Lawsuits Against Brokers Soar: Few Investors Expected To Win

August 1, 2002
By Mary Flood
Houston Chronicle

A growing number of angry investors think they were cheated in the recent stock market slide, not by the winds of fortune but by their brokers, and are looking for lawyers.

And many lawyers are looking for them, with ads on the Internet, in newspapers and over the air.

“This area of law has always been busy. Now we have a steep market decline, so people are pointing fingers,” said Lawrence L. Klayman , a Boca Raton, Fla.-based lawyer who represents employees suing their company stock-purchase plans. “But most people don’t have a good case; most just have spilt milk and sour grapes.”

Because of a clause in most brokerage contracts, most of these cases will be resolved in binding arbitration before a panel of private “judges.” NASD, which regulates the brokers and brokerage firms, says arbitration filings against brokers were already up 10 percent at the end of June, compared with the same period in 2001. Many more are expected.

“Burned by fraudulent brokerage research?” begins an ad by lawyers at Hill & Parker and Arthur S. Feldman & Associates now running on radio and in Texas newspapers, including the Chronicle. Feldman said they are generating up to 60 calls a day.

“How to get your money back when your broker done you wrong,” reads an Internet promotion for Sacramento, Calif.-based lawyer Vincent DiCarlo.

“Report stockbroker fraud, misrepresentation and dishonesty here,” says another Web site that doesn’t specify who will represent those who respond.

Some of the lawyers involved have been specializing in securities law for years, such as DiCarlo and Houston’s Dennis H. Taylor at Shepherd, Smith & Bebel, a firm that runs a regular “Broker Fraud” ad in the Wall Street Journal. But other attorneys, like Houston’s Charlie Parker at Hill & Parker, are now increasing their emphasis on securities cases, while others have not handled the cases before.

Some were inspired by a May settlement between Merrill Lynch and New York Attorney General Eliot Spitzer. Although acknowledging no wrongdoing, the firm agreed to pay a $100 million fine to settle a charge that it had issued misleading research reports.

Significantly, Spitzer has made public the documentation of his case. That information and the knowledge that other states are investigating a dozen big brokerage houses on similar allegations have spawned a legal feeding frenzy.

But most lawyers say only about one in 10 callers has a promising case. The best ones will have lost at least $50,000 – and five times that amount for the elite law firms – and can be shown to be unsophisticated investors who relied on their brokers.

Outside of classic negligence – such as stealing or not buying what they promised – the best cases involve investors concentrated too heavily in one company or one industry. Investors persuaded to take inappropriate risks also may have a case.

“What’s different in this field now is the quantity of cases. An enormous number of people have been seriously harmed,” said California lawyer DiCarlo. “Sadly, I’ve heard many cases where people are coming out of retirement and working at hamburger joints because their stockbroker squandered their savings.”

Those who won’t have much luck are highly educated, savvy investors who were obviously speculating or who had lost in the market before, the lawyers said.

“It’s like my secretary is a financial triage nurse at an emergency ward,” said Jacob Zamansky of New York. “People calling have even said they are considering killing themselves.”

Zamansky won a settlement in a case against Merrill Lynch over high-tech stock losses based on the recommendations of analyst Henry Blodget.

He said many neophyte investors, disabled people and the elderly have been persuaded to buy high-risk stocks unsuitable for their needs – sometimes by brokers and brokerage-house analysts who knew they were misleading people.

For example, he said, one 60-year-old client relied on his broker and a firm analyst when he invested more than 80 percent of his assets, about $320,000, in Global Crossing. The client filed for bankruptcy a few months before Global Crossing did.

Houston’s Parker said his firm has a Texas client who was convinced by a broker to put his entire $500,000 savings into WorldCom, which recently filed the biggest bankruptcy case ever.

“Quite a few of these cases will come down to unsuitability – to brokers promoting clients into high-risk stocks when the client’s situation demanded a conservative approach,” Parker said.

Zamansky, who doesn’t advertise but has done television interviews on securities lawsuits, said he expects a flood of arbitration cases and class-action lawsuits that could clog the system. That might necessitate a global settlement, rather than individual cases being settled by panels or court.

Securities lawyers caution that the arbitration process seldom pays punitive damages. That means someone who lost $100,000 would be awarded $100,000, at most. With a lawyer taking about 30 percent of any award – plus thousands of dollars in expenses and up to $15,000 for an expert witness – even an investor who prevails might not feel like a winner.

Merrill Lynch spokesman Bill Halldin would only say, “We’re confident we have very strong defenses against these claims.”

Other brokerage firms declined to comment. A few spokesmen, asking not to be identified, said they expect the frenzy will die down into the small stream of cases of genuine wrongdoing usually seen in the business.

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