New York Times -April 28, 2003
Analysts to Pay Millions in Fines
By LANDON THOMAS Jr. with GRETCHEN MORGENSON
Henry Blodget, the former Internet analyst at Merrill Lynch, and Jack B. Grubman, the former telecommunications analyst at Salomon Smith Barney, are expected to pay almost $20 million in fines and penalties and agree to be barred permanently from the securities industry today, according to a person briefed on the investigation. The sanctions are to be disclosed when regulators announce the final agreement in the $1.4 billion investment banking research settlement.
Mr. Blodget is expected to pay a $2 million fine and $2 million in "disgorgement" under a settlement with the Securities and Exchange commission, NASD and the New York Stock Exchange. He will not admit or deny the regulators' allegations of securities fraud, the person said.
Mr. Grubman will pay $15 million to make his settlement with NASD without admitting or denying wrongdoing.
The former analysts are the only individuals who are expected to be part of the settlement into conflicts among Wall Street stock research analysts.
Mr. Blodget did not respond immediately to telephone messages. Mr. Grubman could not be reached yesterday.
Eliot Spitzer, the New York State attorney general, and William H. Donaldson, the chairman of the S.E.C., will hold a news conference today in Washington to announce the industry settlement formally. The formal charges and settlement agreement will be filed in Federal District Court in Manhattan this morning.
The broad outline of the settlement was announced last December when 10 securities firms agreed to pay $1.4 billion to resolve charges that many of their research analysts issued overly bullish reports in order to generate investment banking business. Citigroup, which agreed to fines and payments of $400 million, and Credit Suisse First Boston, which agreed to pay $200 million, together with Merrill Lynch (which paid $100 million), will see the word "fraud" used to describe their practices during the stock market boom. Seven other firms will also make payments, ranging from $50 million to $125 million. Salomon Smith Barney recently was renamed Citigroup Global Markets.
Wall Street Firms Make Fewer Settlements In Arbitration
By LYNN COWAN Of DOW JONES NEWSWIRES
WASHINGTON -- More Wall Street firms besieged by investors' arbitration claims are choosing to go through a lengthy hearing process rather than settle the cases.
The trend is likely to increase the already hefty backlog of cases at the National Association of Securities Dealers, and dissuade some plaintiffs' attorneys from taking on cases with smaller potential awards.
In 2002, a record-high level of 7,704 arbitration claims were filed against brokerage firms by investors at the NASD, the primary forum for arbitrations. Although the NASD managed to close more cases that year than in any time since 1996, it still ended the year with 1,747 more cases filed than closed, the highest level since the self-regulatory body began tracking its case statistics in 1990. The average turnaround time for a case going to hearing is 16.9 months as of February, down from 17.4 months in February 2002.
Thirty-two percent of the cases went to a hearing, two percentage points higher than in 2001. The last time the rate was higher was in 1998, when 35% went to a hearing. At the same time, the percentage of cases being settled by firms declined seven percentage points to 37%, the lowest level since 1998.
Plaintiffs' attorneys say they've noticed a marked change in the behavior of Wall Street attorneys at arbitration during the past year, particularly at Merrill Lynch & Co. (MER) and UBS AG's (UBS) UBS PaineWebber unit, two firms that were previously more amenable to settling cases.
"They are much less likely to try to settle cases. I think they're waiting longer and in general offering less money," said J. Boyd Page, an Atlanta attorney who represents investors at arbitration.
Mark Maddox, an Indianapolis plaintiff's attorney, said he used to take 10% of arbitration cases to hearings and settle 90% of them. Now, only 60% are settling and 40% are going into hearings. He said he was surprised recently when he filed a case for a widow with three young children who lost $150,000 due to her broker's mistakes, and the firm is insisting on going to a hearing.
"In the old days, no one would have tried a case like that against me in Indianapolis," said Maddox. "I've probably tried five cases at hearings in the first three months of this year. Traditionally, I do five a year total."
Plaintiffs' attorneys theorize that brokerage firms may be trying to buy time by sending all claims through a lengthy hearing process, delaying any eventual payments to investors by a year or more, when they hope the industry's revenue will have improved. Another possibility, they say, is Wall Street executives are trying to broadcast how difficult and expensive they plan to make arbitrations in an effort to stem the flood of cases filed.
