Stumping the Schwab: Investor Submission to Class Action Waivers

By Josh Brandsdorfer

Since 1987, when the Supreme Court in Shearson v. McMahon ruled that a brokerage firm could force customers to agree to arbitration, this method of dispute resolution has become the virtually mandatory in the financial regulatory industry. However, this previously preferred method of dispute resolution could be facing a new frontier if Charles Schwab has its way. In 2011, Charles Schwab added a clause to their agreements that mandated that clients could not pursue action against the corporation in class action suits. Class actions, common amongst investors who cannot afford representation or whose claims are not lucrative enough to hire a lawyer, provided a course of action for aggrieved customers.

The court in Charles Schwab v. FINRA, finding in Schwab’s favor, reinforced that there is little to protect consumers from downright predatory customer agreements, even for the nation’s top financial regulators.

In February, Charles Schwab won its initial panel hearing; and while FINRA, the brokerage industry’s self-financed policing arm, appealed this decision, it could prove disastrous for customers looking to recover against unscrupulous broker-dealers. Though some arguments arise that class action suits benefit the attorneys more than the aggrieved investor, class action suits are sometimes the only options for individuals who do not meet the high loss thresholds many law firms hold for these types of disputes. Instead, customers are forced to become part of a class; individuals similarly situated who all have claims against a common broker or product. These actions can provide powerful results to customers who otherwise could not afford representation and allows investors seek clarity in their legal issues.

The addition of non-profit clinics, such as the University of Miami’s Investor Rights Clinic, at least gives customers another avenue should the appeals court hold that Charles Schwab, and likely every other broker-dealer, can shield themselves from class action lawsuits. It is, however, unlikely that the number of non-profit clinics will be able to cover the customer cases that were once engulfed by class actions. A Charles Schwab spokesman indicated that the company will offer to pay the arbitration forum fees for claims under $25,000, but this sum usually only accounts for a few thousand dollars. While a nice gesture, it does not solve the problem. For claims this low, it is not economical for attorneys to take these cases, unless they are categorically similar, in which the attorney would previously cluster these claims together into a class action suit.

Though class actions may be very lucrative for some attorneys, the only parties who truly suffer from the unfavorable judgment in Schwab v. FINRA are the rights of investors. If the appeals panel does rule that Schwab’s action were reasonable and class action suits are in fact not required in brokerage contracts, look for more pro bono or small scale legal practices, like the Investor Rights Clinic here at Miami to become more popular. Law students can gain an insightful look into real legal practice in this pro bono environment. Perhaps more universities will embrace the idea of providing free legal services to investors whose investment claims remain too low for most private attorneys.

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