So you've got a complaint, now what?

March 31, 2009 07:00 PM

Deciding to complain about an investment or a broker is only the first step. There's a variety of options depending on a broker's membership affiliation and the severity of the alleged infraction. There also are avenues for arbitration outside of a courtroom to seek a recovery of funds.

From outright scams to questionable trading practices and simple misunderstandings with a broker, when investors think they've been wronged they understandably want to complain. Fortunately, there are a variety of resources through futures exchanges, regulatory agencies and law enforcement to handle these problems.

Those who have a complaint or a question regarding a broker that is a member of a futures exchange may want to start there. The Chicago Board of Trade (CBOT) monitors the activities of its members through a Sophisticated Market Analysis Research Technology (Smart) computer system and can analyze various aspects of a broker's trading two days after each trading session.

Bryan T. Durkin, vice president and administrator of the CBOT office of investigations and audits, says the Smart system combines information from each broker's trading cards, a pit's volume and price action to analyze an entire day's pit activity.

"The system allows us to recreate 100% of our trades," Durkin says.

The Smart system, along with trading pit committees and CBOT pit-watchers, points the exchange's regulators towards suspicious trading activities. Smart allows the CBOT to examine trading details, such as the brokers involved in a particular trade, who they were trading for and how active trading was at that time.

The system also allows comparisons of each trader's activity profile, such as the type of trading and the size of orders a broker typically handles. A broker who commonly trades in orders of 10 contracts, for example, likely would draw suspicion for suddenly handling a 30-contract trade.

Durkin says the CBOT examines more than 500 trades a year, based on trading surveillance and anonymous tips, but only "several dozen" reach the investigative stage.

Customers can check with the Office of Investigations and Audits if they believe a broker mishandled an order. Durkin says most customers call seeking information on a trade and to make sure it was handled properly.

"For the most part, a lot of it is educational," Durkin says. "Somebody might not be happy with the price they received on a trade. That doesn't necessarily mean there was a violation."

If a customer placed an order to purchase a T-bond futures contract at 121-00, but the order was filled at 121-02, the customer might suspect the broker didn't properly execute the order. However, the Smart system may indicate that few contracts were traded at the lower price while trading was heavy at the price where the order was filled, indicating the broker obtained the best price possible.

Brokers found guilty of rule violations can face fines and suspensions, with major violations leading to expulsion.

Customers who believe they lost money on a trade can file a complaint with the Arbitration Committee at a cost of $150 if the claim amount is less than $2,500, or $250 for claims above $2,500. The committee typically decides cases based on written information only, but it does have the power to call a hearing. A CBOT spokesman says the time it takes to resolve an arbitration case varies from several hours to several weeks.

Exchanges will refer complaints to other regulatory bodies if a complaint is made about a non-exchange member.

Information warehouse
The National Futures Association (NFA) can be a starting point for those seeking the return of lost funds or simply for notifying regulators of possible violations of an association member. The benefit of NFA arbitration is a streamlined process that is faster than civil courts, says Cynthia A. Cain, director of arbitration for the NFA. Claimants can represent themselves or appoint a friend or attorney to handle the case.

The request for arbitration forms is straightforward and NFA literature explains the process in plain English so hiring an attorney might not be necessary.

"We try to simplify the procedures here because a lot of the claims don't involve a lot of money," Cain says. "We don't want to force a party to incur the additional expense of hiring an attorney." She adds that once a case is accepted for arbitration it takes about five months to complete the process.

The cost of filing for NFA arbitration depends on the amount of the claim, with costs starting at $50. An additional charge is required for cases involving a hearing.

Cain says the NFA averages more than 200 arbitration cases a year, with more than half of them settling before they reach an arbitration hearing and about one-third involving a hearing. She says the average claim amount is less than $15,000.

Claims of less than $5,000 are decided based on written information. Claims from $5,000 to $10,000 face a hearing only if one is requested. Cases involving larger sums of money always face an oral hearing before an arbitrator.

