Declining stock markets have produced a spate of legal clashes between brokers and their clients over trades made at the peak of the market.
Brokerages are required to settle all commercial disputes before they can be dissolved, and as the number of firms looking to wind up has increased, so too have arguments between trading houses and disaffected clients.
"In the last three years, court cases related to stock market disputes have not just doubled, or tripled, they have quadrupled," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment in Abu Dhabi.
Brokers who had verbal agreements to trade on their clients' behalf before the 2008 plunge have tried to dodge responsibility on the loss of clients' wealth. On the other side, investors who leveraged their positions through so-called margin trading have tried to avoid paying for soured investments, alleging that brokers had no written agreements to trade on their behalf.
"There has been a huge increase in disputes raised at the courts as a result of irregularities made by brokerages during the global financial crisis," said Mahmoud Homidat, an associate at the law firm Al Tamimi & Company. "The frequent cases are related to brokerages, who took out loans from banks and extended them to clients as unregulated facilities, [and] are now asking clients to pay outstanding dues after markets slumped and trading volumes crashed."
Mr Homidat said that last year he personally handled three such cases worth between Dh27 million (US$7.3m) and Dh100m.
Globally, brokerages record telephone conversations to limit the potential for disputed buy and sell orders. But this was often overlooked in the Emirates between 2005 and 2008, when traders often accepted orders from intermediaries acting for clients, through fear of losing their future business.
"Global best practices were secondary and even tertiary at times to a lot of clients and the brokerage houses during the boom times," said an in-house lawyer for one of the UAE's largest brokerages. "The markets were seeing a big influx of money coming from the West and the East and not thinking what should happen when things collapse … such as taking orders on a non-recorded line and extending unreasonable financing facilities."
The Dubai Financial Market General Index has dropped by 80 per cent since its peak in 2005, while the Abu Dhabi Securities Exchange General Index has declined by 60 per cent in the same period.
Brokerages complain that they are sometimes disadvantaged by the parallel dispute resolution avenues open to claimants.
"Clients will go to SCA [Securities and Commodities Authority] to address a complaint … If the decision comes in favour of the client the brokerage is penalised. But if the decision is made in favour of the brokerage, clients will more than often disregard the ruling and refer directly to the courts," Mr Yasin said.
He would like to see the SCA attend hearings related to trade disputes at Abu Dhabi and Dubai's Judicial Department as technical experts to replace the current committee, which includes a handful of auditors and accountants, who he says have limited experience in stock market-related disputes.
"The legal framework in the judicial system needs to be more robust," Mr Yasin said. "The current system is bringing brokerages large liabilities."
There are 61 brokerage companies in the UAE, down from 105 last year as markets slumped and trading volumes crashed.
"About 80 per cent of the operating financial firms have outstanding cases with their clients," said Ashraf Taha Amin, a partner at Al Noor Auditing Bureau and a mediator at Abu Dhabi's Judicial Department.
