Alternative Investment

Legal Help for Small Investors Is Disappearing

Kathy Piniewski is adamant that she wasn’t looking for her investments to make her rich.

Piniewski, who worked in a suburb of Buffalo, N.Y., while spending part of each year in Florida, told WealthManagement.com she’d managed her retirement savings well—she had an IRA and annuity through Bank of America.

But in 2008, shortly after the sudden death of her husband and wanting to make sure she was making the most of her savings, the 51-year-old widow met with an advisor who was recommended by a friend of a friend.

The advisor purportedly placed about $50,000 of her funds in a nontraded real estate investment trust.

Later, Piniewski said, she learned a nontraded REIT was one of “the worst things you could possibly do” for someone with her profile. On the cusp of retirement, she was not looking to take on excessive risk and wanted a liquid investment to draw from as needed.

She fired the advisor and went to her bank in hopes of fixing the damage but was told the investment was locked up and her money inaccessible. She was scared she would be stuck with the bad investment for the foreseeable future.

She went looking for legal help but soon found that while $50,000 was a lot of money to Piniewski, not everyone felt the same.

“I was online and tried to get a lawyer, but they didn’t think it was worth it,” she said. “It wasn’t enough money to make it worth their while.”

In 2013, she found her way to the University of Miami School of Law’s Investor Rights Clinic. The pro bono clinic is one of a handful in the country where law students, under the direction of faculty, help small investors without deep pockets pursue claims against brokers and financial services firms in arbitration proceedings.

“They were an amazing bunch of people,” she said. “They gave you hope that they may be able to help you.”

As the statute of limitations on her claim was ticking down, the law students rushed to take on Piniewski’s case. The students’ demeanor meant a lot, as she heavily criticized herself for trusting the advisor.

“They were never condescending,” she said. “They always said, ‘You wouldn’t believe how much this happens.’”

 A Vast and Underserved Market

Over a decade ago, there were many similar investor clinics like the one in Miami.

They began at the urging of former SEC Chairman Arthur Levitt in the 1990s, who argued that small investors often wouldn’t pursue valid claims in arbitration because any potential recovery would be too low for private attorneys to take them on as clients. He suggested law schools create legal clinics to offer free assistance for these investors.

With Levitt’s guidance, the commission helped launch pilot programs at Pace University and Fordham University in New York in 1997. By 2012, 18 clinics were in operation, including schools in Georgia, Michigan and California, spurred in part by FINRA Foundation funding in the late 2000s.

These clinics primarily handle claims totaling less than $100,000; the clients are often seniors or older investors who have some money to invest, but not enough to comfortably lose nor hire an attorney if they run afoul of a bad broker. Often, claims center on the misuse of retirement funds, with brokers placing assets in inappropriate alternative investments with high commissions and obtuse, sometimes undisclosed, rules on lockup periods and early-withdrawal penalties.

But funding for these clinics dried up as grants from FINRA were depleted and other funding sources didn’t materialize. According to the SEC, there are now only 11 clinics, with one in Nevada acting only as a policy center and not taking on clients at all.

“There is a vast underserved market of people who have lost money investing with brokers who cannot find representation,” Scott Eichhorn, a professor and acting director of the University of Miami’s School of Law Investor Rights Clinic, said. “They’d never find an attorney unless it was part of one of these programs, and the programs are extremely limited.”

Additionally, five of the 10 clinics are in New York, initially supported with funding earmarked by former Gov. Eliot Spitzer. Other clinics in Pennsylvania, New Jersey, Washington, D.C., Illinois and Florida largely relied on the three-year FINRA seed grants, but these were intended only as startup funds. Some were not able to secure funding beyond that time frame, whether from the law schools themselves or other sources.

Now, there are no clinics working with clients west of Chicago, and the University of Miami clinic is the only one operating in the entire Southeast region. According to Eichhorn, the clinic declines 90% of cases it receives in large part due to limited resources.

While the dollar figures may be relatively small, the damage done to these types of investors from bad investment advice, fraud, account churning or unsuitable recommendations can be profound, according to Christine Lazaro, the director of the Securities Arbitration Clinic at the St. John’s University School of Law in New York, which takes on claims well below the $100,000 threshold.

 “It could be a $5,000 claim, but it could mean someone can’t pay for their medication,” she said.

Clients find the Miami clinic from a variety of referrals, including the FINRA and SEC websites, as well as Florida attorneys who want to help but can’t take on the smaller claims. Still, many attorneys and investors don’t even know the option exists, Eichhorn said.

“It’s a problem, because I think we could be out helping a lot more people than we are,” he said. “Of course, that’s a resourcing issue; if there was another Florida clinic, that would be fantastic.”

Benjamin Edwards, the director of the Public Policy Clinic at the University of Nevada, Las Vegas’ William S. Boyd School of Law, said the total amount of unpursued claims could fall into “the millions, potentially billions” of dollars but said it was difficult to know precisely.

“What I can tell you is these clinics never have any difficulty finding clients,” he said.

