Coping in the Aftermath : Most Complaints Against Brokers Unresolved: Study

Among the darkest legacies of the crash of 1987 are the thousands of complaints made by small investors about how their brokers botched orders, levied unexpected margin calls, conducted unauthorized trading, provided false or misleading information, or committed other questionable practices.

According to a survey to be released today by state securities regulators, two-thirds of small investors with such gripes are still waiting for them to be resolved. In addition, two-thirds (67%) of the investors surveyed already have or plan to change their brokerage firm and adopt a more conservative investment strategy. Nearly one in three (29%) have substantially less money in the market and more than four in five (82%) are less confident about the securities markets.

“This confirms our suspicions that small investors were, and remain, the ‘invisible victims’ ” of the crash, said John Baldwin, director of the Utah Securities Division and incoming president of the North American Securities Administrators Assn., an organization representing state regulators that conducted the survey.

To be sure, the survey was not scientific and may exaggerate the magnitude of unresolved complaints. It was based on responses from 829 of some 15,000 small investors nationwide who registered beefs with a complaint hot line set up by the association shortly after the crash; those whose problems were resolved promptly and satisfactorily probably had no reason to call.

Also, some of the complaints may not be resolvable, because brokerages contend that many investor gripes lack merit or that the firms have no legal obligation to act, given the terms of the investment.

The survey showed that many investors misunderstood their rights or their investments. Indeed, many of the complaints came from investors using options, which by nature are more complex and risky than direct purchases of stocks.

Nonetheless, it does show that many investors are still hot about their treatment during the crash and that their anger has contributed to reduced investor confidence, association spokesman Scott Stapf said.

The results showed that one out of seven of those who were active investors before the crash have bailed out of the market altogether or now hold $500 or less in securities.

The association said a key finding was that nearly half (49%) of investors’ complaints might have been prevented if brokers had stuck to proper sales procedures before the crash, avoiding unsuitable investments for their clients.

Not surprisingly, about three out of four (74%) respondents with an opinion said they were against mandatory arbitration of securities disputes.

Many brokerage firms require clients to sign agreements stating that they will use arbitration instead of civil lawsuits to resolve disputes. More than half (54%) of respondents, however, said they didn’t know or couldn’t determine whether their agreements contained such clauses.