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Sue-It-Yourself: Going After Your Online Broker

11/6/2000

Forbes.com

If you want to sue your online brokerage, get in line. Online trading has ballooned in the last few years and now makes up roughly one of four retail stock trades. But customer complaints of shoddy service and bungled communications have grown right alongside it.

The number of complaints fielded by the Securities and Exchange Commission (SEC) about online trading shot up 330% and the National Association of Securities Dealers (NASD) received 55 arbitration claims against online brokers last year.

TD Waterhouse (nyse: TWE – news – people), which conducts 150,000 online trades a day, is facing a class-action suit filed in New York City by four investors who say they got confirmation that a trade had been canceled only to discover that it had gone through after all. Unhappy clients have filed three more class-action suits against E*Trade (nasdaq: EGRP – news – people) in California, saying they couldn’t make trades due to technical breakdowns, slow execution of orders and telephone tie-ups.

Securities lawyers said they are seeing more of these complaints from online investors, particularly those that tap margin loans. Lael Desmond, a medical student in Indiana, won $22,670 in compensatory damages from Ameritrade (nasdaq: AMTD – news – people) last fall because the company closed his margin account after initially giving him four days to deposit more money.

“I think that was one of the biggest turning points in the history of those cases,” says Desmond’s attorney Mark Morris, who has settled about 18 online cases and won two in arbitration. “I have seen a change in the attitude of the online firms. They’re settling a lot more of these cases and not rolling the dice as much as they used to.”

So when can you sue an online broker? The most promising scenario is when you can demonstrate that the company sent you false information or broke a promise. Investors who sue over system failures and delays, however, may have a longer shot. Many lawyers say their clients have false expectations about the efficiency and speed of the trading process.

“People think it’s automatic and it’s not,” says attorney Phil Aidikoff of Beverly Hills. “They think they push the button and the stock is theirs.”

And just whose fault is that, the E*Trade plaintiffs inquire in their complaint. They say the company advertised a fast and reliable service that it knew it couldn’t provide. The New York State Attorney General’s office and the SEC have also chastised online brokers for their advertisements’ slaphappy suggestion that you can make a million with the click of a mouse.

But drinking a Coke isn’t guaranteed to bring a smile to your face either. So far, no one seems to have convinced a court that online brokerages are responsible for lost trades just because their ads never mention that the phone lines might be jammed during a downturn in the market.

“No more than if you call your traditional broker and he’s in the bathroom and you can’t get to him,” says Credit Suisse First Boston analyst James Marks, who tracks the online trading industry. “The only liability I can see with online brokers is if they can prove they knew they couldn’t handle the volume and continued to advertise.”

So far, that proof hasn’t emerged. And as online brokerages continue to upgrade their software systems and client services, the number of such cases may be diminishing. The NASD only received six complaints about online trading in the first nine months of 2000. That doesn’t mean that complaints against online brokers have disappeared, but it suggests that the new claims may fall into more traditional categories such as misrepresentation, fraud or negligence.

But because online investors make their own decisions, the brokers take no responsibility for making unsuitable investments, a common complaint against their full-service brethren. If a bus driver with three kids wants to concentrate half her portfolio in software stocks, she is unlikely to receive an e-mail informing her that such an investment is incompatible with her income level or long-term goals. A full-service broker, lawyers say, would be professionally obliged to discourage her.

Attorney Walton Bader, of White Plains, N.Y., insists that online brokers are no different. “Online is nothing more than a telephone,” he says. But how can these companies know what investments are suitable for clients they have never met?

“They say, you’re not asking us for any advice, we’re just executing an order,” says Constantine Katsoris, a securities law professor at Fordham University in New York. Okay, but what if a 90-year-old grandmother opened an account for conservative investment and then tossed back a few glasses of sherry one night and started typing in options orders? Katsoris answers his own question: “Well, I don’t know if I’d turn that case out of my office.”

Aidikoff, however, might show her the door. “For $8 to $15 a trade,” he says, “you kind of get what you pay for.”


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