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Brokerage Settlement May Spawn Lawsuits

Apr 29, 2003 | AP

Documents released as part of the $1.4 billion Wall Street settlement are a treasure trove of evidence for investors filing claims against brokerages, but the process may be arduous and costly for those with smaller portfolios.

The settlement includes a $387.5 million fund to compensate customers of the ten brokerage firms involved, but the claims from investors who believe they were cheated are expected to far exceed that amount.

New York Attorney General Eliot Spitzer, who worked on the investigation with the Securities and Exchange Commission and other regulators, said the newly released information would provide people "the factual records upon which they can base their litigation."

"It is now up to them and their lawyers to go to court, make their case, establish the facts," Spitzer said Tuesday.

Settlement documents include dozens of e-mails in which Wall Street analysts privately derided the same stocks they hyped in research reports to investors powerful ammunition for lawyers developing class action suits. The free discovery may be particularly beneficial for investors seeking restitution from firms through arbitration the industry's alternative to public court.

When brokerage customers open accounts, they almost always must sign an agreement to resolve any disputes through arbitration — a process that can be confusing for inexperienced investors, said John Coffee, a Columbia University law professor who specializes in securities fraud.

But, he said, "what's the alternative? It's really too expensive for most individuals who have losses under $1 million to consider suing, and they can't sue in court."

For those seeking claims of less than $50,000, hiring an attorney may be impractical, said David Robbins, a New York securities lawyer. The NASD and New York stock exchange set forth clear guidelines, and some law schools offer free clinics, he said.

For claims over $100,000, however, "you really need an experienced securities arbitration attorney, because the other side will always have an experienced attorney," he said.

The NASD is trying to prepare for the expected avalanche of cases related to analyst conflict of interests, said Linda Fienberg, president of the watchdog group's dispute-resolution program.

"We will do whatever it takes in terms of staffing and space to handle the cases that come in within the same time frames that we now handle them," said Fienberg, noting that the group has added 14 staff members and is working to increase its ranks of arbitrators. Most cases that go before a hearing are resolved within a year-and-a-half.

A record 7,704 arbitration cases were filed last year, and even more are expected this year. The pace of new filings is up 24 percent through March of this year; of those, Fienberg said about 125 were related to analyst conflicts. At least 70 were filed in New York by the law firm of Hooper and Weiss, which is gathering complaints from small investors who lost money in the WorldCom bankruptcy.

"We don't think the cases will come in all at once, we think people will start evaluating all of the documents and they will come in in stages," Fienberg said.

The group encourages mediation, and most cases are settled, but about a third are heard before panels chosen at random from a pool of 8,000 public and industry arbitrators. The three-member panels include two public arbitrators and one member of the securities industry. Claims of less than $25,000 are usually heard by a single public arbitrator.

Public arbitrators include teachers, accountants, attorneys anyone not affiliated with the securities industry or married to someone who is. They must have at least five years of business experience, some college and NASD training, Fienberg said.

Robert Weiss considers the complaints of his clients a "mass tort," although class actions are not allowed in the NASD forum. He maintains that the process is biased toward the securities industry and should have been addressed in the settlement.

"We now have to go before an industry trade organization comprised of the same companies that agreed to pay $1.4 billion in fines for the very same activity that is the subject of those fines," he said.

Robbins, a public arbitrator who has led panels, also expressed some disappointment with the settlement, particularly in the amount of money set aside for investor restitution.

"Everyone was patting themselves on the back yesterday and the victims are just going to be shortchanged," Robbins said. "My wife doesn't like the word, but in my view the customers will get screwed."

Paul Cohen, one of Robbins' clients, is trying to recoup technology boom losses through arbitration. Cohen kept his investments with Merrill Lynch for two decades trusting that his broker, a cousin, would have his best interest at heart.

Relying on the broker's advice and the research of fallen Merrill Lynch analyst Henry Blodget, Cohen says he invested heavily in tech stocks in 1998. The family lost nearly $216,000 by 2002.

"I wake up in the middle of the night full of guilt. I kick myself every day," said Cohen, 51, chief executive of SkyMedia Airships in San Diego. "I am so angry at myself for being fooled by these people."

A Merrill spokesman said the broker had recommended a conservative strategy, but Cohen insisted on filling his portfolio with internet stocks.

"Any losses that he may have suffered, he suffered as a result of his own decision to invest in technology stocks," spokesman Mark Herr said.


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