Investors don't have a choice in the matter: The industry requires mandatory arbitration of its customers' complaints, and the ability to settle a claim is entirely dependent on the two sides' willingness to cooperate. A hearing, in front of a panel of three arbitrators, results in a decision that is generally almost impossible to overturn in court.
Charles Austin, a Richmond, Va., plaintiff's attorney, said he's heard colleagues say they're unwilling to represent investors whose claims are $100,000 or less, since there are heftier claims out there to chase and a finite amount of time they can spend in hearings.
"If the industry can turn away three sub-$100,000 claims by virtue of a hard-nosed posture, then for every $200,000 claim that they lose at a hearing, they ultimately save money," Austin said.
Wall Street firms say the lower settlement rate can probably be attributed to one thing: The ongoing bear market has resulted in more frivolous cases being filed where firms feel they should bear no blame for an investor's portfolio performance. They say they're seeing more investors trying to recoup losses that are attributable either to the market downturn, or to their own greed to grab hot technology stocks at the top of the market.
On that theory, the percentage of cases where an investor wins should be declining. But NASD statistics show that the investor win rate is actually rising, to 55% in 2002, up two percentage points from 2001. Past win rates have been even higher, however; the record was in 1999, when 61% of cases resulted in some type of award for investors.
PaineWebber was not immediately able to comment on its arbitration policy. But Merrill Lynch said it views the uptick in hearings as a sign of the poor quality of cases being filed by aggrieved investors.
"We continue to vigorously defend those cases that are either without merit or in which plaintiff's counsel make excessive demands relative to the alleged harm suffered," said Merrill spokesman Mark Herr. "As we have encountered a third year of a bear market, we have seen a bull market in meritless claims."
Morgan Stanley, a firm known for its stalwart history of offering few settlements even in more bullish times, says it hasn't changed that stance. Citigroup Inc.'s (C) Salomon Smith Barney brokerage unit, which plaintiffs attorneys say have always been tough to strike settlement deals with, couldn't immediately comment. Prudential Financial Inc.'s (PRU) Prudential Securities brokerage unit, which is also known among attorneys for its distaste for settlements, refused to comment.
Longtime plaintiffs' attorneys who have built strong securities arbitration practices say they think some of the blame for the decline in settlements lies with less-experienced attorneys, who are trying to make hay out of well-publicized regulatory probes into analysts' conflicts of interest on Wall Street. In reaction, firms are putting up a tougher fight, they say.
"Some of my colleagues will say, how terrible that the securities firms are not settling with us. While firms that have clearly been involved in wrongdoing ought to, they're not required to pay now just because we want them to," said Seth Lipner, a New York plaintiff's attorney. "Meanwhile, people have gravitated to our little corner of the world who may not be as knowledgeable as us, and I think those mass tort guys may be in it for the settlement moneys."
Maddox said whatever the cause, it's making his job more interesting.
"I'm having more fun doing this work now than ever before. And one reason is brokerage firms are not settling as quickly," he said.
-By Lynn Cowan, Dow Jones Newswires; 202-628-9783; lynn.cowan@dowjones.com Updated March 28, 2003 1:59 p.m.
First Boston Faces Another Fraud Charge From a State
By PATRICK McGEEHAN with NORM ALSTER
October 22, 2002 New York Times
Taking a page from Eliot Spitzer's playbook, Massachusetts regulators filed a fraud complaint yesterday against Credit Suisse First Boston, contending that the firm's investment advice had been tainted by its hunger for fees from corporate clients.
In an administrative complaint filed yesterday in Boston, state regulators accused First Boston executives of using the firm's ratings on stocks to reward companies for hiring the firm to underwrite their stocks and bonds. Regulators contended that bank executives also used shares of sought-after new stocks as a way to entice corporate clients and invested the firm's money in private companies to inflate their values if they went public.
The state is asking for $2 million in fines against First Boston and a complete separation of its analysts from its bankers, though not a spinoff of the research department.
The secretary of the commonwealth, William F. Galvin, who is seeking election to a third term, said in an interview that the firm's executives had mocked investors and regulators. Even after Wall Street officials started setting new rules to limit the influence of bankers over analysts, Mr. Galvin said that First Boston executives showed a "cavalier attitude" about the changes.
Frank Quattrone, who runs First Boston's technology banking group and oversaw technology analysts, was not named as a defendant but his name appeared several times in the complaint. Mr. Galvin said Mr. Quattrone would probably be called to testify in an administrative hearing and could eventually face charges.
