In this interview, Hayes discusses securities arbitration in general and provides consumers with helpful information about when they might have a claim against a broker or brokerage.

Interviewer: Could you tell us what NASD and NYSE stand for?

Debra Hayes: Yes. The NASD is the National Association of Securities Dealers. Any brokerage firm or any broker must be a member of the NASD in order to sell securities that are tracked on the NASD. There’s also the NYSE, the New York Stock Exchange. Again, if you are going to be a broker or a brokerage firm, you must be a member of the NYSE in order to sell securities that are carried on the NYSE.

Interviewer: How would a consumer end up in your office? Why would they need securities arbitration?

Debra Hayes: First of all, the consumer will be someone who has lost money investing in the stock market.

The reason a consumer would need securities arbitration is that whenever you decide to invest in any manner and you go to a typical firm, such as Merrill Lynch or Salomon Smith Barney or Citigroup or Edward Jones or Raymond James, these would be the biggest names, you’re going to sign an account agreement with this company in order for them to be your broker and help you with your investments. So, when you sign that agreement, there will always be an arbitration clause in it.

Your right to go to your state court or your federal court and present your case to a jury is waived when you sign this arbitration agreement. So your only way to have a grievance against the firm or against the broker is to file a claim with the NASD or the NYSE who then sets up the arbitration of the matter.

If you went out to invest and you have lost a fair amount of money in that investment process, then you should seek an attorney and see if you have the right to obtain a recovery for the monies that you’ve lost.

Interviewer: When would you know that you have a claim versus just a typical loss that may happen with any investment?

Debra Hayes: First you want to look at how much money you lost and what type of market did you lose it in. For instance, in 2001, when the market crashed, if you lost more than 20% of the principal amount of your investment, you had a good claim. So, if you took $100,000 in to an investment firm and all of a sudden you’re sitting here with a only $80,000 left, you haven’t made any money on your investment, in fact, you lost money and should seek out an attorney.

In today’s market, a strong upward market, if you have suffered any loss of money, you probably have a case against the broker and you should seek advise on the matter from an attorney.

There are also products that are purchased that raise a red flag for consumers. For instance, one of the hottest products of late has been something called a variable annuity. You may be in a variable annuity and not even understand that you’re in it. Variable annuities are virtually unacceptable and what we call “unsuitable” products for the majority for people; there are very few people they are suitable for. So, if you’re in a variable annuity, then you should be contacting an attorney as to whether or not that’s a good product for you to be in.

Other things that have happened of late that are very popular are what we call a 72(t) plans. The average consumer isn’t going to understand what that means. Say for instance you’ve got a 401(k), you’re retiring and decide to roll over your 401(k) or you’ve got a lump sum retirement because your company was encouraging early retirement. These accounts were then taken by the brokerage firms and a hypothetical illustration was run showing you that you could take “x” number of dollars out per month and your money was going to last you as long as your life expectancy.

Unfortunately, those hypothetical illustrations have not proven to be true. You’re probably not going to discover for seven to 10 years down the road when all of a sudden you don’t have any money left. So, I would encourage anyone that has any questions about what’s going on in their accounts, and they may not even understand how much they’ve lost, to contact us so we can look at your documents. It’s a simple process and we don’t charge for it. We can either affirm that we think you don’t have a claim or, if we do see some problems with your investments, then we can take the case further at that point.

Interviewer: What is broker misconduct?

Debra Hayes: Broker misconduct can range from someone, a broker, stealing your money—which, frankly, there is so much regulation that this really doesn’t happen very often these days—to a broker making an unsuitable recommendation to you. For instance, a broker recommends that that person over the age of 55 buy a variable annuity. That’s an unsuitable product; there are huge surrender charges if you ever try to get out of it. You’re paying for the most expensive life insurance product that’s wrapped into this variable annuity that you could ever pay. That’s an unsuitable recommendation; that’s broker misconduct.

A broker who runs a hypothetical illustration and makes assumptions in that hypothetical illustration that are not reasonable showing that your retirement monies are going to last you throughout your life, that’s broker misconduct. Putting an IRA account inside a variable annuity, that’s broker misconduct. In addition, broker misconduct would be filling out forms in a fraudulent manner or saying that a retiree who’s most concerned about income is an aggressive growth investor.

