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Arbitration Makes Flood of Brokerage Claims Unlikely

8/20/2001

Los Angeles Business Journal

The recent conclusion of a couple of high profile arbitration cases raises the question: Will Wall Street be inundated with investor arbitration claims contending that brokerage analysts did them wrong? Will investors en masse charge that stockbrokers, following the recommendations of brokerage analysts, herded them into lousy stocks, benefiting not the investor but the brokerage’s underwriting department?

Likely not, said Phil Aidikoff of the Beverly Hills law firm Aidikoff & Uhl. Aidikoff is a 20 year industry veteran of the arbitration wars and president elect of the national Public Investors Arbitration Bar Association, a group of lawyers who represent investors in claims against stock brokerages.

True, the number of such claims is rising – and a recent successful case against Internet sector analyst Henry Blodget of Merrill Lynch & Co. garnered a lot of attention. But much militates against any one investor filing a claim, said Aidikoff.

First off is the simple cost of litigating.

“The reality is, if the loss is less than $50,000, generally speaking, it will be difficult to find a lawyer to take the case,” said Aidikoff.

Obviously, an investor maintaining diversity in a portfolio will be unlikely to have $50,000 in a single stock, unless the investor is well heeled. So a number of claims that might have merit are simply too small to litigate in a cost effective way, said Aidikoff.

As a result, the vast majority of analyst bias claims are shunted to the circular file. “In general, we take about one in eight cases brought our way. But with claims of analyst bias, it is much less than that,” he said. “I looked at a very interesting claim recently, but the loss was only $8,000. It was not worth pursuing.”

Still, practical cases are popping up. In the Internet bubble of 1998-1999, stockbrokers “got caught in the tech euphoria,” and thus advised clients into positions heavily concentrated in tech stocks recommended by brokerage analysts, said Aidikoff.

So when several criteria are met – a loss larger than $50,000, a stockbroker who advised concentration to boost gains, and an analyst whose “buy” recommendation is conflicted by a specific investment banking relationship – then a claim might thread the needle and bring a settlement, said Aidikoff.

The iffy nature of arbitrating means that the process will probably never be a big enough stick to beat Wall Street into reforming its system of research, said Aidikoff. “Most likely, arbitration awards will just be considered a cost of doing business,” said Aidikoff. “But it remains the only redress available for investors.”


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