Disputes with Stock Brokers

A Programme of the Securities Industry

Not long ago a broker found himself served with notice of a lawsuit. The infamous Bre-X stock was mentioned which added to his anxiety level.

The plaintiff was the estate of an elderly gentleman who had suffered from Alzheimer's disease and died while in a nursing home. His son was the executor of the estate. A short time after the funeral the son reviewed his father's investments. He was very surprised to see that a significant portion of the portfolio included Bre-X shares.

When the father had begun to display symptoms of Alzheimer's, the son had met with the broker and suggested that the high-risk stock be sold. This meeting occurred before the value of the shares began to rise dramatically. Over the following months while the stock skyrocketed, the son kicked himself more than once for intervening the way he did.

However, the broker did not carry out the sale. After the conversation with the son, the broker had phoned the father to discuss the matter. The father indicated he was not prepared to make a decision over the phone and would call the broker back. Neither side followed up and the shares were not sold.

On discovering this fact after his father's death, the son called the broker and instructed that the shares be sold immediately as the value was beginning to drop. Unfortunately, the broker was powerless to make any changes to the portfolio because the will had not yet been probated, a process which would take some weeks. In the meantime the value of the shares continued to tumble.

The son was furious. He met with a lawyer who agreed that the broker failed to "know his client". A standard for brokers is the "know your client" rule, which requires that they ascertain their clients' understanding of the market, their risk tolerance and so on. The lawyer stated that substantial investment in high-risk stock was inappropriate for a sick and elderly person. A writ was filed against the broker and the brokerage firm.

The lawyer searched court records to see whether the broker or brokerage house was involved in other lawsuits. The estate's case would be stronger if there was a record of other lawsuits suggesting incompetence or negligence by the same firm. He was unable to find anything.

Further, the brokerage was a large organization that could finance a lengthy and expensive court battle. In contrast, the resources available to the estate were severely limited.

The estate's lawyer was discussing the problem with colleagues and learned about a dispute resolution programme developed in British Columbia by the Vancouver Stock Exchange and the Investment Dealers Association of Canada in conjunction with the BC International Commercial Arbitration Centre. The idea is to make mediation and arbitration available as methods for resolving disputes with brokers. Investors are offered ways of resolving a dispute which are fair, efficient and effective, ensuring confidentiality and privacy, while being generally less expensive and faster than going to court.

Investors are encouraged to try to resolve their problems directly with the broker as soon as they arise and, if necessary, with the firm manager or compliance department. The availability of mediation and mandatory arbitration, which can provide a binding decision within months rather than years, encourages firms to enter good faith negotiations. If talks with the firm do not result in a settlement, the investor can apply for mediation or arbitration of the dispute.

Mediation provides a neutral third party to facilitate a negotiation, aimed at resolving the matter to everyone's satisfaction. Going to mediation requires the agreement of both parties. All matters discussed are without prejudice, which means they cannot be used as evidence in court at a later date if the investor decided to litigate the dispute. They are also confidential to the parties.

If the investor requests arbitration, the broker and related firm are obliged to participate. The arbitrator is appointed by the BC International Commercial Arbitration Centre. The arbitrator hears the evidence from both sides, reviewing all relevant information presented, and renders an award which is binding. As with mediation, all matters discussed in the arbitration are confidential to the parties involved. Once arbitration commences, litigation is no longer an option to either party.

In this case, the lawyer for the estate applied to the Centre for arbitration and dropped the court case. An arbitrator was appointed and a hearing date was set for the following month. In the course of preparing evidence for their respective cases, both sides saw that there was room for negotiation and asked a mediator to assist in their discussions.

At the mediation, each side recognized that the red tape and delay with probate were not of either side's making. The son came to appreciate that the firm was not responsible for the significant losses during the probate period. He was reminded that he might have sought power of attorney over his father's investments when he became worried about his father's capacity to make wise decisions. The firm recognized that it had a responsibility to know its client and recommend appropriate investments. However, the estate could not argue that the investments were inappropriate and still expect to benefit from an enormous return on the shares had they been sold at the height of the market.

In the end both sides reviewed their rights and responsibilities and settled on an amount agreeable to both. The mediator, who was knowledgeable about practices within the securities industry, was able to keep the parties focused on finding ways to resolve the problem and make the best of an unfortunate set of circumstances.