When investors are ready to sue their stockbroker or investment firm, they are often shocked to learn they can't. Fine print in the agreement between the investor and the investment firm requires that all disputes be resolved by binding arbitration, administered by the National Association of Security Dealers (NASD), the industry's leading trade group, or one of the stock exchanges. Mediation is also an option.
A good source of information on this is on NASD's website.
Mediation
Mediation is the voluntary settlement of a dispute with the assistance of a person (the mediator) knowledgeable about the industry and trained at getting two warring sides together.
In complex cases where it is best to compromise, mediation often assists the parties get the dispute behind them.
Where justice is clear, a mediator can sometimes explain the facts of life and devise a face-saving way out.
Mediation is nonbinding, so if it doesn't work, arbitration is still available.
Sometimes, the broker or investment firm stonewalls even if the case is solid. In such cases, mediation is a waste of time and money, and it is better to go straight to arbitration.
A lawyer is a good source of advice as to which is the better course.
Arbitration
Unlike mediation, arbitration tries the case and renders an enforceable judgment, just as a court would. The decision is almost always final; only in rare cases can an appeal be successfully taken to a court.
Arbitration is done by one to three arbitrators, depending upon the size of the case. The arbitrators come from panels appointed by the NASD. It is common to find accountants, lawyers, investment advisors, and even retired judges on the lists.
The NASD claims that because their arbitrators are knowledgeable about the securities business, they provide a speedy and fair resolution of disputes. There is some truth to that, but the system does have its critics (especially among trial lawyers).
Critics point out that arbitrators are initially chosen by the very industry they are called upon to judge, and these critics accuse arbitrators of being insensitive to unfair practices in the industry.