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Investors Burned in Bear Market Turn On Brokers

9/8/2002

Seattle Times

Irate investors who have been burned by their brokers or the market are out for revenge.

Across the nation, legal filings against stockbrokers are at unprecedented levels, said the National Association of Securities Dealers, which regulates brokers.

Securities attorneys say they’re being bombarded with legitimate cases and with calls from people who have lost lots of money during this sour stock market and think someone should pay.

Arbitration cases against brokers through the association are up 10 percent through the first half of this year, on top of last year’s 24 percent increase. (Investors generally must go through arbitration instead of court lawsuits because of agreements they sign as new clients.)

Securities attorneys say this year’s surge is a continuation of last year’s explosion of angry investors.

“My phone has never rung as much as it has in the last year,” said securities lawyer Mark Maddox of Indianapolis, whose practice is one of the largest in the nation and whose caseload has increased by 25 percent this year.

“I’ve seen all of the market cycles in my career, but I’ve never seen anything like this.”

Mildred Jeffries of Cleveland is typical of the cases local securities attorneys are taking. When she retired in 1997, Jeffries wanted to take $50,000 of her retirement nest egg and stash it in a nice, safe CD or money-market account. But last year she noticed that her savings – a rollover from an annuity – had shrunk.

The 71-year-old realized that her stockbroker had invested her money in stocks.

Jeffries said she’s been fighting with the company ever since to switch her investment to what she really wanted.

Meanwhile, Jeffries’ $50,000 has dwindled to about $25,000. And her pleas to be reimbursed for the broker’s wrongdoing have been laughed at, she said.

“I told them I have no knowledge of the stock market. I wasn’t looking to invest to make money,” said the former schoolteacher. “I was happy with a little bit of bank interest. He didn’t do what I asked.”

Jeffries plans to pursue action against the company.

Philip Aidikoff, president of the Public Investors Arbitration Bar Association, said many investors have realized only recently that brokers invested their money inappropriately, charged inflated commissions or stole money outright.

“The bull market covered a lot of wrongs,” said Aidikoff, a California attorney.

Investors often tell Aidikoff they weren’t really scrutinizing their brokerage statements as long as they were making money, but that still doesn’t excuse broker wrongdoing, he said.

Brian Biggins, a securities attorney in Ohio, said most of his clients realized too late that their broker had falsified paperwork and invested them in volatile or high-commission products.

“So many people have no idea of the type of risk they’re in,” he said.

In other scenarios that Biggins sees frequently, investors have asked their brokers to shift their investments to safer holdings when they retire, for example.

But the broker has refused or lied to the investor that a change was made – because the move would reduce the commission. Biggins’ firm has filed about 25 arbitration cases with the association so far this year.

Maddox, who’s on pace to file 120 new cases this year, said many of his clients were sold annuities.

“I’m seeing so many cases where brokers are selling someone’s entire portfolio and putting them into an annuity,” he said. “Annuities pay this high upfront commission to the broker. It’s one of the highest-commission products a broker can sell.”

Attorneys are seeing another class of investors who – because the market is in its third straight down year – have lost money through no fault of their broker. These cases are generally getting turned away.

Attorneys who represent investors almost always work on contingency, said Aidikoff, meaning they collect no money from the client and get paid only if they win the case. So attorneys aren’t known for taking cases they think are without merit.

Biggins said he’s turning away at least 50 percent of people who call because the cases have no grounds. “Some people have sour grapes. They say, “I lost money and I want somebody to pay,” Biggins said. “But we can’t hold brokers to a standard of having a crystal ball.”


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