More than half of the cases involve sales practice allegations such as high-pressure sales tactics, misrepresentation and failure to disclose risk. Decisions can be appealed in court but only under limited circumstances. The NFA notes that an arbitration decision carries a strong presumption of validity. The NFA also offers mediation services that may resolve an arbitration request before it reaches the hearing stage.

Investors who want a NFA member to face a disciplinary complaint, either outside of or in addition to an arbitration request, may file a complaint with the NFA's compliance department.

Tony Gialanella, NFA director of compliance, says the association can be a starting point for those wanting to file a complaint. If a complaint is made against a non-NFA member or if the complaint would be better handled by another regulatory body, the association can send an investor in the right direction.

"Between all of us we try to get the complaint to the place where it's going to get resolved better, the quickest and most efficiently," Gialanella says. "We kind of portray ourselves as the clearinghouse for this kind of information. So if people aren't sure where to go, we'd be happy to start the ball rolling. Give us a call, and we'll see if we can get it to the right place if we can."

He says an initial inquiry decides whether a case should be presented to the NFA's Business Conduct Committee for authorization of formal charges and a hearing before the Hearing Committee. Punishments may include a warning letter, cease and desist orders and possible fines of up to $250,000 for each violation of an NFA rule. Extreme cases could involve membership suspension or expulsion.

Government action
The Commodity Futures Trading Commission (CFTC) regulates the futures industry and can be a place to turn for complaints against non-NFA and non-exchange brokers. Information obtained from the CFTC Web site indicates investors can file both complaints of violations of U.S. commodity law and reparations complaints to seek a recovery of lost funds. The CFTC offers three decisional procedures for reparations complaints: voluntary, summary and formal.

Voluntary procedures can be used for claims of any amount and cost $50 to file, but all respondents must consent to the procedure. An oral hearing is not allowed.

Summary procedures involve claims of $30,000 or less and cost $125 to file. Oral hearings are optional and at the discretion of a judgment officer who will decide the case. Awards cannot exceed $30,000. Formal procedures involve complaints of more than $30,000 and cost $200 to file. Oral hearings are held before an administrative law judge. Decisions on voluntary procedures cannot be appealed; however, summary and formal procedures can be appealed to the U.S. Court of Appeals.

The CFTC's Web site indicates voluntary procedures typically are decided within eight months, while summary and formal proceedings normally require about a year.

Federal law enforcement
Federal law enforcement authorities recommend investors start their complaint process with a futures exchange, the NFA or the CFTC. Although federal authorities do investigate claims of fraud against individuals, they note that many investor complaints may not reach the level of law violation to be pursued on a federal level.

Complaints about bad fills, for example, are handled by an exchange or other regulatory body. If these entities suspect a crime was committed beyond their jurisdiction, they can notify federal authorities.

"What the person has to realize is that we're geared toward the criminal penalty side, which may only mean that if, after some time, the guy is convicted of wire fraud the end result could be a jail sentence but not necessarily any restitution," says Wayne Kern, supervisory special agent with the Federal Bureau of Investigation (FBI).

He notes that a sentencing judge may order restitution in addition to criminal penalties, but the NFA and the CFTC are geared more toward helping investors recover funds. Kern says it's not unusual for criminal investigations to be conducted in addition to separately run administrative complaints. Federal authorities typically are more likely to handle cases such as nationwide investor scams, rather than complaints about individual brokers.

When federal charges are filed in these cases they are typically those of wire or mail fraud.

"Any kind of scheme used in connection with the futures and commodities industries relies on either wire transfers or the mailing of funds, confirmations, etc. No matter how you would defraud somebody illegally, if you use the mail to do it, that is the violation," says a FBI spokesman.

The U.S. Postal Inspection Service also handles federal fraud cases and conducts investigations either apart from, or in concert with, the FBI. David Colen, a postal inspector in Chicago, says his agency often receives referrals from the CFTC and the NFA. He suggests investors start with one of these bodies.

"We do a significant amount of commodity and securities fraud work and certainly people could call us, but they should call us maybe in addition to those other [agencies]," Colen says. "They could call us or the FBI, but they should call us in conjunction with calling the CFTC or the NFA."

Investors can obtain the phone number of the nearest Postal Inspection Service branch from their local post office.

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