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Bubble Investors Can Still Try Arbitration, Other Courts

7/2/2003

Dow Jones Newswires

While Wall Street draws a sigh of relief that investor litigation has been dismissed against Merrill Lynch & Co. , people who lost money during the dot-com years still have avenues to seek damages from Merrill and other firms. Arbitration and state court are two of the forums for recouping losses, legal experts say.

In arbitration, individual customers of Wall Street brokerages attempt to recover money though proceedings at the New York Stock Exchange (News – Websites) or National Association of Securities Dealers. The procedure takes about 12 to 15 months – faster than the 2 to 5 years it takes for most lawsuits to wind their way through the courts – and can often be cheaper for investors, arbitration lawyers say.

“That really is and always has been the investors’ best avenue of recovering money,” says Andy Stoltmann, a Chicago securities lawyer who has about 45 arbitration claims pending against Merrill and other firms.

He and other arbitration lawyers don’t expect the dismissal of class-action claims against Merrill to have an impact on arbitration proceedings. On Tuesday, U.S. District Judge Milton Pollack in Manhattan called investors in Internet stocks “high-risk speculators” who couldn’t show they were defrauded by Merrill’s stock research.

“This decision does not have the far-reaching effects Merrill Lynch and other brokerage firms would have you believe,” says Phil Aidikoff, a securities lawyer with Aidikoff & Uhl in Beverly Hills, Calif.

Merrill declined to comment on the impact of Judge Pollack’s decision on arbitration or other claims still pending against the firm.

Judge Pollack dismissed suits brought against Merrill by stockholders of 24/7 Real Media Inc. and Interliant Inc. Earlier Wednesday, he also threw out a related case brought by shareholders of the Merrill Lynch Global Technology Fund.

The judge noted that the 24/7 and Interliant plaintiffs weren’t Merrill customers and didn’t claim they made their decisions based on reading Merrill’s research reports.

Aidikoff says he currently represents investors in arbitration who are accusing Merrill and other firms of issuing overly bullish stock ratings to generate investment banking business. His clients, unlike the 24/7 and Interliant plaintiffs, were customers of the firms they are suing.

“That’s the missing ingredient,” he says.

Clearly, though, Merrill and other firms face a far greater threat from class- action litigation, in which plaintiffs hope to win potentially multibillion- dollar settlements on behalf of other investors. (By contrast, in 2002, a total of $139 million was paid out in arbitration, according to NASD statistics.)

It’s unclear how much of an impact Judge Pollack’s ruling will have on federal judges who are currently mulling similar class-action claims against other Wall Street firms. “It’s one judge’s view of the situation,” says Fred Isquith, an attorney with Wolf Haldenstein Adler Freeman & Herz LLP, a firm that has pursued litigation against Morgan Stanley (MWD) and its analyst Mary Meeker (News).

Other federal judges will certainly consider Pollack’s decision but are “not bound by it and may even disagree with it,” he said.

Plaintiffs’ attorneys, who make their living suing the likes of Merrill and other Wall Street firms, are considering other ways they might successfully pursue investor claims, says Jeffrey Haas, a securities law professor at New York Law School.

For instance, some plaintiffs’ lawyer may pursue investor claims in New York state court under a consumer fraud statute, Haas says.

Investors in the Merrill case were rebuffed by Judge Pollack because they couldn’t prove that the firm or its analysts intended to defraud them. The state statute, unlike tougher federal securities laws, doesn’t require that plaintiffs prove intent, he says.

“Plaintiffs’ attorneys are looking at potential billion-dollar settlements, and they’re not going to go away because one judge said so,” Haas says. “This is their chance to swing at the fence.”

“It is something that the Merrills of the world need to be thinking about.”


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