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Investors Win Small in Analyst Dispute

8/10/2001

Los Angeles Times

Investors who were seeking $1.75 million in compensatory damages against Goldman Sachs Group and one of its stock analysts have been awarded a fraction of what they sought, a possible setback to investors who might expect large awards in the growing number of cases against analysts.

In a decision released Thursday, an arbitration panel awarded $261,231 to a Texas investor and his two daughters who claimed they invested in funeral-home operator Loewen Group based on research reports by a Goldman analyst.

The investors, Stuart Hunt and his daughters Hara and Hilre Hunt, bought shares of Loewen in late 1998 because Goldman rated the stock a “market outperformer,” said Michael O’Neill, the plaintiffs’ attorney. However, the Hunts lost money as Loewen’s stock dropped. The company sought bankruptcy protection in 1999, and its stock now trades for 11 cents a share. The Hunts contended that Goldman had done investment-banking work for Loewen that created a conflict of interest for the analyst.

Though the brokerage was ordered to pay damages, all claims against the Goldman analyst, Jordan Alliger, were “dismissed and denied,” according to the panel’s ruling. Experts said that could indicate that the panel felt the analyst did nothing wrong, but that Goldman bears some responsibility for the investors’ losses because of the alleged conflict between its stock-research and underwriting businesses.

A Goldman spokesman declined to comment on the decision. According to the panel’s ruling, Goldman had argued that the Hunts were responsible for the losses “because of their investment decisions” and that the firm’s research reports “are protected opinion.”

In addition to the compensatory damages, the panel ruled that Goldman must pay $65,000 in attorneys’ fees, as well as interest on the award. The panel rejected the Hunts’ request for almost $3.5 million in punitive damages, which rarely are awarded in arbitration cases.

In the wake of last year’s stock-market collapse, a controversy has erupted over analysts’ potential conflicts of interest. Critics say analysts often issue favorable reports in hopes of winning lucrative investment-banking business from the companies they follow.

Last month, Merrill Lynch & Co. settled an arbitration case in which an investor claimed he was misled by high-profile stock analyst Henry Blodget over his bullish comments on an Internet stock. The investor claimed $500,000 in losses. Merrill agreed to pay $400,000.

The fact that there was an award at all in the Goldman case may mean investors stand a chance of winning at least partial awards in cases against analysts.

“Now a panel has said customers have a right to rely on the integrity of [Wall Street] research,” said Philip Aidikoff, a Beverly Hills securities lawyer. “And if the research is less than reliable due to inherent conflicts of interest, then customers have a right to hold [firms] accountable.”

However, the relatively small size of the Goldman award–15% of the compensatory damages sought–indicates that investors may have a tough time winning large amounts unless they can prove blatant wrongdoing by an analyst, experts said. The average award is normally between 25% and 50% of the compensatory damages claimed, said John Coffee, a securities-law expert at Columbia University.

“It was a pyrrhic victory because the panel essentially decided that 85% of the losses should be borne by the investor,” Coffee said.

Experts also note that arbitration cases, unlike court rulings, do not set formal precedents that must be followed in deciding future cases.

It’s unclear why the panel ruled as it did. As is customary in securities arbitration cases, the panel did not explain the rationale behind its decision.

The Hunts initially bought Loewen stock at $10 in late October 1998, O’Neill said, and purchased additional shares through late December of that year. By mid-1999, the stock had fallen below $1; the company filed for bankruptcy protection in June 1999.

The Burnaby, Canada-based company piled up $2.3 billion in debt by snapping up a string of mom-and-pop funeral homes and cemetery companies in North America and Britain. The company overpaid during its buying binge, some analysts said, and slowing sales crippled the funeral home industry in the late ’90s as people began living longer.

The “market outperformer” rating that Alliger gave to Loewen falls in the middle of Goldman’s five-tiered stock-rating system.

This week, Goldman began requiring its stock analysts to disclose personal holdings in companies they follow.

Times staff writer Josh Friedman contributed to this report.


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