Fordham Law


The Charles Schwab Corporation : Schwab client-waiver spurs FINRA complaint

Constantine Katsoris in 4-Traders, February 01, 2012

Media Source

(Reuters) - Wall Street's own watchdog filed a complaint against Charles Schwab Corp on Wednesday accusing the online brokerage of requiring customers to waive their rights to pursue class actions against the firm, a violation of industry rules.

The Financial Industry Regulatory Authority alleged that San Francisco-based Schwab added a new provision in October to more than 6.8 million customer account agreements that would preclude them from starting or joining class-action lawsuits against the brokerage, according to FINRA's complaint.

Schwab also required customers to agree that industry arbitrators would not have the authority to consolidate claims from multiple parties. These types of consolidated cases are common, but typically include far fewer claimants than those in a class action court cases.

FINRA, in addition to being Wall Street's regulator, runs the arbitration forum where customers and brokerage firms typically must resolve legal disputes. FINRA arbitration rules do not allow arbitrators to hear class action cases.

The rules also restrict brokerages from limiting investors' rights to file cases in court in situations that arbitration rules allow, such as in class actions.

Schwab's agreement would effectively leave investors in a bind, in which many would not have access to a legal process for recovering their losses, say lawyers.

Investors with larger claims, say $1 million, could have an economic incentive to pursue their claims in an individual arbitration case, said Steven Caruso, a securities arbitration lawyer for Maddox Hargett & Caruso in New York. But many investors with small damages, who often join together in court class action cases, would effectively have no remedy, he said.

"If you can't get the class, it's not economical to bring an arbitration, so you don't do anything," Caruso said. Schwab "was trying to get the best of both worlds," he said.

Schwab's revised agreement outraged many securities arbitration lawyers.

"Schwab used its arbitration provision to limit the ability of clients to bring claims they have a right to bring and to limit what arbitrators can do," said William Jacobson, a professor at Cornell Law School's Securities Law Clinic in Ithaca, New York. "Schwab tried to do the opposite of what they should be doing."

The limitations on investors' ability to consolidate claims in FINRA arbitration also drew criticism.

"I don't think that's fair. We're not talking about a class of thousands," said Constantine Katsoris, a professor at Fordham University School of Law and long-time arbitrator.

Filing some claims separately, such as related actions involving the same broker, could be inefficient and expensive, he added.

FINRA is seeking an expedited hearing before its own hearing officers, noting that Schwab continues to impose these conditions on new customers. More than 50,000 new accounts have been opened since October.

"The class action waiver will likely lead millions of Schwab customer who have received the account agreement to incorrectly believe they do not have the ability to bring or participate in class actions against Schwab," FINRA said in its complaint.

Schwab, in response to FINRA's complaint, filed a federal court action on Wednesday. It is asking the U.S. District Court for the Northern District of California to declare its class action waiver provisions are enforceable under federal law and recent decisions by the U.S. Supreme Court, according to court documents and a written statement from the company on Wednesday.

Many lawyers for investors, however, are pleased about FINRA's action against Schwab.

"This is fantastic to see. Brokerage firms are trying to eviscerate the protections afforded to retail investors," said plaintiff's lawyer Andrew Stoltmann of Stoltmann Law Offices in Chicago. "Hopefully, FINRA has made it clear that these sorts of tactics won't be tolerated."