Fewer Options and Lower Odds of Success

The regional dearth of clinics leaves many clients in the cold because attorneys (and students working in the clinics) are often limited to practice in the states in which the clinic is located, according to Michael Edmiston, an attorney with Jonathan W. Evans & Associates and the former president of the Public Investors Advocate Bar Association.

For example, clinics outside the state of California would have to meet certain requirements to assist a client in that state bringing a case to arbitration, creating “another burdensome access” issue put in front of small investors, he said.

“Ultimately, it means a small investor has one of two choices,” he said. “Either do nothing or try the case pro se (without a lawyer) and expect to take a loss.”

While some of the small claim cases concern outright fraud and churning, many revolve around thornier and more complex questions of suitability, according to J. Samuel Tenenbaum, a clinical professor and the director of the Complex Civil Litigation and Investor Protection Center and Bluhm Legal Clinic at the Northwestern Pritzker School of Law in Chicago.

Northwestern’s clinic is one of the few that can handle cases brought outside of its home state, but the lack of resources and extra rules around the out-of-state claims make it prohibitive to take on many of them.

Clients in states without a clinic are usually left without any options at all.

“There is a demand there,” he said. “Can you imagine, in the entire state of California, there’s no place that an investor can go to, or a retired person in Arizona or Texas?”

If investors move forward on arbitration proceedings without an attorney, they’re less likely to find a welcome outcome, according to Nicole Iannarone, an assistant professor at the Thomas R. Kline School of Law at Drexel University in Philadelphia.

Iannarone is also the chair of FINRA’s National Arbitration and Mediation Committee and founded the Investor Advocacy Clinic at Georgia State University College of Law (which has since shuttered).

She looked at FINRA data on arbitration proceedings from approximately May 2014 to 2019, separating out claims for $100,000 or less. Among those, she looked at whether the client represented themselves and whether they received an award in their favor.

The preliminary research showed that in arbitration proceedings that ended in a decision, about 46% of small claims investors represented themselves, compared with only 10% to 15% of those seeking awards over $100,000. Among those small claimants who went without legal representation, there was a win rate of only 24%, compared with a total overall win rate of nearly 40% for investors in arbitration proceedings.

“As to why pro ses are prevailing at such a lower rate, it can be because they don’t have the experience to present viable claims in a way that leads them to recovery,” she said. “On the other hand, it could be that the claims they bring lack legal grounds. Without information about the substance of their claims—which FINRA does not make public—it is not possible to definitively answer why.”

Weeding Out Bad Brokers Benefits Everyone

The lack of funding for the small claims investor is the impetus behind the Investor Justice Act of 2022, introduced by Sen. Catherine Cortez Masto (D-Nev.) in the Senate and Rep. Mike Quigley (D-Ill.) in the House of Representatives earlier this year. The bill would mandate the SEC provide funding for investor legal clinics at law schools in the form of grants, which would be issued for up to three years before coming up for renewal.

The $5 million proposal sets up a matching program, where law schools would have to equal the funding. Iannarone called it a “no-brainer,” considering overhead for these clinics is relatively low; she estimated the total funding could support as many as 20 new clinics across the country.

“It also brings flexibility to those administering the grant,” she said. “Let’s say we’re bringing in a new law school to provide this service; perhaps it should be a bit tighter at the beginning as they get started, and once they’ve proven themselves and the university’s proven their commitment, perhaps we can expand the length of the funding requests.”

The sustained funding is one of the proposed bill’s essential aspects, according to Lazaro. The structure is why many of the New York–based clinics beginning with Spitzer continue, while many clinics started with the FINRA Foundation seed grants later closed once that funding ran dry. Sustainable funding means law schools may be more willing to ante up, Lazaro said.

“Having the grant money coming from the SEC allows for nationwide reach,” she said. “In New York, we have money because we got it from state regulators, but that doesn’t help clients in other states. The SEC grant can ensure equal access to grant funds around the country.”

Stable funding would mean existing clinics would have more time to handle cases and would spend less time each year frantically seeking out new funding sources, according to Tenenbaum.

And more clinics would benefit brokerage and investment firms, he said.

“They may not like us, or losing a case, but we do help flush out bad apples,” he said. “We do screen out a lot of cases they don’t have to bother with.”

The commission’s Investor Advisory Committee in June recommended lawmakers support the Investor Justice Act, after first recommending ways to find new funding to support the clinics in 2018.

Life-Changing Outcomes

Students at Miami’s investor clinic worked on Piniewski’s case for a year, and in 2014 they won the arbitration claim against Royal Alliance Associates. She received nearly $50,000 in compensatory and punitive damages, and the Miami clinic more than $33,000 to pay its fees.

“It was really life-changing for me,” Piniewski said. “It doesn’t sound like a lot of money to most people, but it was life-changing to me. It took my whole life to save that.”

Eventually, she got her money out of the REIT and with her principal-protected annuity, she is living in Florida and feels able to “finally rest,” she said. She believes others should benefit from the kind of assistance the Miami clinic gave her.

“People need these ways to get help,” she said. “It sure meant a lot to me.”

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