$700,000 Gone : Dean Witter Loses Round in Lawsuit

When Billie Wederski unexpectedly inherited $700,000 in 1985, she figured that she could afford to quit work and live on the interest.

She found a stockbroker, gave him the money and sat back to enjoy an early retirement.

Seven months later, she claimed, she discovered that the nest egg not only was gone but the broker was demanding she pay the $150,000 she owed.

Wederski, 43, an Orange County resident who is married and has three grown sons, said it was a “nightmare.”

‘I Was Very Angry’

“I was not able to believe what happened,” Wederski said Thursday. “I was very angry. I just could not believe it.”

On Thursday, Wederski won what her lawyers say is a critical decision in her $9-million lawsuit: the right to a trial by jury.

The 4th District Court of Appeal ruled that a standard clause in the brokerage contract that she signed, apparently requiring her to submit her claim to an arbitrator, should not be enforced.

The lawyer for the brokerage firm of Dean Witter Reynolds Inc. said he will probably appeal. Paul Dubow said the arbitration clause should be binding and recognized by the courts unless a customer can prove he or she has been defrauded.

“She was unsophisticated,” said Arthur Nakazato, one of Wederski’s lawyers. “She was like most people who hadn’t invested in stocks before. She had no experience.”

Jury to Decide Issue

In an opinion by Presiding Justice John K. Trotter Jr., the court ruled that a judge and jury must decide the truth of Wederski’s claim that she was duped into signing the arbitration clause.

“Wederski alleges Dean Witter concealed the true nature and content of the documents it had her sign. The truth of her allegations must be determined judicially,” Trotter wrote. “To allow this question to be decided by arbitrators would be to that extent to enforce the arbitration agreement even though steeped in the grossest kind of fraud.”

The appellate court reversed a decision by an Orange County Superior Court judge. The procedural ruling was important, Nakazato said, because arbitration panels are “typically composed of stockbrokers.”

Nakazato claimed the panels are selected under the auspices of the New York Stock Exchange or the National Assn. of Securities Dealers. A customer’s right to veto an arbitrator is limited, he said.

The “institutional bias” won’t be present in an Orange County courtroom, Nakazato said.

“In addition, (the arbitration clause) also has a provision that the laws of the State of New York shall control,” Nakazato said. In such cases, New York law does not allow punitive damages, which constitute the bulk of Wederski’s claim, the lawyer said.

Engaged in Options Trading

In Wederski’s case, she had no idea she signed papers binding her to arbitration, Nakazato said. Wederski thought she was investing in “no-risk” U.S. Treasury obligations, according to the appellate opinion. Instead, her account was used to trade in options, which involve “serious risks,” according to the opinion’s summary of her allegations.

“During the next seven months, (the broker) allegedly ‘churned’ the account, making 215 trades totaling over $26 million in value. During this period, Wederski received weekly status reports which indicated her principal was intact, while in reality she was losing money rapidly,” according to the opinion.

“In early March, 1986, Wederski discovered Dean Witter had lost all her money. In fact, Dean Witter claimed she owed it $149,996 due to margin losses.”

Dubow said Dean Witter has yet to file an answer to the allegations. The decision appears to mean that disgruntled customers can avoid promises to take their claims to arbitration simply by alleging fraud, Dubow said. He declined to comment further.

Wederski said she and her husband, Lonnie, 43, still face the $150,000 claim from the broker. She has not returned to work.

“It’s put so much emotional stress on me that I haven’t been able to consider going back to work,” Wederski said “I’m still in shock.”