The first, and in many respects the most important, question for any investor is: Do I have a case? Not only does this keep you from wasting your time on a meritless claim, it also helps avoid having costs awarded against you for frivolous prosecution. When you receive the Statement of Answer, typically it will include a plea for dismissal and costs. A good claim, properly written, will normally breeze right by this test.

Although arbitration, in its correct form, is based more on equity than law, there are basic legal necessities that every claim must satisfy before it is considered valid. To present a claim, you must have a "cause of action," and "damages." In other words, someone has to have done something wrong (or negligent), and the complainant must have lost money as a result. As a general rule, if you didn't lose money, you have no case.

Even before the above determination, you need someone to go after, you need to be able to establish the arbitration's jurisdiction over them, and you need to make sure the case is not too old. The simplest way to determine the latter is to ascertain if the firm and/or broker is a member of one of the exchanges or the NASD. Each of these bodies requires arbitration by its members upon the demand of a public customer. No written arbitration agreement is required. If your respondent is a member of the NASD, it must arbitrate.

If the Respondent is a NASD member, it will so state on monthly statements and other documents. But is it still an NASD member? Is it still operating? The easiest way to resolve these questions is either to call the NASD, or call the Respondent's offices. If someone answers, they're probably still in business.

Is the case too old? There are two hurdles to cover on this question. The first, and easiest, is the NASD's six-year eligibility requirement. This is not a statute of limitations, but simply a test to determine whether or not the NASD will allow you to arbitrate this case (similar to the jurisdictional question discussed above). A NASD arbitration Rule (15), states that you may only bring an action if it is within "six (6) years of the act or dispute" about which the customer is complaining. Some recent rulings indicate the interpretation may mean six (6) years from the purchase of the security.

On occasion, if a case is more than six years old, you may not commence a NASD arbitration, even if the local statute of limitations allows you to sue in court. The major exchanges have this same ambigious rule.

If the case is less than six years old, the NASD will allow it to commence, but the arbitrator may dismiss it based on the relevant statute of limitations. These vary from state to state, and for different causes of action. The may be as short as a year, or as long as ten years. As a general rule of thumb, any cause of action over four years old may well have problems unless "discovery" is a triggering event.

An exception may be carved out of this body of law in the case of "fraudulent concealment." If you can show that the Respondent deliberately withheld or concealed vital information from you, which prevented you from finding out what was going on, then you may be able to have the statute of limitations tolled for some length of time. Caution: This is not easy.

Assuming the NASD can assert jurisdiction, your Respondent is still a viable entity, and you haven't waited too long, you can turn your attention to the claim itself. First, ask yourself what happened. Then ask yourself why it was wrong. Remember that a cause of action is the first requirement for a claim--just because you lost money in the stock market is not necessarily a reason for you to recover damages.

The most common causes of action involve fraud (the broker didn't tell you something, or outright lied), negligence (the broker was simply careless), or failure to follow instructions (failure to tender, or forgetting to put on a stop loss, for example). If you are unable to articulate a complaint other than "He gave me bad advice," don't waste your time and risk exposure to costs and fees by filing a frivolous claim.

Fraud: Fraud requires, (1) a promise made without the intent to perform; or (2) an ommission to disclose information when under the duty to do so; or (3) an intentional misstatement of material fact; or (4) any other act of deception that unknowingly, you relied upon to your detriment. Fraud can be difficult to prove in a non-hearing situation unless you have documentary evidence. Ask yourself how you are going to write a claim showing a misrepresentation when you have no proof? Did the broker give you any written materials that can be shown to be fraudulent (as opposed to mere "puffery")? Were there contemporary reports on the stock in the press that the broker should have been aware of, and that he should have told you about? If you have some proof, ask yourself if you reasonably relied upon the broker's words. Take an honest look at your educational, business, and investing background. Be sure you honestly assess yourself and your level of sophistication. At this point you are seeking to protect yourself from filing a frivolous claim and finding yourself paying the Respondents' costs and fees as a result. If you think you can hide anything, think again. Did you suffer losses as a result of these misrepresentations? A quick profit-and-loss statement will answer that question.

Negligence: The "rule of thumb" on negligence is to compare the broker's actions against the standards of the industry. Would the average broker make such a mistake? If he or she did, would you have a legitimate complaint?

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