"`He participated in the tainting of research and analysis advice," Mr. Galvin said of Mr. Quattrone. "The performances of analysts that he reviewed were largely based on how faithful they were in selling the investment banking products."
Late yesterday, First Boston, the investment banking arm of the Credit Suisse Group, said in a statement that Mr. Galvin's contentions were "riddled with misleading statements and inaccuracies." It defended Mr. Quattrone, who was the firm's most valuable employee during the technology-stock boom, and denied that shares of new stock offerings had been used to attract banking business.
The complaint against First Boston was similar to one filed by Mr. Spitzer, the attorney general of New York, against Merrill Lynch in April. After Mr. Spitzer released dozens of embarrassing e-mail messages written by Merrill analysts and bankers, the investment firm agreed to pay $100 million in penalties to New York and other states.
Analysts on list of top scammers
State regulators say conflicts of interest by stock analysts join this year's list of top 10 scams.
August 26, 2002: 12:53 PM EDT
NEW YORK (CNN/Money) - Stock analysts and unscrupulous brokers have joined the list of those
engaged in top investor scams, according to an organization of state regulators released Monday.
 "Record-low interest rates and a bear market on Wall Street have created a bull market in fraud
on Main Street," said Joseph Borg, president of the North American Securities Administrators
Association, which includes the securities regulators from the 66 states, provinces and territories
in the United States, Canada and Mexico.
New to the list this year is conflicts of interest by stock analysts in making recommendations to
investors. The organization points out that it was a state official, New York Attorney General Eliot
Spitzer, who led the way on this problem, winning a $100 million settlement from leading brokerage
house Merrill Lynch & Co., along with promises to reform research practices. It said other state
investigators are reviewing materials provided by a dozen firms for possible securities law violations.
But state action in this area is under attack by Wall Street, according to the group. The organization
said Morgan Stanley Dean Witter tried to introduce language into federal legislation in June that would
have stopped states' probes into whether analysts intentionally misled investors. It said the NASAA led
the fight to keep that limitation out of the final draft of the legislation. Morgan Stanley declined to
comment on NASAA's claim.
The organization listed unlicensed individuals, such as independent insurance agents, selling securities
as the No. 1 investors fraud of the year, and unscrupulous stockbrokers as No. 2. Among the abuses it
cited investors in at least 14 states losing close to $30 million from the sale of fictitious limited
partnerships by independent insurance agents, as well as stockbrokers in North Dakota who allegedly issued
phony account statements to cover up losses from hundreds of unauthorized trades.
Charitable gift annuities and oil and natural gas scams were among the other new additions to this year's
list of top scams. This is the third year the NASAA has compiled the list of investment scams.
The following companies or some of the brokerage firms associated with
Investment Banking business in the following stocks have been or are being
investigated, by sundry government agencies, for FRAUD:
- Enron
- Adelphia Communications
- World Com
- Merrill Lynch by Attorney General Of New York
- Infospace
- Exodus
- CMGI
- ICGE
- ARBA
- AETH
- Lifeminders
TALKING MONEY WITH BILL O'REILLY For Once He Says, 'Don't Take My Advice'
“Mr. O'Reilly also holds shares of Merrill Lynch technology mutual funds — another losing proposition that he picked. ‘Merrill Lynch is a disgrace,’ he said. ‘Their mutual funds are disgraceful and have been for decades. They don't make any money.’” GERALDINE FABRIKANT, New York Times, 8/18/02
Merrill Replaced Research Analyst Who Upset Enron
WASHINGTON, July 29 - In the summer of 1998, when it was
eager to win more investment banking business from Enron,
Merrill Lynch replaced a research analyst who had angered
Enron executives by rating the company’s stock “neutral”
with an analyst who soon upgraded the rating, according to
Congressional investigators.
The move by Merrill Lynch came after two Merrill executives
wrote a memo that April to the firm’s president, Herbert
Allison, saying that Merrill had lost a lucrative stock
underwriting deal because Enron executives had a “visceral”
dislike of the research analyst, John Olson, and what he
told investors about Enron stock, according to documents
obtained by investigators for a Senate panel looking into
the relationship among Enron and its banks.
Merrill vigorously disputes that there was any link between
its rating on Enron and its desire to win more business
from Enron. New York Times, RICHARD A. OPPEL Jr., 7/ 30/02
NEW YORK, June 28 (Reuters) By Nichola Groom - Investment banks that
underwrote billions of dollars in bond sales by telecom
companies that later tanked could be the next target of New
York's crusading attorney general, Eliot Spitzer.
