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Arbitration Filing Rise in Grim Market

Los Angeles Times

Arbitration claims against brokerage firms jumped sharply in April, signaling what may be the start of a long-awaited surge in litigation after the last year’s brutal stock market decline. Investors filed 581 arbitration claims last month, up 55% from 374 in April 2000, the National Assn. of Securities Dealers said Friday. The 2,137 cases filed in the first four months of 2001 are up 24% from last year’s pace.

Given the plunge in technology stocks in the last 14 months, the number of arbitration cases is expected to skyrocket this year.

“You’re looking at the tip of the iceberg, and the iceberg is enormous,” said attorney Philip Aidikoff of Aidikoff & Uhl in Beverly Hills.

The new NASD statistics, combined with earlier data from the Securities and Exchange Commission and interviews with securities attorneys, indicate that many investors blame their losses on full-service brokerages that invested their money in risky tech stocks.

Brokers are supposed to make sure that their investment recommendations are “suitable” for customers based on such factors as the client’s age, financial situation and tolerance for risk. But investor attorneys say brokers recommended unsafe investments because they made higher commissions doing so.

Complaints about unsuitable recommendations rose 58% in the first quarter, according to the SEC.

Brokerage firms say investors were delighted with their holdings when the market was rising and now may be looking for scapegoats.

“Many customers refuse to accept responsibility for their own actions,” said John Hartigan, a partner at Morgan, Lewis & Bockius, which represents many brokerages.

But investors say they didn’t understand the market and relied on their brokers for sound advice.

Susan Campbell, a 48-year-old crossing guard from Bermuda Dunes, Calif., filed an arbitration claim last month against

Roth Capital Partners in Newport Beach charging that she lost at least $1.8 million.

Campbell invested more than $4.7 million in February 1998, saying she was a novice investor who wanted to preserve the money she had inherited after her mother’s death, according to the NASD filing.

But her broker bought stocks on “margin” with borrowed money and invested in risky tech stocks, including, a Latino-themed Web site, according to the complaint.

“I was extremely naive,” she said. In a written statement, Roth Capital Partners denied Campbell’s allegations and said the firm would “vigorously defend itself.”

Roth Capital said Campbell incurred her largest loss in a non-tech stock that she had inherited and transferred into her Roth account. Other than that, Campbell’s portfolio “mirrored that of hundreds of thousands of other investors across the country” who sought to profit in the bull market, Roth said in the statement. The firm declined further comment.

Attorneys for disgruntled investors say brokers should not have put conservative investors into high-risk stocks, even if those investments rose during the bull market.

“Just because you made money does not mean it was ‘suitable’ for you,” said David Harrison at Spivak & Harrison in Los Angeles.

Though the market began falling a year ago, it normally takes months for arbitration filings to increase.

Investors initially delay action, hoping that their portfolios will rebound. Later, it takes time to find attorneys and piece together cases. And some lawyers try to negotiate settlements with brokerages before filing claims.

Moreover, securities attorneys say they are turning away many potential clients who don’t have legitimate cases. In arbitration, investors argue their case before a panel of experts, who decide what, if any, compensation the investor will receive. Investors generally are required by their brokerages to take disputes to arbitration rather than to court.

Aidikoff said he has rejected “financial suicide” cases in which investors lost money because of their own risky stock trading. “They call up and say, “I lost a lot of money, and I’m mad at my brokerage firm,’ ” Aidikoff said. “And I say, ‘OK, what do you think the broker did wrong?’ And generally there’s silence.”

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On the Rise Arbitration filings against brokerage firms have surged in recent months following the sharp drop in the stock market.

April: 581 Source: National Assn. of Securities Dealers