Former Law Office of Vincent DiCarlo

As of September 1, 2008,Vincent DiCarlo
is no longer engaged in the private practice of law.
This site is no longer maintained, may no longer be accurate,
and is provided for historical purposes.  See disclaimer below.


Stockbroker Arbitration

When an investor's losses result from unsuitable recommendations or other misbehavior by a stockbroker, rather than simply the luck of the market, binding arbitration sponsored by the securities industry is often the best way to recover the losses.

Forums for binding arbitration are sponsored by, among others, the securities exchanges, the American Arbitration Association, and the National Association of Securities Dealers. Investors are often required by the contracts they sign with their brokers to submit disputes with those brokers to such arbitration. Even in the absence of contractual provisions, investors may still submit such a dispute to arbitration. If they do so, the rules of the National Association of Securities Dealers require that its members submit to the process as well.


Where the investor has a choice between arbitration and a lawsuit, arbitration can have significant advantages. Simplified procedures, such as the lack of formal pleading rules, the absence of most pretrial motions, and simplified discovery can substantially reduce the cost of obtaining a decision.

In arbitrations before the National Association of Securities Dealers, when a panel of three arbitrators hears the case, one will be a stockbroker or other member of the securities industry. Typically, the other two panel members are lawyers, accountants, or other professionals. As a result, it is often easier to present cases involving industry practices or complex damages models to an arbitration panel than to a judge or jury.

Because the rules of the NASD require that arbitration awards be paid promptly, on pain of disciplinary proceedings against the broker, it is sometimes easier to collect an arbitration award than a court judgment. Finally, the grounds for setting aside an arbitration award are extremely narrow, much narrower than the grounds for appealing a judgment. As a result, costly appeals are usually unnecessary.

On the other hand, litigation in court has its advantages as well. In certain cases, the right to conduct extensive discovery, the right to appeal an adverse judgment, and the right to a jury trial will outweigh the advantages of arbitration.


While any claim that can be made in court can be made in an arbitration, in practice, cases often fall into certain well defined categories. In one common situation, a broker recommends investments to a client that, in light of the client's circumstances and investment objectives, are unsuitable. Suitability cases involve several different legal theories, all of which may be available to a particular investor.

If the broker ws merely negligent, claims are generally asserted for negligence and breach of contract. Where the broker's recommendation lacks a reasonable basis, claims may be made under the antifraud provisions of the federal and state securities laws, as well as for common law fraud.(2) Where, in connection with the unsuitable recommendation, a misrepresentation is made by the broker, there may be additional grounds for a claim for fraud or deceit.

Another common experience involves a broker who makes unauthorized trades on behalf of a client. The broker may simply fail to consult a client before making trades in a nondiscretionary account. Sometimes the broker buys stock on margin without authority or ignores specific instructions by a client with respect to a discretionary account. Unauthorized trading can result in claims for rescission, breach of contract, or fraud, depending on the facts.

Sometimes a broker who has discretionary authority over an account engages in excessive trading in order to generate large commissions. This practice is known as "churning," and will provide a basis for claims for state and federal securities fraud, common law fraud, negligence, breach of contract, and breach of fiduciary duty.(3)

Finally, a broker may simply misappropriate an investor's funds. This often occurs in situations where the broker is not reporting a particular transaction to his or her employer. This practice is known as "selling away." In connection with "selling away," it is important to remember that, even if the firm employing the broker is unaware of the transaction in question, or even of the existence of a particular customer, the investor often recovers from the firm on a theory of respondeat superior, controlling person liability under both the state and federal securities laws, or negligent supervision.(4)


Because the facts in a typical broker case may give rise to several claims, the analysis of time limits to bring a claim can be complex. Claims for securities fraud under Rule 10b-5 of the Securities Act of 1933 must now be brought within one year of the time that the fraud should have been discovered, or within three years of the occurrence, whichever is shorter. Claims for common law fraud must be brought within three years of discovery. Claims for breach of fiduciary duty must be brought within four years of discovery, and so on.

Moreover, statutes of limitations for state securities fraud, common law fraud, breach of contract, and negligence may also be subject to discovery, delayed accrual, or tolling rules that can substantially extend an investor's time to bring a claim. Under such rules, claims can sometimes be successfully brought a decade or more after the first wrongful act occurred.

In addition to the time limits imposed under each claim, the Code of Arbitration Procedures of the NASD provide that claims submitted more than six years after their occurrence are not eligible for arbitration.

The thing for an investor to remember about delay is that, while no amount of delay is safe, he should never conclude that his claims have become time-barred without first getting the advice of a qualified lawyer.


