Brokerage Ordered to Pay $450,000 to O.C. Investor

Donna Manwarren, a high school graduate, considers herself a homemaker, not a sophisticated investor.

A stack of blue-chip stocks she inherited from her great-aunt 20 years ago sat in a bank safety deposit box for 18 years, growing in value to nearly $1 million and generating $40,000 a year in income, said her lawyer, William R. Hart of Santa Ana.

The Huntington Beach resident used the money from those shares in IBM, AT&T; and other Fortune 500 companies, her lawyer said, to meet living expenses and help her do what she loves most: adopt and raise orphaned and foster children.

But that income stream was put in jeopardy two years ago after she turned over the stock certificates to a Smith Barney Inc. broker, whom Manwarren later accused of unloading the shares and reinvesting the proceeds in riskier ventures, including Argentine and Mexican government bonds that soon dropped in value.

Manwarren contended that the broker, Elaine Hineman, sold the shares without her knowledge and never warned her about the likelihood that the trades would result in a huge capital gains tax.

In a binding decision disclosed this week, a three-member panel of Pacific Stock Exchange arbitrators unanimously found that Smith Barney failed to supervise its broker adequately. The panel awarded Manwarren $450,000.

The decision was unusual. Barely 10% of all cases filed with stock exchanges nationwide result in arbitration awards favoring investors, according to 1994 figures compiled by the Securities Industry Conference on Arbitration.

Smith Barney denied any wrongdoing. Hineman and her supervisors could not be reached for comment.

The arbitration panel did not comment on Manwarren’s allegations that she didn’t authorize the sale and that she was forced to sell part of the portfolio to pay a $318,000 capital gains tax. The value of her portfolio fell by half.

“When she learned of the sale of her stock, she was told by the broker not to worry, that she was in good hands,” Hart said. “But her portfolio was effectively destroyed.”

The grounds for appeal are very limited, noted a Smith Barney lawyer, Michael Licosati of Long Beach, and it’s unclear whether the brokerage will seek a review of the decision.

Manwarren was unavailable for comment. She is in Belarus arranging for the adoption of two war-orphaned children, her lawyer said. She and her husband, who earns about $13,000 a year as a school bus driver, have three children of their own and five adopted children.

Two years ago, reading that a company in her portfolio was having financial problems, Manwarren sought advice from a friend and was steered to Smith Barney. She turned over the certificates to the brokerage at Hineman’s request, Hart said.

“She asked Smith Barney to watch the stocks,” he said. “She told the broker that she depended on them for dividends for family.”

After she learned that her shares were sold, Hart said, she called Hineman. But the broker persuaded her that Smith Barney had a plan for her, that she would be getting more than $40,000 a year in income.

But when she saw her accountant in March 1995, she found instead that she owed $318,000 in taxes, forcing her to sell part of the portfolio to pay the government. She took her remaining investments to another brokerage.

Licosati, the Smith Barney attorney, said that Manwarren had sought additional income and wanted Hineman to take steps to increase her cash flow. Manwarren, he said, was told that much or all of the existing portfolio would have to be sold and reinvested.

All trades were made with Manwarren’s knowledge, Licosati said.

But he acknowledged that Smith Barney, like many brokerages, didn’t give her any tax advice or suggest that she obtain such help.