Clients Sue Brokerage for ‘Panic’ in Plunge

Two Florida limited partnerships have sued a brokerage for at least $100 million, accusing it of “panic, mismanagement and indifference” during last Monday’s stock market crash.

The suit was filed in federal court Friday by Pompano-Windy City Partners Ltd. and East Wind Associates Ltd., which traded in securities and commodities.

The Boca Raton, Fla.-based partnerships accused Bear, Stearns & Co. of liquidating their margin positions without notice.

Buying stock on margin involves using money borrowed from a brokerage to cover up to 50% of the cost of the securities.

When the value of a stock falls, a brokerage issues a “margin call,” or an instruction to the client to put up more collateral. If the call is not met, the brokerage can sell off the stock to cover the shortfall.

The lawsuit claimed that as the Dow Jones industrial average plummeted 508 points on Monday, the brokerage had no certain way of knowing the correct margin requirements for many of its clients.

“Many of Bear Stearns’ personnel were in a state of panic and hysteria” at the time, the suit said.

In seeking $100 million in punitive and compensatory damages, the partnerships accused Bear Stearns of breach of contract and fiduciary duty, violating securities law, fraud, negligence and defamation.

Bear Stearns spokeswoman Fabianne Gershon declined comment, saying the firm had not seen the suit.