Clients are still upset about portfolio losses during the market crash, and based on the rising FINRA arbitration claims—up 65% in August 2009 versus the previous year—they’re taking it out on their advisors.
 
Some 4,991 cases were filed with FINRA in the first eight months of 2009, surpassing the total of 4,982 cases filed for the whole of 2008. “By August, we should not be matching last year’s numbers,” says Brian Hamburger, a securities attorney at Hamburger Law Firm, in Englewood, N.J., who represents brokerage firms and sits as a FINRA arbitrator. “Summer is typically a slow period, it’ll be interesting to see what’s in store for us by year end.”

Negligence was the most common complaint brought by clients against advisors and firms. There have been 2,341 negligence claims filed so far this year, a 46% increase over 2008. One plaintiff’s attorney says this is due to the inadequate response of securities firms to the crisis. “You have CEOs of securities firms saying ‘Who knew this would happen?’ That’s ridiculous. There were plenty of signs and the firms were negligent,” he says.

Mutual funds were the most common security type involved in cases. They were involved in 1,173 of the complaints filed, up 26% from last year. However, the number of cases brought over derivatives plunged 43%, to 458 cases, so far this year. Hamburger says this is due to the regulatory focus on these securities. “Once you have regulatory scrutiny, firms put their focus on that area and work out a settlement,” he says. “That supplants the need for customers to bring individual complaints.” The number of auction-rate securities cases also fell from 299 last year to 199 this year as firms continue to announce buybacks of those securities.

Despite the large number of cases filed so far this year, the percentage increase in cases in August was actually lower than the increase in July, which jumped 71% from the previous year. The slight drop in August may be due to the improvement in the market over the past couple of months, says Alan Foxman, a securities attorney at Boca Raton, Fla.,-based  Fred Chikovsky& Associates and former staff attorney at FINRA predecessor NASD. But he’s not convinced the trend will continue. “Some people contemplating filing may have recovered some of their losses and held off,” he says. “But if there’s another downturn the numbers will shoot back up.”