Broker misconduct comes in many, many forms. Unfortunately, clients don’t know about it until they lose money as a result.

Interviewer: Is this true for individual brokers or just for brokerage houses?

Debra Hayes: It varies. Many times the individual broker is the one making decisions. However, what he does, the action he takes, is supposedly and allegedly supervised by the branch manager in those offices. Many times our claims involve failure of the branch managers to supervise what’s going on.

Sometimes, these branch managers and compliance managers get reports on their desk that—they call them exception reports—that are telling them, “Mr. Smith is over here losing 50% and 60% of his money and no action is taken.” So, obviously there’s supervisory and compliance issues that are not being followed by these firms.

Also, there is misconduct by the actual brokerage firm – something that we call “making a market” in a stock. In other words, the financing part of Merrill Lynch is financing this stock and earning money. So, they’re promoting this stock, they’re encouraging their brokers to sell this stock to their clients so that they make money on it in every way that we can. Not because it’s necessarily a good stock, not because it’s a suitable security or stock for that client, but because they can make money on every side of the deal. So sometimes the misconduct is at a higher level.

There are other instances. Edward Jones is in the middle of a class action settlement for taking kickbacks from the mutual funds. When you walk into Edward Jones, there were eight mutual funds and every single client I’ve ever had, has the same one of those eight mutual funds. Well, that’s because Edward Jones was getting kickbacks on those mutual funds.

So, sometimes it’s at the high level where the brokerage firm is putting a “daily special list” out there to the brokers and saying, “Here’s what’s on the daily special, sell it to your clients.” Sometimes it’s at the midlevel management where the supervisor isn’t doing his or her job. Other times it’s at the individual broker level where they’re not acting in the best interest of the client, which is what they are ordered to do by the securities regulations.

Interviewer: How can an investor recognize if they’ve been a victim of this type of misconduct?

Debra Hayes: Again, the misconduct is typically going to show up in the losses; the clients are going to lose money because this broker has not acted in their best interest and has taken action that’s actually harmful to them. So, it could be that they’re not getting a proper return. For instance, in this very high stock market, if you’re sitting there and you’re not making a 10% to 12% return, there could be broker misconduct. Many times when the market falls, like it did in 2001, that’s when so many people get hurt because they weren’t adequately protected; the market crashes, the brokers sit there and let the accounts fall and people can’t ever recover from those kinds of losses.

Again, it may be the type of product that they have and many times people don’t even know what they have. So, people need to inquire with their current broker, “What exactly do I have?” They need to understand what they have and then they need to seek out, either do some of their own research or seek out competent counsel to determine that and the manner in which they’re invested is suitable for their situation.

Interviewer: Is there a more typical type of victim of this type of misconduct?

Debra Hayes: It’s typically the elderly, those that are retiring or are retired. In this day and time, many, many people are retiring at the age of 55 and that’s not what we would normally think of as elderly. However, I would say that the victims tend to be from age 55 and up. It’s across the board. We see very educated people taken advantage of because they rely on the broker’s recommendations. Of course, those that are not highly educated are victims of these types of conduct as well. The common sentiment is that people hire a broker that they trust and then they rely on them and accept their recommendations.

Many employees that are retiring meet with a broker that their company chooses. They’re very trusting in that type of a situation and think, “Oh well, my company let this person speak to us, they must know that they’re a good person. They must know what they’re talking about.”

These brokers are extremely good salesmen, which is what they are, salesmen. They really are not the financial analysts, in my opinion, but they claim they are. So again, those that fall victim to that the most often are 55 and over, retirees and elderly people.

Interviewer: You’ve recommended seeking counsel if you think there is a problem with an investment you’ve made and this type of misconduct as something a victim should do. Is there anything else they should do and things they shouldn’t do?

Debra Hayes: Number one, they need to absolutely understand what the product is they’re in and what the fees and expenses are that are going into that product. For instance, you might be getting a lovely 8% or 9% return, but if you’re in a product that’s costing you 3%, you’re only earning 5% or 6% and so you really aren’t earning what other people in the market are. You’ve got to ask very detailed questions and understand what you’re getting into and hold your broker accountable.