In theory, any remedy that can be obtained from a court can be obtained in an arbitration. The most basic remedy is damages for out-of-pocket losses. The out-of-pocket lost is generally the amount of money invested minus the returns and the residual value of the investment. The out-of-pocket measure is also generally the smallest measure of damages, so it is important not to limit yourself to it.

In addition to out-of-pocket losses, an investor is often awarded damages based on the profits he would have made had the wrongful act not occurred. These lost profits are proved through the use of a computer program that performs an alternative investment analysis or interest calculation. In the event that there are difficulties establishing the residual value of the investment, the arbitrators can award rescission and require the investor to return or assign the improper investment to the broker in exchange for a return of the full purchase price and any ancillary damages.

Arbitrators have the power to award punitive damages(5) and will do so where the facts warrant them and the arbitrators are satisfied that there is an adequate basis in law to do so. Since punitive damages are not available for a claim under Rule 10b-5, the availability of punitive damages is generally determined by Section 3294 of the Civil Code, which applies to the state law claims.

Arbitrators may also award attorneys' fees in an appropriate case. The most common basis for an award of fees is an attorneys' fee provision in the investor's account agreement. However, it should be noted that the Ninth Circuit has specifically upheld an award by arbitrators of attorneys' fees where there was no fee agreement based on federal common law that allows the award of such fees for improper defense tactics.(6)

Finally, since the arbitrators can grant any remedy that could be granted by a court, in a proper case arbitrators may impose constructive trusts, direct that specific property be turned over, or enjoin future misbehavior.(7)

Most of the time, when an investor loses money he has no alternative but to chalk the loss up to experience. However, where the loss results from misbehavior by the investor's broker, the investor may have a practical and often successful means of recovery through an industry sponsored arbitration. In our experience, where cases are selected carefully, recoveries of between 50 percent and 400 percent of the investor's out-of-pocket losses have been obtained. Since these cases are often handled on a contingency fee basis, an investor who believes that he is the victim of misconduct would be well advised to seek counsel to evaluate his claim, regardless of whether he is able to pay hourly fees.

1. A version of this article originally appeared in the July 1992 issue of The Docket, which is published by the Sacramento County Bar Association. Copyright 1992 Vincent DiCarlo.

2. Marx v. Computer sciences Corp., 507 F.2d 485 (9th Cir. 1974)(opinion false under Rule 10b-5); Dyke v. Zaiser, 80 Cal.App.2d 639, 652, 182 P.2d 344, 350-351 (1947)(opinion false for common law fraud when no reasonable basis); Cohen v. S&S Construction Co.T21 Cal.App.3d 941, 946, 201 Cal.Rptr. 173, 175 (1983)(same); Gagne v. Bertran, 43 Cal.2d 481, 487 (1954)(opinion false for negligent deceit claim).

3. See, e.g., Mihara v. Dan Witter & Co., Inc., 619 F.2d 814, 820 (1980).

4. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1574, 1577 (9th Cir. 1990)(controlling person liability in a selling away case under Rule 10b-5); Ingle v. Bay Cities Transit Co., 72 Cal.App.2d 283, 284, 164 P.2d 508, 508 (1945)(employer's inability to prevent wrongful act does not avoid respondeat superior liability); Alhino v. Starr, 112 Cal.App.3d 158, 174, 169 Cal.Rptr. 136, 146 (1980)(neither does the fact that the employer reaps no benefits from the wrongful acts of the employee).

5. Baker v. Sadick, 162 Cal.App.3d 618, 627, 208 Cal.Rptr. 676, 682 (1984); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1063 (9th Cir. 1991).

6. Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1064-1065 (9th Cir. 1991).

7. See, e.g., Pacific Investment Co. v. Townsend, 58 Cal.App.3d 1, 10, 129 Cal.Rptr. 489, 493 (1976).


DISCLAIMER: I have entered government service and, as of September 1, 2008, am no longer engaged in the private practice of law.  Therefore, this site is no longer being maintained,  may not be accurate, and should not be relied upon.  It is not now and was not ever intended as legal advice.  It is being provided for historical purposes, and for the benefit of those lawyers who are capable of independently verifying the information and judging the opinions in it, and then reaching their own conclusions.  You are strongly advised to consult qualified legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation, and may no longer be accurate or prudent in any case.  The opinions and statements at this site were solely my own.  They were not and are not those of, nor were they nor are they made on behalf of, any agency of government or anyone else.

Copyright © 1998-2008 Vincent DiCarlo