Spitzer, whose probe into stock research that forced
Merrill Lynch to pay $100 million has the investment community
shaking in its boots, is looking into whether Wall Street firms
knowingly supplied misleading information about bond sales by
doomed companies, a spokeswoman for Spitzer told Reuters.
Citigroup Faces Probes Following Grubman's Departure (Update1) - By Rob Urban
New York, Aug. 16 (Bloomberg) -- Jack Grubman, the star telecommunications analyst at Citigroup Inc., resigned under pressure amid allegations he misled investors by issuing favorable stock ratings to win investment banking work. The legal challenges against his former employer his actions instigated remain.
Citigroup faces criminal probes, a congressional subpoena, regulatory investigations and more than two dozen lawsuits over allegations that Grubman violated rules by functioning as an investment banker while he was employed as an analyst at the firm's Salomon Smith Barney unit.
Grubman's resignation ``isn't going to change any liability that Salomon may have,'' said John Coffee, a securities law professor at Columbia University. ``No organization can avoid liability for conduct of their agents when they were in office by later seeing them resign.''
FOCUS FUNDS or FUNDS CONSISTING of ANALYST’S RECOMMENDATIONS - By James Paton
NEW YORK, Aug 2 (Reuters) - Wall Street's high-profile
stock analysts once carried so much clout with investors that
the leading investment houses proudly built mutual funds around
their "best ideas."
Now, with the analysts better known for the famous bad
calls they made on Enron ENRNQ, WorldCom WCOME and
Internet stocks, their firms are giving up on the concept. Wall
Street firms are abandoning funds that relied on their research
departments' top stock picks, at a time when "sell-side"
analysts have been tainted by allegations of bias and conflict
of interest.
"In this environment, it's obviously a pretty tough sell,"
said Russ Kinnel, director of research at Morningstar Inc. in
Chicago. "Wall Street stock recommendations are of very little
value" because they tend to tout investment banking clients.
Goldman Sachs Group Inc. GS, Morgan Stanley MWD and
Bear Stearns Cos. BSC offered portfolios that relied purely
on recommendations of their brokerage analysts, instead of
ideas from the stock sleuths on their money management teams.
But now, Wall Street faces mounting scrutiny over
allegations that juicy bonuses and pressure from executives
have driven its analysts to issue overly rosy reports favorable
to their firms' banking clients, or potential clients.
Mutual fund firms and other big investors lack those
inherent conflicts. Compensation for fund analysts and managers
depends largely on their stock-picking ability, not whether
they steer profitable investment banking deals to their firms.
"There's a bad odor surrounding these analysts," said Roy
Weitz, who runs the watchdog Web site FundAlarm.com. "The sell
side (brokerage house business) is in the dog house right now,
so they probably said, 'Let's just wipe the slate clean.'"
The Goldman Sachs Research Select Fund and the Morgan
Stanley Competitive Edge "Best Ideas" Fund announced in
documents filed with U.S. regulators that they are giving up on
their original mandates, depending now on their traditional
fund managers and in-house analysts, rather than brokerage
analysts.
Representatives for those firms declined to give reasons
for the moves. But weak performance appeared to be a factor,
since the funds have generally done worse than the market as a
whole.
The Goldman Sachs fund has fallen 37 percent in the last 12
months, while the Morgan Stanley portfolio is down 24 percent
in that period, according to Morningstar. Meanwhile, the
Standard & Poor's 500 Index, which the Goldman fund aimed to
beat, has dropped 25 percent in the last 12 months.
The $154 million Research Select Fund now will be run by
stock pickers on the firm's value and growth investment teams.
The fund had been based on the firm's U.S. Select List, a batch
of stocks recommended by its stock analysts. But the list was
discontinued when Goldman Sachs announced changes to its stock
rating system last month, a spokeswoman said.
The $30 million Morgan Stanley fund, which relied on the
"Best Ideas" list compiled by its stock research team, has
changed its name to the Global Advantage Fund, and will look
for an array of investment opportunities around the world.
Bear Stearns has renamed its Bear Stearns Focus List
Portfolio the Bear Stearns Alpha Growth Portfolio, effective
Aug. 1. The fund is no longer modeled on the "buy" list of the
Bear Stearns research department.
