August 13, 2007
By Debra Cassens Weiss
A retired lawyer who took his dispute with his broker to arbitration has learned that potential arbitrator conflicts are not always revealed.
Harley C. McDonald, a former general counsel for a construction services company, lost 80 percent of some $60 million in stock, according to the New York Times. He claimed his broker had failed to diversify his portfolio of just two communications company stocks—one of which was WorldCom. The company filed for bankruptcy in 2002.
Arbitrators are supposed to reveal any conflicts of interest, but it was McDonald’s lawyer who uncovered potential conflicts, the Times reports. The arbitrator selected to head the panel worked for a law firm with ties to the brokerage McDonald blamed for his losses.
The stock brokerage had hired the arbitrator’s law firm to underwrite two public offerings and defend three of its brokers. McDonald’s lawyer, Lawrence Klayman of Klayman & Toskes in Boca Raton, Fla., learned of the ties just days before a scheduled hearing in the case.
Klayman says the rules should be changed to require defense counsel to investigate and reveal any possible conflicts.
“The system needs to be overhauled,” he told the newspaper. “Now we have evidence that possibly mandates change.”