Investors Duped By Wall Street Have Some Options

May 20 2003
By Lynn Cowan

WASHINGTON–(Dow Jones)–Investors who lost money in one of the stocks covered by the $1.4 billion Wall Street settlement can seek redress in two ways: File an arbitration or sit back and hope for some change to shake out from a government restitution fund and various class-action cases.

The role a broker played in an investor’s losses, as well as the amount lost, are key factors in determining which route to choose. Investors who lost at least $100,000, and who can show that their broker not only recommended stocks tainted by analyst research but also mishandled their portfolios in other ways could stand to recoup much more of their losses at arbitration than through a class action, say many attorneys.

“The only people who have good (arbitration) claims are those who have concentrated or margined portfolios,” said Lawrence Klayman, a Boca Raton, Fla., attorney representing a WorldCom Inc. investor who withdrew from a class-action case to file a $11.1 million arbitration claim. “People with broadly diversified portfolios have no cases.”

Klayman maintains that even investors who can show that they relied on research notes from an analyst whose research was tainted by investment banking interests are going to have a hard time convincing an arbitration panel to award them compensatory damages on that claim alone.

Those who will fare best in front of a panel are customers who not only held shares of stocks tainted by research, but those who can prove their brokerage firm put them in inappropriate stocks for their age or risk appetite, for example, said Andrew Stoltman, a Chicago attorney.

“In most of the claims that I’ve been filing, (analyst issues) are just tagalong claims to other concerns, such as the suitability of the investments,” said Stoltmann. “If people have multiple claims, they’re better off going into arbitration.”

Conversely, claims that hinge solely on a complaint of tainted stock research are much more appropriate for class-action suits. Even those who bought stocks from a brokerage firm that wasn’t among the 10 firms involved in the settlement could be considered eligible for the proceeds of a class-action case, said attorney Samuel Rudman, of Cauley Geller Bowman Coates & Rudman. The Securities and Exchange Commission’s $399 million restitution fund is open to only clients of those 10 firms.

“Anyone who bought that stock through a certain period of time could join (a class action), on the theory that the analyst reports from those firms inflated the market,” said Rudman.

But such a scenario may be difficult to collect on even through a class action, said Melvyn Weiss, of class action specialists Milberg Weiss Bershad Hynes & Lerach. At an arbitration hearing, it would be impossible, he said.

“But at least in the class context, you’re not going to spend a lot of time or cost” pursuing it, said Weiss.

Costly Fees

Because of the costs associated with arbitration – fees run to the tens of thousands, not including attorneys’ fees, which are usually charged at an hourly rate – it’s usually not economical for people who lost less than $75,000 to $ 100,000 to pursue arbitration, said Stoltmann and Klayman.

But once that $75,000 to $100,000 breakpoint is hit, it doesn’t make sense for investors who have viable claims to hang all their hopes on a class-action outcome. When investors win in arbitration – and 54% of them have so far this year, according to National Association of Securities Dealers statistics – they are likely to recoup about 60% of their losses. In securities class actions, the percentage of estimated damages collected through settlements has ranged between 2% and 5% over the five years ended in 2002, according to a study by Cornerstone Research, a Menlo Park, Calif., commercial litigation consulting firm.

Not everyone agrees with the $75,000 breakpoint or with the single-versus- multiple claims test for arbitration. Atlanta attorney J. Boyd Page said he’s in the process of consolidating arbitration claims for multiple investors, some of whom lost even less than $25,000. He said with enough similar one-note claims, it will be fairly easy and economical for his firm to file a barrage of smaller arbitrations, and he would be surprised if they didn’t garner some wins.

“Do I have a crystal ball to tell you every arbitrator who sees an InfoSpace claim for a client who bought it from Merrill while Merrill’s own analyst called it a piece of junk will give us a win? No,” said Page. “But in this business, a lie is a lie is a lie. State and securities laws prohibit such misrepresentations and lies. It would be a sad day if those arbitrators say it’s OK not to tell the truth. If it does turn out that way, it bodes ill for the capital markets system.”

By Lynn Cowan, Dow Jones Newswires; 202-628-9783;

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