June 1, 2002
By Dan Jamieson
On Wall Street
What’s the latest battleground for brokerage attorneys? Stock-option exercise cases, say plaintiffs’ lawyers, who are salivating over the big dollars involved — and the accompanying headlines. They claim brokers are liable for losses suffered when they didn’t diversify or hedge concentrated, and often highly margined, positions for highly paid clients.
But defense attorneys think many of the suits are frivolous. The plaintiffs are formerly bullish employees — many of them high-ranking managers — who believed in their company until they suffered seven-figure losses and a hit to their lifestyles, defense attorneys say. And since brokers have no incentive to keep assets inactive, investors can’t show a motive for the alleged mismanagement.
Nevertheless, the plaintiff’s bar sees its next big payday.
Lawrence Klayman, a Boca Raton plaintiffs’ attorney, says option-exercise cases are now half his practice. He says he’s settled 10 cases already on behalf of Microsoft shareholders. “We’re all over the technology spectrum on these,” Klayman says. He’s got cases against Merrill Lynch, Salomon Smith Barney, UBS Paine Webber and Oppenheimer.
“Some brokers from major firms have given mistaken advice,” says Jacob Zamansky, another plaintiff’s attorney in New York who’s also been busy filing cases. “They’ve taken advantage of people who have never had a brokerage account.”
A typical plaintiff is a technology employee who makes $100,000 or $150,000 a year, exercised a few million dollars in stock options on margin, but didn’t withhold enough for taxes, Zamansky says. Twenty-eight percent withholding is mandatory, but those in high-tax states should set aside more, he claims. When the stocks dropped, these people not only lost their major asset, they also couldn’t meet tax bills.
Klayman says he’s using the firm’s own training programs as evidence against brokers, showing that reps had hedging programs available, but failed to use them. And if a broker did something to trigger unnecessary taxes, he’ll add that amount into his request for damages.
But didn’t a lot of these clients refuse to lighten up on their beloved employer’s stock? Maybe, “but you have to document that, and show that you gave them alternatives,” Klayman says. He claims many of his clients were never told about hedging or diversification options.
Klayman warns firms not to hold out their brokers as experts in option exercise or wealth management if reps are not qualified. “It’s a case of total mismanagement and a failure to execute” proper strategies, he says.
“Investors should pay taxes in full, use minimal if any margin, and follow an asset allocation model,” says Zamansky, the investors’ attorney. “If brokers do that, they’ll never hear from me.”
Joe Floren, a San Francisco defense attorney, describes a legitimate case he’s seen: The client was concentrated and specifically asked the broker for help in protecting the value and cutting the margin debt. “And the only answer he got from his major firm was, ‘Don’t worry, our analyst thinks it’ll go higher,'” Floren says.
The industry was concerned when Merrill Lynch was ordered to pay $3 million award in an option-exercise case decided this past February. But other cases have since been turned down or been decided for much smaller amounts. The cases “don’t seem to be gaining traction with arbitrators,” Floren says.