INVESTING: When in Doubt, Sit and Talk

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The $220 billion securities industry hailed the decision. Eugene and Julia McMahon of Yonkers, N.Y., reviled it. In a ruling of vital concern to small investors everywhere, the U.S. Supreme Court last week came out in favor of arbitration over litigation as a means of settling disputes between stockbrokers and their clients.

The court's ruling involved a suit by the McMahons, who own a funeral home, against giant Shearson Lehman/American Express. Back in 1984 the McMahons charged that their Shearson broker had churned their brokerage accounts, meaning that a variety of trading transactions were conducted solely to increase the brokerage commissions. The McMahons' contract with Shearson provided that disputes involving the handling of the account should be settled by private arbitration. By upholding that provision, the court ensured that brokerages will be able to divert hundreds of lawsuits from the courthouse to the arbitration room. Shearson estimates that it will save $5 million to $10 million in legal fees annually as a result.