Schwab may apply class-action victory to pending cases

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By Jed Horowitz | February 27, 2013 7:28 AM EST

Charles Schwab Corp will likely seek dismissal of pending class-action cases after a regulator on Thursday upheld its right to bar clients from bringing such lawsuits, the company said.

"It is possible we can now move to dismiss those cases that are class actions based on this FINRA ruling," Greg Gable, a Schwab spokesman, wrote in an email, referring to the Financial Industry Regulatory Authority. He said he did not know if Schwab will also try applying the decision retroactively to cases that have already been settled or decided.

Any attempt to leverage its victory, however, could further inflame criticism from consumer advocates, state regulators and class-action lawyers about Schwab's move to limit clients' complaint alternatives.

Rival broker-dealers would not comment for the record, but the securities industry appears split on the issue of restricting clients' dispute alternatives.

Many firms are likely to follow Schwab, industry lawyers said. But some may urge their brokers to woo clients away from the San Francisco-based firm by highlighting a policy some view as hurting the individual investor Schwab has long championed, said two sources at large brokerages who were not authorized to speak publicly.

A FINRA hearing panel last week upheld Schwab's late 2011 move to require clients to waive their class-action rights. Schwab's action violates FINRA's rules, but the rules themselves violate the National Arbitration Act, the panel found.

Schwab is litigating two class-action cases filed after the ban was imposed in its client account agreements. The cases, consolidated in San Francisco County Superior Court, allege that Schwab recorded confidential phone conversations without clients' consent, in violation of California law. They seek $5,000 for each alleged violation against the firm's approximately 9 million client accounts.

Massachusetts Commonwealth Secretary William Galvin on Tuesday called on Schwab to repudiate the class-action ban. It is likely to be adopted industrywide, he said in statement, giving "every rogue broker-dealer the green light to steal from their customers in small-dollar amounts."

Clients who prevail in class-action suits usually receive small amounts of large settlements without having to formally argue cases or personally hire pricey lawyers, as they would have to do in a FINRA arbitration.

"If the broker-dealer has harmed a large group of people, they cannot combine their resources to go against the larger corporate entity," said Christine Hines, consumer and civil justice counsel at Public Citizen, a Washington-based consumer advocacy group. "It's just another way for the corporate entity to escape accountability for any wrongdoing or harm that they cause."

Some lawyers at brokerage firms who insisted on anonymity said direct Schwab rivals such as TD Ameritrade Holdings and E*Trade Financial are likely to follow its move to ban customer class actions while some very large rivals may keep the status quo. Almost all broker-dealers require clients to bring individual disputes to FINRA arbitration, but do not ban class suits. Spokespersons at the brokerage firms declined to comment.

Public relations experts said the Schwab decision may provide a marketing opening for rivals who do not impose class-action waivers.

"If I were the competition I'd seize on this as a great opportunity to articulate a willingness to entertain complaints of small investors," said Mark Arena, founder of The PR Verdict, a website that grades firms on their public relations responses.

"Given where we are in the economic cycle and the perception that small investors continue to be bullied around by the interests of Wall Street, this might not be the best time" to follow Schwab. Arena was formerly a public relations executive with UBS AG's U.S. operations.

Schwab maintains that class-action lawsuits take longer to adjudicate and are more expensive than arbitration proceeding for both parties, a claim Massachusetts' Galvin on Thursday called "disingenuous."

"We believe the evidence is overwhelming that investors - large and small - are better served through arbitration than class actions, where the plaintiff's lawyers reap the lion's share of settlements," Gable said in response to Galvin.

(Reporting by Jed Horowitz; Editing by Jennifer Merritt and Richard Chang)

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