Today, Charles Schwab agreed to end a long standing dispute over their customer’s right to participate in securities class action lawsuits. In a settlement reached with the Financial Industry Regulatory Authority (FINRA), Charles Schwab agreed to pay a $500,000 fine and refrain from including language in its customer agreements that would prevent customers from participating in class actions. Click here for our earlier blog post on this subject.
Brokerage firms have always included language in their customer agreements requiring all disputes to be resolved through FINRA’s securities arbitration program–with one exception: Customers were allowed to skip arbitration if a related securities class action lawsuit had been filed. Schwab’s recent settlement with FINRA preserves the status quo and maintains a customer’s right to either pursue an individual arbitration claim or join a class action.
Arbitration vs. Class Action
The decision whether to join a class action or go it alone in arbitration depends on a variety of factors. In previous blog posts, we’ve noted that customers with legitimate arbitration claims tend to do much better financially in arbitration. If customers with viable claims can recover more money in arbitration, why would Schwab want to prevent class actions and force all customers to go to arbitration? A major reason is that class actions can be very expensive to defend. In a class action, all affected customers are automatically included in the lawsuit. Even though class members are often paid “pennies on the dollar,” total class action payments can be substantial. For example, Schwab agreed to pay more than $200,000 million to settle a class action involving the firm’s Yield Plus Fund. By attempting to limit class actions, Schwab was undoubtedly trying to bank on the fact that only a small number of customers will actually go through the legal and financial hassle of pursuing an individual arbitration claim.
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