement in mediation, the plaintiff can move toward binding arbitration. But that doesn't mean the opportunity for mediation is lost. Indeed, as parties proceed toward arbitration, watching legal bills mount, they can return to mediation at any point or simply work out a settlement. Even without mediation, about 60% of arbitration filings are settled or withdrawn before reaching the arbitrator. Mediation simply offers the chance to push a settlement earlier, before the two sides have engaged in the expense, anxiety, and nastiness of a legal case.

During the mediation process, the two parties are much freer than in arbitration to express their feelings. Mediators say customers often feel better after expressing anger. And a broker can express remorse without worrying that it may be perceived as an admission of liability. Deitz recalls one case in which a customer and a broker reached a mediated agreement, and when the customer received the check, he proceeded to deposit the settlement back at the same firm. "That doesn't happen every day," Deitz admits.

The NASD hopes to push 10% of the arbitration load, or 600 cases, into mediation within a year. The effort began on the West Coast, says Andrichik, where consumers are more familiar with mediation than they are in other regions. Now, the group is busy teaching and certifying mediators in the rest of the country. Another source for mediators independent of the securities industry is the American Arbitration Assn. (212 484-4000), a nonprofit group with 36 offices nationwide.

As customers and brokers face off, they often begin with polarized views. "Customers say the broker's a crook, and brokers say the customer's a sore loser," says Stephen Diamond, Maine's securities administrator. Of course, they might not have ever gotten to that point if they had paid closer attention to each other in the first place. But people with dollars on their mind are notoriously bad listeners. It's in mediation, when they're forced to listen up, that reality sets in.EDITED BY AMY DUNKIN By Stephen BakerReturn to top

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