You can also always go and visit with a competitor, go to another broker at another firm and have them give you an opinion. Although, quite frankly, you’re just probably going to get an opinion about them wanting to put you into whatever their hot product is.

There are insurance agencies and securities agencies in every state. You could contact, for instance, the Texas Securities Board or the Alabama Securities Board. Those entities differ by each state as to how aggressive they are. For instance, Joe Borg in Alabama is very aggressive and he will investigate any claims of abuse that anyone would bring to his attention. I’m not as familiar with every other state, but some states are very good about investigating, so that is another route that people could take.

Interviewer: Are there things they shouldn’t do?

Debra Hayes: They should not accept these recommendations carte blanche. They should discuss it with other family members, other brokers, perhaps an attorney, perhaps their accountant—that’s another source of information that they can go to.

They should not believe that they will get something for nothing. In other words, if you are told that you are going to get the highest return, then you need to understand that you’re taking the highest risk. Nothing comes for free, even in the stock market. If you are getting the highest return, you’re taking a tremendous amount of risk and you need to be honest with yourself about that.

You should be vary wary, in my opinion, of any portfolio that involves being invested 100% in the stock market. I think that every person, especially this group we’re talking about which are retiring or retirees, need to have well-balanced portfolios and that means a mix of bonds and stocks, as well.

Interviewer: You mentioned state agencies to contact. Does broker misconduct fall under state and federal law, state or federal law? What rules do apply here?

Debra Hayes: It would probably have to rise to the level of criminal for the state to be involved. Again, someone stealing money. I believe that a state would certainly have jurisdiction over that and can take action in that sense. Most of the time it’s what we call common law, which is that the broker has been negligent or the broker has been fraudulent. Those are just state laws that apply, as well as their NYSE, NASD and SEC, which is the Securities Exchange Commission. They have their own set of rules that lay on top of the law of each state. So for instance, if my client is in Texas, then I’m applying Texas law as well as these overlying SEC, NASD, NYSE rules. If the client is from Alabama, we’re applying Alabama law.

Interviewer: What is the statute of limitations on these misconduct cases? How does that work?

Debra Hayes: Six years is a good rule of thumb. If you get your case on file within 6 years of the when the losses occurred or when you closed the account, you will probably be safe.

There is a six-year eligibility rule that, in other words, the damage that was caused must have occurred within the last six years. For instance, you may have bought the stock seven years ago, but if it wasn’t sold until two years ago, because there is a transaction, you still come within that statute of limitations or statute of eligibility.

There’s not an easy answer to those questions because there are many factors to consider in the statute of limitations, but six years is a good rule of thumb. In other words, if the broker that caused you harm, you closed that account with him seven years ago, you don’t have a case.

Interviewer: You mentioned that often people don’t realize this until they’re into their retirement and realize they have no money or less money than they should. How would statute apply in those types of cases?

Debra Hayes: There is always what we call the discovery rule, which is that you realize that you’ve been harmed when you discover the harm. In these retirement cases where there’s a lump sum distribution, you’re not going to discover that you’ve run out of money until six or seven years later. So, the statute is tolled based on when you discover that. Those people are protected under the 72(t) cases.

Interviewer: How does the arbitration process work?

Debra Hayes: The first thing that happens is if you contact our office, we’re going to ask to see your account statements. We want to see the monthly statements that you get from Merrill Lynch, Edward Jones or Raymond James every month or every quarter. We take a look at those and we can tell whether there’s been wrongdoing. We listen to your story. We look at the documents. From that, we’re pretty much able to tell whether there’s been wrongdoing.

We conduct an interview with the client and look at the documents. We accept the case. Then we prepare what’s called a statement of claim; that’s the document that starts the process. We file that with either the NASD or the NYSE. They send to the defendant (they’re called respondents in these actions). They’ll send it to Merrill Lynch and say, “Here, you’ve been sued by Mr. Smith and you need to file an answer in 20 days.” So, they file their answer. Then you begin the discovery process. There are no depositions, there’s simply an exchange of documents. Then, a three-day hearing is set in the city, in the major city closest to where the client lives.

You’re dealing with our office throughout this. It takes about a year to 18 months to complete it, so it does go very quickly; unlike a court case, that’s one of the positive things. We will be dealing with you throughout this time period, getting additional documents, talking to you about your case, getting feedback and getting you ready for the hearing.

