In The News

MORGAN STANLEY DEAN WITTER TO PAY $1.7 MILLION AWARD FOR IMPROPER INVESTMENT
Deborah Lohse
San Jose Mercury News
January 28, 2003

Arbitrators ordered Morgan Stanley Dean Witter to pay $1.7 million to a former San Francisco employee of America Online to resolve her complaint that her broker cost her millions of dollars by improperly investing her money in risky securities.
The award is one of the largest such payouts ever in the Bay Area and comes as a record number of investors have filed broker complains after the bursting of the tech-stock bubble.
''Those who suffered are just starting to hit the arbitration process now,'' said Cary Lapidus, a San Francisco attorney whose client received the award Friday.
The three-person arbitration panel, as is customary, did not disclose why it chose to award the employee, Meikle Hall, only $1.7 million out of the $4 million that she claimed she lost.
According to a summary of the complaint, Hall exercised about $10 million worth of AOL stock options in late 1998 and early l999, paying roughly $50 a share and holding on to most of the stock instead of immediately selling it.
She then asked her broker to handle her portfolio, selling the shares as needed to help meet her and her family's ''conservative investment objectives,'' the complaint says.
The broker persuaded Hall and her husband, William, to use the AOL shares in a highly complex arrangement known as a ''prepaid forward contract,'' which cost them $1.2 million in interest over 18 months.
Such contracts are typically used to free up cash by people who own a lot of stock but can't or don't want to sell it for tax or other reasons. Lapidus said his clients didn't need or want such a complicated arrangement.
The broker, Joseph Schlater of Morgan Stanley's Beverly Hills office, then invested the proceeds from the forward contract, roughly $5 million, in risky tech and telecommunications stocks, the complaints says. He magnified the risk by borrowing money against the account's assets, earning $172,000 in margin interest for the firm on top of $142,000 in trading commissions.
Schlater could not be reached for comment Monday, and Morgan Stanley declined to comment.
But Morgan Stanley argued during the arbitration proceedings that the Halls knew what they were doing, in part because they got a legal opinion from Wilson Sonsini Goodrich and Rosati before entering into the prepaid forward contract.
The ruling comes at a time when investors have brought a record number of complaints against their brokers. Last year, investors, filed 7,088 arbitration cases through the securities industry regulator, NASD. This year will break that record, NASD says.
Arbitration is a disupte resolution system that most brokerages required clients to agree to use to settle disputes. The majority of arbitration complaints are settled before arbitrators reach a decision.
The $1.7 million award received the the Halls is one of ''less than a dozen'' such awards greater than $1 million in the Bay Area, according to Richard Ryder, president of Securities Arbitration Commentator, which collects arbitration data.
Some lawyers are hoping the Morgan Stanley award signals that arbitrators will be sympathetic to the flood of claims that brokers over-invested in tech stocks or failed to diversity the portfolios of employees who exercised their stock options.
But so far, the statistics aren't showing any spike in pro-investor awards. In 2002, 55 percent of the 1,483 cases that went to a final arbitration verdict, rather than being settled or dismissed, awarded some money to the investor, according to NASD data. That's comparable with 53 percent of the rulings in favor of investors in 2000 and 2001, and 61 percent in favor of them in 1999.

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