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Attorneys Who Pursue Brokers Often Manage Their Own Money

4/4/2003

Dow Jones Newswires

NEW YORK — Attorney Mark Maddox makes his living pursuing stockbrokers who have done their clients wrong. So when he needs someone to manage his money, to whom does he turn?

A Salomon Smith Barney stockbroker who believed every word that now-defrocked telecom analyst Jack Grubman uttered about the industry – including the fact that his clients should hold on to their Worldcom Inc. (WCOEQ) stock even as its stock price plunged.

“I had a pretty common Grubman experience,” said Maddox, an Indianapolis lawyer and a former Indiana securities commissioner. “I had a portfolio that was kind of heavy in technology, and it did really well for a while, then of course it came down. As I watched it go down, I talked to my broker, saying, shouldn’t I unload this stuff?”

His broker, an old high school friend, advised him not to, citing Grubman’s predictions that the stocks would come back. Worldcom is now in Chapter 11 bankruptcy and Grubman, no longer at Salomon, is expected to pay $15 million and be barred from the securities industry for life as part of a settlement with regulators over his research practices.

“I was one of those guys who held on to MCI Worldcom all the way down,” said Maddox, who last year won a $250 million punitive damage award against Prudential Securities Inc. in a class action suit involving a broker who sold all his clients’ holdings in 1998 without their consent.

Attorneys who specialize in representing investors against brokerage firms spend their careers looking at the seamy side of Wall Street. Every month, they depose brokers who are accused of mismanaging their clients’ money; talk to experts who calculate how often accounts have been churned to generate excess commissions; and spend countless hours badgering firms to produce documents showing that warning signs were ignored by supervisors. At the end of the day, how can a lawyer be comfortable leaving his money in the hands of a brokerage firm?

The answer is: Many don’t. Some of the most successful securities attorneys in the business say they don’t have the nerve, after all they’ve seen, to trust their money to a brokerage firm.

“I keep my money in a bank and a money market fund,” said Seth Lipner, a Garden City, N.Y. lawyer who won $3 million last year in an arbitration case that alleged a Merrill Lynch & Co. (MER) broker gave negligent stock options advice. “I work hard for my money, and I’d rather make sure I enjoy all the money I make than that it grow into something bigger – especially if I have to risk the fact that I may lose it all.”

Lipner said his retirement is in mutual funds, which he choses through Charles Schwab Corp. (SCH). Ironically, one of the sectors that he invests in through mutual funds is the financial services industry, the very industry he litigates against.

“Maybe it’s a hedge against my business. If they start doing well, maybe I won’t,” joked Lipner. “Or it’s a sport. Or I think they will come back. I mean, these guys are the brightest of the brightest, and they will find a way to make money.”

Andrew Stoltmann, a Chicago attorney who won a $4 million arbitration award against Stifel Financial Corp. (SF) last year for a case involving a broker who was jailed on wire fraud charges, worked as a broker at Merrill Lynch before he switched careers to pursuing brokers at arbitration. He now manages his own account and his mother’s account, sticking to index funds, long-term bonds and Fidelity i-shares xx.

“I definitely do not use a broker. Maybe that’s just because I worked with so many bad brokers. I worked with 40 brokers at Merrill and there are only two that I remotely would trust to handle my mom’s money.” Stoltmann said.

Others aren’t so critical of the brokerage industry, even though they spend nearly every day steeped in its mistakes. Robert A. Uhl, a Beverly Hills attorney who won $2 million last month against Merrill Lynch, said he uses a fee-based Sanford Bernstein broker who manages his money in a wrap account. Uhl choses his investment objectives and is comfortable with his broker. But he says he isn’t currently putting any more money in the market, preferring instead to invest in real estate.

“I plan to preserve what I have and hopefully stay current with inflation,” said Uhl. “The great fortunes of America were never made in the stock market – unless you’re a thief.”

Maddox has also managed to get beyond his Grubman experience. He didn’t pursue an arbitration claim against his former broker, whom he doesn’t blame for his losses, and the two remain good friends. He is, however, secretly rooting for the outcome of a class-action suit filed against Grubman and Salomon to be ruled in favor of the investors who filed it – after all, he fits into the plaintiff’s class.

“I think my broker at Salomon was an honest guy looking out for my interests,” but who was misled by Grubman’s research, he said.

Since his experience, Maddox has shifted his brokerage account from Salomon Smith Barney – to a new broker, this time, from Raymond James Financial Inc. (RJF). Maddox said he spent a long time evaluating Tony Fiorillo, quizzing him on his investment philosophy before he felt comfortable opening an account with him. Fiorillo thought Maddox was just picking his brain for theories to use at arbitration hearings, never knowing that the attorney was really interviewing him to see if he should trust him with his own portfolio.

Today, Maddox’s account is still down – he blames market conditions – but “not nearly as much as most of my clients,” he quipped.

He is so at ease with his decision that he often refers his own clients, people who have had bad experiences with their brokers, to Fiorillo.

Fiorello, for his part, acknowledges that it is a little unusual for one of his most loyal clients to be an attorney who always represents aggrieved investors against the brokerage industry. To add to that, many of his referral clients come from Maddox, after they have had a bad brush with the industry.

“It’s very difficult when people are turned over to me, and I’m in the position of asking them to do the hardest thing they will ever be asked to do – trust somebody else,” said Fiorillo, a fee-based broker who relies on exchange-traded funds to balance portfolios among asset classes.

“I’ve had other people in the industry who look at you sideways when you tell them the story (about Maddox).”


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