NewYork Post (August11, 2002)
Investors demand brokers pay up
By ISABELLE SENDER and JEANNE BURKE
With the Dow in the dumps and the Nasdaq shattered, thousands of angry investors are attacking their brokers for costing them their life savings.
This year, a record number of devastated market players have filed complaints charging their money managers with malfeasance – claiming they lied about investment risks, bought and sold stock without permission and made excessive trades to boost commissions.
In just the first six months of the year, the number of complaints accusing brokers and brokerages of misdeeds has risen 10 percent over the same time last year – as more than 3,700 jilted investors filed complaints.
When the year is done, 11,000 investors may have sought redress.
It’s happening across the country, said Christopher J. Bebel, an attorney with Shepherd Smith & Bebel in Houston.
The complaints are being filed with the National Association of Security Dealers, the self-regulating Wall Street agency that arbitrates claims and determines the damages balky brokers have to pay.
So far this year, the awards are up.
In just the first half of this year, $72 million has been awarded to wronged investors – compared to the $97 million awarded in all of 2001.
Of course, the investors cannot reclaim all their lost dough.
Investors are compensated roughly 60 cents on the dollar for money lost and about 27 cents on the dollar for lawyers’ fees and punitive damages, according to one financial journal.
Many of the complaints come from investors with money in mutual funds that have imploded. This year’s number has already surpassed last year’s total – partly because, some experts say, so may 401(k)s are invested in mutual funds.
From coast to coast, more cases are being settled in favor of investors. The win rate for investors has increased to 57 percent so far this year from 53 percent in 2001, according to NASD figures.
INVESTORS: IT’S PAYBACK TIME
Winding road to justice on Wall St.
Most claims against investment brokerages are heard by the National Association of Securities Dealers Dispute Resolution division. To seek damages against your broker via NASD, you have to:
g File a claim detailing the dispute, relevant dates and names, damages being sought, as well as supporting documents. And sign an agreement that the resulting ruling will be final. The filing charge is $200.
The claim is sent to the opposing party, which usually has 45 calendar days to respond, file a counterclaim, if necessary, and sign the agreement that NASD’s resolution will be binding.
If a counterclaim is made, the claimant has 10 business days to file a reply.
g If you are seeking $25,000 or less, the claim will generally be processed solely on the basis of the claim and the paperwork you filed – though you may request a hearing.
g For a larger claim, a three-person panel appointed by the NASD will review your claim at a hearing. In this case, experts advise hiring an attorney, though many won’t take on a claim seeking less than $50,000 in damages.
The panel of arbitrators is selected by computer. The choices may be challenged. A hearing date is set, and the parties are given 15 days notice.
g After the hearing, the panel has months to reach a decision. Over the last three years, the average turnaround time for small claims was about nine months. Large claims sometimes take more than 16 months. And arbitrators are not obliged to detail the reason for their decision.
g If they award an investor money, the brokerage firms have 30 days to pay or they risk disciplinary action.
For more information, see www.nasdadr.com.
How to beat your broker
Here are some tips from the experts:
-Identify the red flags of bad investments.
Christine Bae, a securities arbitration lawyer, said certain statements might signal an unresearched investment choice on your broker’s behalf, such as “My manager loaded up on this stock today,” or “I put my grandmother in 100 shares of this stock, today.”
-Keep a paper trail.
Retain your records from the broker – everything from the initial account application to the analyst recommendations and all the confirmations and statements in between, said Bae. If you end up in a dispute with your broker, “you need to articulate and show what went wrong with your account.”
-Complain to your broker and his firm before calling a lawyer.
If you really feel that the broker has done you wrong, you need to take it up with the broker, Bae said. Since the financial community already favors private arbitration and the current climate is so volatile, you may get farther faster.
-Beware of trading on your own while you have a relationship with a broker.
Doing so shows you have a certain sophistication about the market and will make you a poor candidate for claiming your broker duped you.
-Use the existing arbitration process to your advantage.
In general, your broker is supposed to be the expert.
-In the future, don’t be easily convinced you should be in stocks.
Too many brokers seduced their older clients into believing they should still be in stocks, said Micheal Thompson, strategist for RiskMetrics Group. Individuals in or near retirement should be in conservative investments, such as bonds, which over the past three years have returned almost 10 percent on average.
Viable complaints against brokers fall into four categories.
We call them SCUM, said Barbara Black, professor at PACE University Law School, which runs a clinic for investors who have lost $50,000 or less.
S is for suitability, which involves making inappropriate investments in light of the client’s profile. Both the NASD and the NYSE require that brokers make appropriate investment recommendations based on their knowledge of the customer. Older people, for example, should have less stock and more bonds in their portfolios.
