Investors Still Have to Press Their Cases

The brokerage industry’s response to an extraordinary government crackdown on alleged abuses was to hand over $1.4 billion and promise extensive reforms.

The industry’s response to individual investors almost certainly will be: “Prove it.”

Attorneys who press small investors’ complaints against brokerages say they are elated to have access to the reams of material that government regulators collected in their yearlong investigation of the industry, which culminated in Monday’s historic settlement.

Legal experts caution, however, that brokerages aren’t likely to become any less strident in fighting individual arbitration cases seeking damages for money lost since the stock market bubble burst in 2000.

Because the government didn’t demand that any of the 10 major brokerages involved in the settlement admit guilt, “I guarantee these firms will be in here arguing that ‘we have no liability’ ” despite the settlement’s revelations, said J. Pat Sadler, a partner at Atlanta law firm Sadler & Hovdesven, which represents investors in securities arbitration cases.

At the same time, some experts say the pressure now will intensify on Wall Street to settle the many class-action lawsuits already filed against it.

Because those lawsuits could be worth much more money in total than arbitrations, it might be in the brokerage firms’ interest to stem the tide by getting rid of them sooner rather than later.

“I think there are going to be a lot of conversations in the next 30 days between plaintiffs’ attorneys and brokerage attorneys about settlement” of the class-action cases, said James Cox, a securities law professor at Duke University.

There are two major sets of class-action cases already in the courts. One set alleges that 55 brokerages conspired to manipulate the prices of 300 initial public stock offerings during the bull market, said Melvyn Weiss of law firm Milberg Weiss Bershad Hynes & Lerach in New York, which is spearheading that group of cases.

The other set of suits focuses on alleged brokerage analyst misconduct, including issuance of tainted research, Weiss said.

More class-action cases are sure to be filed stemming from evidence the government released Monday as part of its probe, experts say.

The potential downside of joining a class-action suit, compared with filing an individual arbitration case, is that aggrieved investors typically see relatively small payments in class-action settlements.

“It’s a rare case where you get 30 cents on the dollar” of claims, Cox said. “More likely is 5 to 10 cents on the dollar.”

Virtually every brokerage customer signs an agreement when he or she opens an account, giving up the right to sue for alleged abuse. Instead, disputes must be taken before arbitration panels run by the New York Stock Exchange or the NASD, formerly the National Assn. of Securities Dealers.

The exception is that investors can join class-action suits.

Not surprisingly, attorneys who specialize in individual arbitration cases argue that, despite the potential difficulty in proving such cases, investors who believe they were victims of brokerage fraud should go the arbitration route rather than simply join a class action.

“No one makes money on class actions except class-action attorneys,” said David E. Robbins, an arbitration expert at Kaufmann Feiner Yamin Gildin & Robbins in New York.

One handicap investors have long faced in arbitration cases is that they can’t force depositions of individuals to collect evidence, said Cliff Palefsky, attorney at McGuinn Hillsman & Palefsky in San Francisco.

That is why the documents, e-mails and other data gathered by state and federal investigators may prove particularly helpful to investors in arbitrations. “We’re going to be putting this stuff in as evidence,” said Jacob Zamansky, an arbitration attorney at Zamansky Associates in New York.

But just because a stock’s price has plunged in recent years doesn’t mean an arbitration panel would see a direct connection between investor losses and the conduct of analysts, brokers and investment bankers at the investor’s brokerage, Cox said.

“The question is, could the losses have been unrelated to the practices” of those players, he said. For example, it’s reasonable to ask whether many Internet stocks would have soared, then collapsed, without any involvement from brokerage analysts. Plenty of individual investors, after all, were enamored of the Internet’s potential in the late 1990s without having input from Wall Street.

Robbins, however, said many investors would have legitimate claims in arbitrations based on one of two allegations: Either their brokerage misrepresented a stock, or it omitted critical information about a stock.

To many investors, the most galling evidence of abuse turned up by the government is in the e-mails between analysts and investment bankers, in which the analysts admitted that they would be downgrading their ratings of certain shares except that the bankers wanted to keep the subject companies happy.

An investor has a solid argument if he can state that, “Had I known what the analyst knew, I wouldn’t have invested,” Robbins said. If an investor can show that he followed false advice, or that he didn’t get the whole story about a stock, “Then yes, you have a case,” he said.

Even so, attorneys say, an investor has to show that he paid attention to an analyst in the first place, or that his broker paid attention to the analyst and based recommendations on the analyst’s reports.

If there is little in the way of a paper trail, then an arbitration panel is forced to decide which party has the best recollection of what actually transpired, perhaps several years ago.

“Did you really read this analyst’s report or hear from some broker in the firm who said [a stock] was a good buy?” Alan Bromberg, a securities law professor at Southern Methodist University in Dallas, asks rhetorically. “Or did you hear about it from your brother-in-law?”

California investors face another hurdle in bringing arbitrations: Because of a dispute between the state and the NYSE and NASD, investors here must waive their rights to certain disclosures about arbitrators if they want a panel to hear their case.

For more information on the arbitration process, investors can check out a number of Web sites: On the New York Stock Exchange’s site (www.nyse.com), click on “regulation” and then “arbitration.” For NASD information, go to www.nasdadr.com. For the Public Investors Arbitration Bar Assn., go to www.piaba.org.