Investors Win Case Against Bear Stearns

About two dozen investors, including several in Southern California, have won a long-running arbitration case against Bear Stearns Cos., which was ordered to pay $2.5 million for its role in a failed trading scheme, attorneys said Tuesday.

The ruling by a panel of the National Assn. of Securities Dealers is unusual because it holds a brokerage firm liable for the losses of investors who were not its customers and did not have accounts at the company.

The 22 victims entrusted about $4.6 million to a Nevada investment advisor, Robert Schmidt, who invested the money in a failed options trading program at Bear Stearns. Schmidt was convicted of embezzling some of the money and is serving a prison term.

The New York-based brokerage argued it should not be held accountable for the losses of investors who were not directly its clients.

But the arbitration panel found that Bear Stearns acted negligently and breached its fiduciary duty because its brokers helped Schmidt attract investors by attending sales seminars and providing him with Bear Stearns documents, according to Jeff Ferentz, the Newport Beach attorney who represented the investors. The panel also found that Bear Stearns should have noticed and investigated suspicious activities in Schmidt’s account, including the movement of funds to offshore accounts, Ferentz said.

Bear Stearns “was helping Schmidt do what he did,” said Ferentz, a partner at Greenbaum and Ferentz. “This ruling shows that the brokerage firms are responsible.”

The ruling also names Bear Stearns brokers Stephen Ackerman, Barry Ganz and Mark Seruya.