A $250 million punitive-damage award levied Friday against Prudential Securities Inc. by a state-court jury is a vivid example of why the securities industry long has pushed to get most investor disputes into private arbitration.
The Ohio jury handed out the large award in a class-action lawsuit against the brokerage firm, a unit of Prudential Financial Inc., after a stockbroker sold all his clients’ holdings in 1998 without their consent. The award, which calls for an additional $11.7 million in compensatory damages, is one of the largest-ever punitive awards for small investors suing a brokerage firm, according to an association that tracks awards.
In a suit filed in 1999, three Marion, Ohio, retirees alleged that Prudential broker Jeffrey Pickett, believing a market crash was imminent, sold all the stocks in their portfolios and put them into more-conservative investments, including less-risky mutual funds. Mr. Pickett took the same action with about 250 clients, according to Mark Maddox, a lawyer with Maddox, Hargett & Caruso, which filed the case. Mr. Maddox estimates that Mr. Pickett’s decision to sell cost the broker’s clients $11 million; the stock market shot up in late 1998, and soared throughout early 2000.
A Prudential Securities spokesman said the brokerage firm plans to ask the court to set aside the verdict. “There is no legal basis for it,” he said. A lawyer for Mr. Pickett, 44 years old, said he was “shocked” at the jury’s decision.
The securities industry has long tried to restrain investors’ ability to win punitive damages. Since the late 1980s, the industry has pressed arbitration on its customers. When opening a brokerage account, many investors sign a standard agreement binding them ahead of time to accept arbitration, rather than resorting to a lawsuit, in the event of a dispute with their broker. And the industry has won regulatory caps on the amount of punitive-damage awards in arbitration cases.
But the Ohio investors were able to get their case heard in court because the action was a class action, and such multiple-plaintiff cases aren’t handled by arbitration panels because of their complexity. The largest punitive-damage award in an arbitration case was $25 million, which was awarded in 2001 to a Waddell & Reed Financial Inc. broker in a dispute with his employer. It’s rare when aggrieved investors win punitive awards of more than $1 million in arbitration cases. Punitive damages, which are generally awarded to punish and deter a defendant found to have acted recklessly or maliciously, are applied in addition to actual, or compensatory, damages, which cover the injury or loss.
As for the Ohio award, “there are only maybe half a dozen awards higher than this in [securities] class-action cases,” says Jim Newman, executive director of Securities Class Action Services, a subsidiary of Institutional Shareholder Services.
One of those class-action awards involved the securities industry. Several major Wall Street firms had to pay a total of about $1 billion to settle price-fixing allegations made in the mid-1990s against securities firms that act as market makers for Nasdaq stocks.
The good news for Prudential is that such large jury awards often are overturned or sharply reduced on appeal. In arbitration, by contrast, awards rarely are overturned because the parameters for appeal are so narrow.
Michael Ungar, Mr. Pickett’s lawyer, said his client isn’t responsible for any portion of the punitive damages, but the jury did find both Mr. Pickett and Prudential jointly responsible for the compensatory award. “This is a guy who admitted to unauthorized trading in his client accounts.”
Mr. Ungar says the broker believed a stock-market crash was coming, partly because of the near-collapse of the giant hedge fund Long-Term Capital Management LP, which triggered a global financial crisis. But the stock market soon recovered, and in 1999 and early 2000 kicked into the last phase of the huge bull market.
Mr. Pickett left Prudential in February 1999. In 2001 the New York Stock Exchange censured and barred him from the securities industry for six months following similar allegations. Mr. Pickett didn’t admit or deny guilt in the NYSE case.
Since leaving Prudential, Mr. Pickett has started his own firm in Columbus, Ohio, and some of his clients from Prudential followed him to his new firm, says Mr. Ungar.
Meantime, says Mr. Maddox, the plaintiff lawyer: “This jury is sending a message to Pru and Wall Street that if you find a problem with a customer, you need to fix it right away.”
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