C is for churning, which is excessive trading and is often suspected of taking place as to increase commissions, fees and interest for the brokers and their firms.
U is for unauthorized trading, which is buying and selling without the customer’s permission.
M is for misrepresentation about essential investment information.
— Jeanne Burke
Immigrant fights back after losing his fortune
By ISABELLE SENDER
Yosef Kvitelashvili came to New York with his wife and son almost a decade ago looking to live the American dream.
Kvitelashvili, a meteorological-engineer-turned-importer-exporter, was approaching his 60s – when most American men are considering retirement – but he worked hard, and it seemed to pay off.
He bought a home in an exclusive neighborhood on the North Shore of Long Island. He sent his son to St. John’s University. His dream had become reality.
But in October 2001, the money Kvitelashvili had saved and invested with a Russian-speaking investment broker had virtually disappeared as the Dow plummeted. The $1.1million he had invested with the broker in early 2000 had dropped to $37,000.
In January 2002, Kvitelashvili filed a formal complaint against Merrill Lynch, where the broker was working at the time, seeking damages of about $4 million – the loss of value in his accounts, plus interest and punitive damages.
It all started, Kvitelashvili said, in late 1999, when he received a marketing call – or “cold call” – from the Merrill broker.
A fellow Russian, she convinced him to let her manage his money, which until then was held in another brokerage account.
Kvitelashvili’s complaint alleges that the broker said she would manage his funds “in a manner to preserve our capital since we were senior citizens.”
Kvitelashvili claims he had been unable to carefully monitor the accounts’ activities after September 2000, when he suffered a stroke.
One year later, he said, the accounts’ value had plummeted to $37,000.
When he questioned the broker, she replied, “Not to worry,” and said that the losses reflected on the statements were “computer mistakes,” according to Kvitelashvili’s complaint.
His claim alleges that Merrill Lynch did not have discretion to trade on his behalf. And up until he suffered his stroke, all trades were made only with his approval.
Without his supervision, he claims, his instructions regarding investments were not followed, funds were improperly invested to maximize fees and profits without regard for his rights as a customer, and his accounts were handled fraudulently.
A Merrill Lynch spokesperson said, “The Kvitelashvilis were experienced, aggressive investors who chose volatile investments and did not follow more conservative investment strategies. They are responsible for their account decline resulting from their knowing and deliberate investment decisions.”
After the first go-round with Merrill Lynch, Kvitelashvili’s lawyer is putting together an amended complaint.
Then he will await a hearing with the National Association of Securities Dealers Dispute Resolution division, which will put the case before a panel of arbitrators.
Many investors who feel wronged by their broker had their money in margin accounts, in which funds are borrowed to buy more shares – without their knowledge.
Mary Silvestro, 50, a widow, said she wants to take action against her broker because $600,000 has evaporated from her account since early 2000. She says the broker bought stock on margin without her consent.
I didn’t find out until a year later that I was in a margin account, she said.
Lawyers and arbitration specialists say brokers prefer managing accounts with ballooned balances due to borrowing on margin. It increases the fees they charge as well as the interest they can accumulate for their firms.
Steamed investors face uphill battle for restitution
By PAUL THARP
What irks bruised investors most is that in order to try to recoup investments lost by bad brokers, they have to face a kangaroo court stacked against them – arbitration.
Wall Street firms and their employees have enjoyed arbitration as a cloak of protection from lawsuits filed by wronged clients for 15 years.
In 1987, the year of the crash, the financial firms universally adopted its industry-sponsored arbitration process to answer all disputes – a venue much cheaper than open court and historically more friendly to brokerages than clients.
When you open a brokerage account, you must sign an arbitration-dispute agreement – signing away your right to take any matter to a court of law – which has been upheld all the way to the U.S. Supreme Court.
One East Side couple, who asked to remain anonymous, entrusted $4 million to a broker at the former Dean Witter, who lost it all in a scheme he helped run from the firm’s offices for takeovers of small companies – without using Dean Witter’s recommended list of approved stocks.
When he got hauled into arbitration to answer charges that he violated numerous trading rules, he lied about it all and got off the hook, according to arbitration papers provided to The Post.
But four years later, the broker confessed to the couple that he committed perjury at their arbitration and said he was sorry.
The wronged investors moved immediately to reopen their case to get back their $4million but were told it couldn’t be done for two reasons.
First, Dean Witter had ceased to exist as a separate company, having been acquired by Morgan Stanley.
Second, and more importantly, arbitration rules give just 90 days to reopen a closed case.
The investors were out of luck, and even lost a landmark appeal in a federal court in the 11th Circuit, which said its hands were tied.
All a dirty broker has to do is keep his lies covered up for 90 days, and he’s home free – the clock runs out permanently, said Tim Dowd, a financial adviser to the couple.