We pick the panel. At some point, we’ll be sent a list of perhaps 10 to 14 panel members and we choose our panel from that. We end up with a panel of three. We go to that city and put witnesses on the stand and go through an evidentiary hearing. Within 30 days, that arbitration panel must entering a ruling—another positive thing. If we win, that money must be paid by the respondent within 30 days. So, hopefully 18 months, worst-case scenario 24 months, you’re done. It’s over, complete, virtually cannot be appealed, so.

Interviewer: So this process replaces a trial in a state or federal court?

Debra Hayes: That’s correct.

Interviewer: And there is, you said, no appeal.

Debra Hayes: It is very difficult to appeal an arbitration award.

Interviewer: So it’s a final decision.

Debra Hayes: Yes. You can appeal it, but in all the years I’ve done these cases, I think I’ve seen only two of them appealed—which we won and then they end up owing more money because the interest statute continues to tick. Now the courts are threatening more and more to sanction people if they file appeals to these cases. So, it’s very rare that a case is appealed.

Interviewer: What can a victim of this type of broker misconduct sue for?

Debra Hayes: Well, they sue for two things. One, the actual out-of-pocket losses that they have. If you turned $100,000 over to the broker and when you left you only had $50,000, you sue for $50,000, which is what we call the net, out-of-pocket loss. You also sue for what we call the market-adjusted damages. In other words, if you had that $100,000 invested properly, it wouldn’t have dropped. It would be worth more and we run charts that show exactly what it would be worth. So, if it was invested properly, we show the panel, “Not only would Mr. Smith not have lost $50,000, he would have had $125,000 because he would’ve earned a proper return on those monies.” We sue not only for the net out-of-pocket loss, we sue for the damages that the monies that the person should have made if it’d been invested properly.

Interviewer: Is it more beneficial to go to arbitration rather than trial?

Debra Hayes: Well, there are arguments on both sides of that coin. There are advantages to arbitration; however, it is a process that is flawed and prejudiced, unfortunately, in favor of the brokerage firms. But it does offer a quicker, less painful recovery.

Interviewer: Are there fees associated with the arbitration and who would pay for those fees?

Debra Hayes: There is a filing fee, which we ask the client to pay. That typically ranges from $700 to $1,500. We then pay all of the other expenses: all copying expenses, all expert expenses and all travel expenses. We take the risk on those fees. If we recover, either by settlement or award, then those expenses are paid out of that settlement or award.

Interviewer: As someone is preparing to come to your office, what type of documentation is required to evidence this type of broker misconduct if they believe they have a case?

Debra Hayes: They should gather any letters between themselves and the broker or the brokerage firm. Obviously, we have to have the account statements and those are the monthly or quarterly statements that they get regarding the account. If they have any other documents, for instance, when you get a variable annuity, you’re typically sent a variable annuity policy and that would be important for us to see. Other than that, if the client filled out questionnaires, we would need to see those. However, there really isn’t a whole lot of paperwork that the brokers provide the clients.

Interviewer: Is there ultimately a cap on the type of damages a client can receive from this type of a suit?

Debra Hayes: No. It’s also possible to seek punitive damages. The amount of punitive damages would, frankly, be limited by whatever state law in which you were trying the case. It’s extremely rare to be awarded damages in arbitration, but it happens.

Interviewer: What type of questions should a potential client ask your office before they decide to go forward?

Debra Hayes: Well, we have a very structured outlined interview, so we would be grilling them to see whether or not we think they have a case. Before a client comes to us, they should ask themselves, “Was I controlling this account or was the broker?” There are people that are the ones choosing the stocks and calling up the brokers and telling them to put in the order, that’s not a case we can do anything with. So, they need to ask themselves, “Was I truly relying on the broker, was the broker controlling this account and making the decisions?” If not, then they probably don’t have a case.

They also need to ask themselves what their losses have been. If you’re in a tumbling market, like in 2001, and the market’s down 25% and you lost 10%, you don’t have a case because the losses you suffered probably were just as a result of the market and not due to broker misconduct. You have to ask yourself, “Did the broker warn me about these losses? Did he tell me that I was taking a risk being in these, making these investment choices? Did he tell me the wide range of services and I’m actually the one that decided to go this route?” If so, then you don’t have a case. Those are the kinds of questions.

