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Disgruntled Investors Face Tough Choices as Arbitration Bogs Down

A dispute over differing state and securities industry rules could stall hearings for years.

February 11, 2003|E. Scott Reckard | Times Staff Writer

When Oscar Bugarini was downsized into early retirement from Boeing Co.'s Long Beach aircraft plant in 1999, he turned his $240,000 in retirement savings over to brokerage Salomon Smith Barney, asking in writing for a conservative portfolio balanced among "value" stocks, bonds and cash.

Instead, Bugarini says, he wound up with technology stocks and Salomon-managed growth-stock mutual funds that shot up briefly, then fell into a long decline. All the while, Bugarini says, he was demanding that his Salomon brokers sell the volatile holdings.

"They kept saying, 'Don't worry; it's under control. The worst thing to do is get out when the market is down,' " recalls Bugarini, now 64. By the time the brokers finally cashed him out in 2001, Bugarini figures he had lost $109,000.

Believing they had been wronged, and wanting to get at least some of their money back, Bugarini and his wife, Mercedes, filed an arbitration complaint against Salomon last summer.

And that's when things really got complicated.

Using arbitration to settle a dispute is supposed to be a quick, affordable alternative to a courtroom trial. Instead, the Yorba Linda couple discovered that the brokerage industry wouldn't appoint arbitrators to hear their case unless they first waived rights granted by a new California ethics law.

The Bugarinis had landed in the middle of a major legal dust-up pitting the brokerage industry -- backed by the U.S. Securities and Exchange Commission -- against the California Judicial Council, the state attorney general and hundreds of investors like themselves.

The battle was sparked after the Legislature in 2001 passed an ethics law that requires arbitrators in California to follow much broader disclosure rules than those required of arbitrators by the New York Stock Exchange and the NASD (formerly the National Assn. of Securities Dealers), the brokerage industry's self-regulatory organizations.

The California law requires that arbitrators divulge a checklist of all business, personal and professional ties that could represent conflicts of interest.

Investors could use such disclosed material to challenge and disqualify proposed arbitrators. The state wants these rules to apply in all arbitration cases, including disputes involving medical claims, employment, insurance -- and brokerages.

The NASD and the NYSE asked a federal judge in San Francisco last fall to decree that California has no authority to issue arbitration rules that conflict with the industry's standards. The suit was thrown out on technical grounds, but the industry is appealing.

In a separate case on the subject, U.S. District Judge Jeremy Fogel in San Jose on Monday heard arguments on the central point of the dispute: Whose rules -- the securities industry's or the state of California's -- should govern arbitration cases brought by residents of the Golden State?

Fogel made no immediate ruling, and with all sides forcefully dug in, "this thing could be going on for years," says Beverly Hills arbitration lawyer Philip M. Aidikoff. He expects the matter eventually to end up before the U.S. Supreme Court.

That's bad news for the hundreds of Californians who, like the Bugarinis, have paid $1,000 or more in fees in the last seven months to the NYSE or to NASD Dispute Resolution, in hopes of having their complaints heard by an arbitration panel.

With their cases now held up, the aggrieved investors face difficult choices. Should they waive their rights under state law? Take their complaints to another state, such as Nevada, where they can be heard by arbitrators under securities industry rules? Wait for the courts to resolve the state-versus-federal dispute?

Or should they abandon the arbitration process altogether and try to take their complaints to state court?

For investors, deciding what to do while the conflict is sorted out is a "tough question," acknowledges SEC Commissioner Cynthia A. Glassman.

For those who won't waive their rights under the new state law, "there would really appear to be from a legal perspective only two options, which are to go out of state, for those who can, or to wait," she says.

Aidikoff is advising his clients to hold their noses and go to arbitration under the rules of the NYSE and NASD. "The chief objective for my clients is getting a speedy hearing," he says.

But other investors, including Bugarini, are taking option No. 4. They're asking state court judges across California to accept complaints that, according to brokerage contracts signed by all customers when they open accounts, are supposed to be heard only by arbitrators provided by the industry.

"I'm not going to waive my rights," Bugarini says.

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