Swindled Investors Flooding FINRA With Record Number of Financial Fraud Arbitration Claims

FINRA, the primary privately-run regulator of U.S. securities dealers, is posting record-setting numbers of customer claims from investors who say they were swindled in Ponzi schemes and other Wall Street scams.

The Financial Industry Regularly Authority is charged with overseeing nearly 5,000 brokerage firms and more than a half-million registered securities representatives. Aside from the U.S. Securities and Exchange Commission and other governmental agencies, FINRA is the largest regulator of securities.

According to FINRA, new arbitration claims were up more than 90 percent in January and February 2009 compared to the same period in 2008. There were 1,065 claims filed in February 2009, but just 561 in February 2008.

And FINRA officials aren’t expecting the upward trend to level off anytime soon.

“We don’t have official projections for 2009, but if the trend continues, we’re probably looking at a high that will match what we saw in ’03 and ’04,” said FINRA spokesman Brendan Intindola.

Indeed, FINRA arbitration claims are on track to shatter the numbers filed in 2003 and 2004, currently the largest on record. In those years, as the dot-com bubble burst and equity markets took a hit, there were more than 9,000 FINRA arbitration claims filed. By comparison, there were just over 3,000 filed in 2007 and about 5,000 filed in 2008, according to FINRA.

Now, as Bernard Madoff, Allen Stanford, and other notorious money managers have been named in billion-dollar investment scams, FINRA’s phones are ringing off the hook.

FINRA Arbitration in High Demand

Investors can force a FINRA member into arbitration to settle disputes, but the agency also settles disputes between FINRA members.

Generally, FINRA requires a three-person panel – including one industry member and two “public” or independent members – to hear customer claims against members. However, a new rule now allows claims involving up to $100,000 to be decided by a single arbitrator. The previous cut-off for single arbitrator hearings was $50,000.

Most of the FINRA claims involve derivative securities and auction-rate securities, officials said. Auction-rate securities essentially are long-term bonds whose interest rates are set at weekly or monthly auctions run by broker-dealers. The instruments are very complex and have been sold to investors who did not fully understand how they work or the risks involved, leading to big losses.

Most customers are complaining to FINRA that their broker-dealer made misrepresentations to them or omitted facts, violated their fiduciary duty, or pushed investments that were inappropriate given the client’s age or financial condition. These are some of the most common problems associated with unethical or dishonest broker-dealers.

FINRA Troubles: Symptoms of a Larger Problem

Word that FINRA has seen a spike in the number of investor complaints and does not expect that trend to stop soon is not surprising. As the nation’s economy continues to weather the worst financial downturn in a generation, many unsavory scandals have surfaced. New York City investment advisor Bernard Madoff’s $65 billion fleecing of investors and the $8 billion Ponzi scheme allegedly carried out by Texas billionaire banker Allen Stanford are just the tip of the iceberg.

Thousands more investors have been lied to, deceived, and sold unsuitable investments by broker-dealers facing increasingly tougher times and resorting to desperate measures to make ends meet. Hopefully, FINRA will be able to swiftly and fairly arbitrate the record number of claims and help defrauded investors receive appropriate relief from financial crimes.

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