Interviewer: What qualifications should the securities arbitration lawyer have?

Debra Hayes: You definitely want someone that is familiar with this area. It’s very unique and I have seen many litigators that are successful trial lawyers that go into arbitration and can’t win. It’s just a different animal and you definitely want someone that understands it. It’s a very technical area, understanding the investments and what parts of the investment make it unsuitable for certain persons.

For instance, on the 72(t) plans that I have been talking about with the IRA rollovers or the lump sum rollover, many brokers are not advising the clients that if they take out anything more the scheduled payment that they will have a huge tax consequence. These types of tax consequences, the different aspects of different products, like the variable annuity, we know inside and out and know to look for those whereas someone that doesn’t do this all time just wouldn’t know all the different things to look for. So, they should be certain that they have practiced in the securities area and that they’ve successfully handled securities arbitration cases.

Interviewer: Is there a type of specialized certification offered for securities arbitration through the individual state bars?

Debra Hayes: No.

Interviewer: If there’s not a qualified securities arbitration lawyer in a claimant’s state, can they hire an attorney from another state to represent them?

Debra Hayes: Yes. The beauty of securities arbitration is that, because it is a private arbitration and not the court system, attorneys are free to do securities arbitration cases across the nation. You do not have to be licensed in any particular state in order to handle a securities arbitration client. We handle cases all over the nation and have clients from across the nation.

Interviewer: How are the securities arbitration lawyers compensated at the end of a matter?

Debra Hayes: We work on a contingency basis and agree to take our fee only if we’re successful. If we lose the case, then we eat all of the expenses and do not earn a fee. The only time that we earn money is if we’re successful.

Interviewer: We mentioned at the beginning of the interview several firms that had been involved in this broker misconduct area. Could you go over the names of those firms again?

Debra Hayes: Yes. It’s typically going to be Merrill Lynch, Edward Jones, Salomon Smith Barney, Citigroup, Raymond James, Hilliard Lyons—those are the major firms that you see across the board. There are also many smaller firms that some people go to and those would really be too numerous to name.

Interviewer: But it’s worth pursuing if a claimant has an account with a firm other than the major ones you’ve listed?

Debra Hayes: Absolutely. We have a quite a few cases against the smaller brokerage firms. In many instances, they are easier to deal with on a case than the big brokerage firms.

However, you’re not going to have a case against Charles Schwab as they do not hire brokers to make recommendations. So, if you’re doing E*Trade or you’re doing Charles Schwab, those are not the kind of firms that have brokers that are making recommendations. Whatever you’re doing at those firms, you’re doing it yourself. You’re making your own decisions and so you’re not going to have a case against those companies when you lose money.

Interviewer: You also mentioned variable annuities and 72(t) plans as being areas in which this litigation has arisen. Besides those, is there any other type of account that claimants should look at carefully?

Debra Hayes: Yes, a managed money account. That means, again, you sat down with your broker, he recommended two or three of these money managers and put you in that. If you’re in mutual funds, you should be concerned about the type of share of mutual funds that you own. If you own B shares, those may not be appropriate shares for you to own. There are A shares, B shares and C shares and so you should see what type of shares in the mutual fund that you own.

If you have an account that’s 100% individual stocks, or even a large amount of your money is in individual stocks, you should be very concerned about the aggressiveness and the risk of your portfolio. What are other types of products? The variable annuity product, you’ll know if you’re in it if you’re getting things from companies like Lincoln National or Lincoln Benefit or MetLife. Many times you’ll be getting documents from other companies other than the brokerage firm; however, those are probably the main products.

Interviewer: Is there anything you’d like to add for potential clients?

Debra Hayes: Just that this is an area where, unfortunately, people just, can be completely unaware that they have any ability to take any action and recover for this misconduct and for their losses. However, I want people to realize that if they are in a well-managed balanced portfolio, they shouldn’t be losing money. Even when the stock market goes down, if they’re set up properly, they won’t lose money. There is a way to recover and people should investigate this and do what they can to protect their rights.

If you would like to contact Debra Hayes, you can reach her at 1 (866) 701-9973 or click here.