In The News

SEE YOU IN MARKET COURT
You Can't Sue An Unscrupulous Broker, But You Can Get Even
Linda Keslar
Individual Investor
October 15, 1997

In 1992 Helen Anderson entrusted $700,000 to a stockbroker, then watched in horror as her portfolio lost $55,000 over three years. Her broker assured her that things would turn around, but Anderson (a pseudonym) didn't buy it. She contacted the couple who had recommended him, and was amazed to hear that their losses were running into six figures. Convinced it was more than that luck, Anderson and her friend sought help.
That scenario is far from rare. Last year the National Association of Securities Dealers (NASD) received more than 20,000 complaints of broker misconduct. ''I'm seeing more cases than ever before'' says David Shellenberger, a Boston lawyer who specializes in securities disputes. ''If you're losing money in a great market, that's a real warning sign''.
Shellenberger interviewed Anderson and her friends, then analyzed account statements and correspondence with her broker. He concluded that the broker had violated a slew of the rules set down by the major stock exchange,s as well as state laws. For example, 95% of the securities and Anderson's portfolio or high-risk instruments such as warrants and options. Since her objective was preservation of capital, those investments were inappropriate. The broker had traded in and out of stocks, mostly without Anderson's permission – an activity called churning. ''In Helen Anderson's case the portfolio would've had to earn 18.5% just to cover the commission costs,'' says Shellenberger.
Churning and investing in unsuitable search your days are two of the most common violations filed with the NASD. But thanks to the 1987 Supreme Court ruling in Shearson vs. McMahon, investors cannot sue Brokers. Look at the fine print on any new account documents you signed in the past 10 years, and you'll see you waived your right to sue. But you do have recourse against an unscrupulous broker.
The first step is to trace the route of a misdeed; that may entail going back to the start of your relationship with your broker. ''A broker is obligated to record information about a person's financial situation – their income and net worth,'' says Cary Lapidus, a San Francisco lawyer. Brokers often inflate figures so they can sell a customer speculative instruments without raising the suspicions of their supervisors. Helen Anderson's broker had recorded her liquid net worth as $175,000 – more than twice the real amount. Because brokers are not required to give clients copies of their new account applications, and Anderson didn't ask for hers, she didn't see the inflated figure until it was too late. If you suspect wrongdoing, request a copy of your application and check it carefully. You also should scrutinize your monthly statements and trading confirmations, looking specifically for activity you didn't authorize.
If you think you have grounds to file a complaint, hire a lawyer who is an expert in securities disputes. ''This is become a complex world, and if a lawyer doesn't know what he's doing, he'll get eaten alive,'' says Shellenberger.
The lawyer prepares your case for arbitration, at which one person or a panel hears testimony and examines the evidence. The New York and the American stock exchanges offer arbitration services, but the NASD's forum is the most frequently used, primarily because all brokers are NASD members. Three firms – Dean Witter, Merrill Lynch, and Paine Webber – also offer for also offer clients a forum: the American Arbitration Association.
''Arbitration is becoming more and more like court litigation,'' Lapidas says. Shellenberger, for example, hires consultants who analyze the clients' monthly statements for signs of churning and other violations. About 70% of the time, such fact-finding facilitates the settlement of cases before they reach the arbitration table.
In the action filed by Helen Anderson and her friends, Shellenberger recovered about half their losses in a settlement reached nine months after the filing. They were lucky. According to a survey by the securities arbitration commentator, a journal based in Maplewood, New Jersey, investors prevail in about 54% of complaints filed against brokers, typically recovering about 40% of their losses. The average complaint can take up to a year to resolve. It isn't cheap either, and if the Nase NASD gets its way, arbitration may get even more expensive. Pending FCC approval, filing fees for investors claiming losses of $100,000-$500,000 will jump from $200 to $300, plus a deposit of $1,125 (up from the current $750).
If your claim does not exceed $10,000, you can mail a written complaint to Ruth Brooks, NASD financial Center, 33 Whitehall St., New York, NY 10004. For filing fees ranging from $15-$75, depending on the size of the claim, a single arbitrator reviews the evidence and renders a decision. In that scenario, however, the investor prevails only 41% of the time, according to the Securities Arbitration Commentator.
Not surprisingly, many legal experts urge investors to avoid securities arbitration at all cost. One way is to use NASD's mediation system, in which a neutral party helps the two sides reached a settlement. Last year the NASD mediated 300 cases, charging $600 for each four hour session.
Of course, preventing a broker dispute is the ideal course. One resource you can use to check out your broker is the NASA's central registration depository at www.NASDR.com. State securities agencies also provide broker information. Be aware, however, that those sources won't reveal everything. Helen Anderson's broker, says Shellenberger, had a clean record, despite some disciplinary problems.
After selecting a broker, write out your investment objectives and send them to the broker and the firm's branch manager. Keep a copy of your new account application. Most importantly, thoroughly research any stock your broker recommends. ''Brokers aren't like doctors and lawyers,'' says Lapidus. ''You're not paying them for a neutral opinion.''

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