Panel Awards Punitive Damages Against Broker : Securities: The New York arbitration ruling challenges a key state law that has shielded the industry.

In a ruling that could have significant repercussions for the brokerage industry, an arbitration panel has awarded punitive damages to an 85-year-old woman who sued her Prudential Securities Inc. broker, even though New York law seemingly forbids punitive damages in arbitration cases.

The ruling by a New York Stock Exchange arbitration panel is of national interest, because a high percentage of disputes between brokers and customers are decided by arbitration panels here.

In addition, the U.S. Supreme Court is expected to decide soon whether brokerage firms can enforce a clause in customer account agreements that makes New York law--including the ban on punitive damages--apply to arbitration cases in other states.

The securities industry has campaigned in recent years to limit punitive damages nationwide, following a series of big awards in cases in which brokers allegedly defrauded customers.

The case, decided last week and made public Wednesday, involves Allice R. Wormser of Westchester, N.Y., who accused broker Michael A. Stern of making stock purchases in 1992 and ’93 that were never authorized by her.

Wormser also alleged that Stern lied to her about her account, withholding confirmation slips and frequently buying and selling securities just to generate brokerage commissions. She testified that her signature was forged on an agreement that allowed the broker to use borrowed money to buy stock for her account.

Even if the ruling does not survive an expected court challenge, experts said, the decision is noteworthy because the arbitrators apparently found the Prudential broker’s conduct so egregious that they were willing to risk a challenge to the New York law.

A 1976 decision by New York’s highest court banned punitive damages in arbitration cases. Nonetheless, a panel of three NYSE arbitrators--apparently persuaded by a novel legal argument made by Wormser’s lawyer, David E. Robbins--ordered Stern to pay Wormser $70,000 in punitive damages and $70,000 in compensatory damages, as well as her legal fees and other costs.

Stern was fired by Prudential a year ago for alleged unauthorized trading and violations of firm rules, according to National Assn. of Securities Dealers records. He now works as a broker at Gruntal & Co.

Stern’s lawyer, David Crystal, said the accusations against the broker are false, adding that he plans to appeal the panel’s decision, which he called “bizarre” and “a violation of the law.”

Prudential, originally named as a defendant in the case, has already reached a settlement with Wormser.

Robbins argued that a federal court decision opened the door to punitive damages in arbitration cases if there was an agreement between both sides giving arbitrators the authority to award them.

Further, he contended that a standard form called a “submission agreement” that both parties sign at the beginning of an arbitration case amounts to such an agreement.

The agreement, Robbins said, specifically authorizes the arbitrators to decide all issues raised in a customer’s complaint--which in this case included a demand for punitive damages.

There was no way to tell if arbitrators accepted that argument. As is typical in NYSE arbitration awards, the panel offered no explanation of how it reached its decision in Wormser’s case.

Richard Ryder, publisher of the Maplewood, N.J.-based Securities Arbitration Commentator newsletter, said the argument raised by Robbins has been upheld recently in state court decisions in Texas and Minnesota. But he added that there is a strong chance that New York courts will overturn the Wormser ruling.