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Arbitration Halt Frustrates Investors

Securities: Despite Pitt's attempt to end standoff, NASD and NYSE haven't resumed hearings while they challenge new rules.


More than 500 investors complaining of fraud and mistreatment by their stockbrokers still can't get a hearing in California, nearly two weeks after Securities and Exchange Commission Chairman Harvey L. Pitt offered hope of ending an arbitration standoff.

On July 1, a new state law governing ethical disclosures by arbitrators handling investor complaints in California took effect. The National Assn. of Securities Dealers and the New York Stock Exchange are challenging the rules in a federal court in Oakland and have brought a halt to arbitration hearings in California.

Earlier this month, Pitt told the groups to resume hearing arbitration cases. Despite assurances of cooperation, hearings still hadn't resumed this week, and Pitt repeated his request Tuesday.

Plaintiffs' attorneys and the state Judicial Council, which wrote the rules at the direction of the Legislature, say they are losing patience over the arbitration logjam.

''Twelve days after Pitt's letter [to the NYSE and NASD], I'm still getting calls from California residents saying their lawyers are telling them they have to go to Nevada" to resolve securities disputes, said Gene Wong, chief counsel for the state Judicial Council.

"It's an outrage," said Vincent DiCarlo, a Sacramento attorney who represents investors in arbitration proceedings. "There's no reason they can't comply" with the state rules pending legal review. Alternatively, DiCarlo said, brokerage firms faced with investor complaints could allow the cases to be heard in courts.

The dispute comes as public attention is focused on widespread allegations of brokerage firm misconduct, including charges that analysts, trying to win lucrative investment banking business for their firms, publicly promoted stocks that they privately called "dogs" and worse.

In the most prominent of those analyst-conflict cases, New York Atty. Gen Eliot Spitzer got the jump on Pitt and the SEC, winning a $100-million settlement from Merrill Lynch & Co. Spitzer is conducting a similar investigation of Citigroup Inc.'s Salomon Smith Barney unit, and securities regulators in other states have formed a task force to investigate additional allegations of misconduct in the securities industry, which typically had been a province of the federal government.

The SEC said Tuesday that it would submit a "friend of the court" brief in the case filed against the California rules, discussing its obligation "to oversee a uniform national system for resolving investor complaints."

The SEC also said it would study whether California's disclosure rules should be incorporated into national policy. It said it had chosen Michael Perino, a visiting professor of securities law at Columbia University, to determine whether NASD and NYSE rules need to be modified.

The California rules are cumbersome and costly, said Ray Pellecchia, an NYSE spokesman. He said objectionable provisions include an overly broad requirement that arbitrators disclose all financial relationships that their family members have had with the brokerage houses involved. The disclosure requirements are so broad that they would encourage frivolous challenges to arbitrators, he said, delaying hearings and multiplying their costs.

Pellecchia and Nancy Condon, a spokeswoman for the NASD, said discussions are underway with the SEC over a way to resolve the arbitration standoff, but neither they nor the agency would elaborate.

In the meantime, some plaintiffs' attorneys have begun taking clients out of state for arbitration hearings under the national rules.

"It's either that or sit around twiddling your thumbs, which we can't do," said Timothy Karen, an attorney in Del Mar, Calif. Karen said he was moving several cases involving millions of dollars of losses, including allegations of analyst fraud, to Portland, Ore.

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