Skip to main content

Fuming Market Investors Ponder Their Legal Options

Los Angeles Daily Journal

Ten major Wall Street firms have agreed to settle conflict-of-interest charges for $1.4 billion, but investors still are fuming over the allegations. And that sentiment could keep securities lawyers busy for a long time.

Attorneys are expecting a huge jump in the number of arbitration cases filed against brokerage firms this year, fueled by anger over the charges.

Regulators accused the brokerage firms of pressuring analysts to issue glowing research reports on companies, in an effort to win investment-banking business. Although the investment banking and research departments of the firms are supposed to be separate, regulators allege that the wall between them was porous. The firms allegedly wanted to keep the companies happy so that they could win coveted investment-banking work, including the opportunity to underwrite their stock offerings and advise on their mergers.

The regulators, including the Securities and Exchange Commission and the New York attorney general’s office, announced the final settlement in April. Under the agreement, the firms neither admitted nor denied wrongdoing.

In the wake of the settlement, investors who blame their stock-market losses on misleading research are considering their legal options.

“Now that you have high publicity surrounding the settlement, I think it’s getting the attention of a log of investors,” says San Francisco sole practitioner Thomas Mauriello, who represents investors in disputes with the brokerage industry.

“They’re wondering if they were the victims of fraudulent research,” adds Mauriello, who is evaluating five potential arbitration cases relating to the analyst scandal.

The 10 brokerage firms are Bear Stearns, Credit Suisse First Boston, Goldman Sachs, Lehman Brothers, J.P. Morgan, Merrill Lynch, Morgan Stanley, Citigroup Global Markets, UBS Warburg, and U.S. Bancrop Piper Jaffray. As part of the settlement, the firms agreed to several reforms to ensure that analysts are insulated from investment-banking pressure in the future.

The National Association of Securities Dealers, which typically administers arbitration in investor cases, is bracing for an expected barrage of claims relating to the alleged wrongdoing by the brokerage firms. Investors who open brokerage accounts typically must agree to arbitrate any disputes that may arise.

J. Pat Sadler, president of the Public Investors Arbitration Bar Association, expects a big jump in the arbitration filings for several reasons. The scandal has attracted the attention of many lawyers, and the publicity surrounding the $1.4 billion settlement has prompted investors to question results in their portfolio, he says.

In Los Angeles, attorney David Harrison says he’s been deluged with calls from investors who want to know their options.

Harrison, who represents investors at Spivak & Harrison, has filed three arbitration cases related to the Wall Street scandal and plans to file another five soon. He also is evaluating whether to add analyst causes of action to several previously filed arbitration claims.

To prevail in arbitration cases related to the scandal, investors first would have to show that they bought stock mentioned in the settlement from one of the 10 brokerage firms, according to investors’ attorney Philip M. Aidikoff. Investors also would need to show that they relied on the tainted research or that the brokerage firm failed to provide material facts about the company, adds Aidikoff of Aidikoff & Uhl in Beverly Hills. Then the investor would have to prove damages.

Aidikoff says he has received hundreds of calls from investors inquiring about the matter. He plans to file two dozen arbitration cases related to the analyst scandal in the near future.

Investors may be able to bolster their cases with evidence from the brokerage firms themselves. Regulators have released internal e-mail messages, memos and other documents from the brokerage firms that vividly depict the alleged misdeeds.

Most of the brokerage firms that settled with regulators either declined to comment on the expected increase in arbitration case or didn’t return calls for comment.

But a representative for one firm says the driving force behind recent increases in arbitration cases is the bad economy.

“That bear market has spawned a bull market in claims, many of which are absolutely without merit or any basis,” says Merrill Lynch spokesman Mark Herr.

The firm tries to resolve claims that have merit, and it vigorously defends itself against meritless claims, Herr adds.

Although some investors may pursue the arbitration route, it’s not the only choice for people who believe they were duped by the big Wall Street firms.

But Aidikoff says that investors likely will recover only pennies for every dollar lost – at best – from the $400 million restitution fund established by the settlement. Investors may opt to join one of the many pending class actions relating to the scandal, but he says the class actions also are likely to yield pennies on the dollar.

Although investors could go to court and file an individual lawsuit relating to the allegations, “anyone who tries to file a lawsuit for an individual will be subject to being bounced right back into arbitration,” Sadler says.