A spokeswoman for Bear Stearns Asset Management said the
change was not related to concerns about sell-side research or
fund performance, saying the fund changed its strategy so it
could use the techniques of new manager Jim O'Shaughnessy, who
uses quantitative models to pick stocks.
"It's definitely not related to any of the research
issues," spokeswoman Braden Bledsoe said.
Attracting money into funds that highlight Wall Street
analysts' research may have been easy when everyone was raking
in money during the bull market -- but not today.
"These funds, the 'best picks,' tended to be marketing
driven, rather than investing driven," said Burt Greenwald, a
fund industry consultant. "I question whether there's any basic
intrinsic value in these things, and I assume that any fund a
company offers represents the best ideas they have."
((--James Paton, U.S. Fund Desk, 646-223-6134,
james.paton@reuters.com, with additional reporting by Martha
Graybow--))
Regulators Find Another Analyst With Questionable Reports
The correspondence, which dates back to November 2000, also indicates how much influence investment bankers had over a research analyst at the firm, Donaldson, Lufkin & Jenrette, during the bull market.
They were between the head of equity research and an analyst at Credit Suisse, which acquired Donaldson, Lufkin & Jenrette on Nov. 3, 2000. The analyst was Kevin A. McCarthy and the subject of the messages is his reports on Lantronix Inc., a network device server company. Donaldson managed the initial public offering of the shares on Aug. 4, and several weeks later, Mr. McCarthy recommended Lantronix to investors. After the acquisition of Donaldson, Mr. McCarthy joined Credit Suisse, where he follows technology stocks.
In the correspondence, Mr. McCarthy tells Elliott Rogers, then the head of equity research, that investment bankers at Donaldson put pressure on him to write positively about Lantronix even though the initial public offering had fallen flat. In the days before the public offering, the size and price of the issue was reduced significantly. On its first day of trading, Lantronix shares fell 20 percent from the offering price of $10.
Mr. McCarthy nevertheless recommended Lantronix stock to investors several weeks later on Aug. 30. That was also the day that Credit Suisse announced it would acquire Donaldson. By then, Lantronix stock had bounced back to $10.56, and Mr. McCarthy assigned it a 12-month price target of $17 a share. Shares of Lantronix shares closed at 70 cents yesterday.
In the e-mail messages, dated Nov. 8, Mr. McCarthy said he had felt forced into recommending Lantronix by investment bankers at Donaldson and that his involvement with the company was "an embarrassment." He also stated that the bankers had "acted as a proxy for management" of Lantronix and stonewalled his attempts to do in-depth analysis of the financial statements.
When the e-mail messages were written, Lantronix stock had plummeted to $5.4375. But Mr. McCarthy still rated Lantronix a buy; his report on the company, which he had written at Donaldson, was transferred to Credit Suisse.
Privately, he derided the company to Mr. Rogers. "I put my reputation on the line to sell this piece" of junk, he wrote, "calling favors from very important clients." New York Times, GRETCHEN MORGENSON September 12, 2002
WASHINGTON, Oct 1 (Reuters) - Wall Street's top regulator
on Tuesday said it would fine Morgan Stanley's MWD Dean
Witter Reynolds unit as part of a settlement in which the SEC
alleged the firm failed to properly supervise a broker who lost
more than $15 million of his clients' money.
Dean Witter consented to the entry of an order that finds
the brokerage failed to properly supervise one of the firm's
former high-producing brokers, Mark Rodgers, the Securities and
Exchange Commission said.
Rodgers' Clearwater, Florida clients, some elderly,
"entrusted Rodgers with a substantial amount of their savings,"
the SEC said -- some of which, the agency alleged, he invested
without their permission and eventually lost.
Dean Witter's compliance procedures were such that Rodgers'
misconduct went unnoticed, the SEC's Ivan Harris told
Reuters.
The company did not conduct reports that would have
detected the amount of shares Rodgers had bought in e-Net stock
at the height of his misconduct in 1998 because Dean Witter's
compliance department was understaffed, the SEC alleged.
Spitzer Sues Executives of Telecom Companies
By PATRICK McGEEHAN
October 1, 2002 New York Times
Eliot Spitzer, the attorney general of New York, sued former top officials of five telecommunications companies yesterday, contending that they had steered investment banking business to Citigroup in exchange for inflated ratings on their companies' stocks and new shares of other companies.
After filing suit in State Supreme Court in Manhattan, Mr. Spitzer said he wanted the executives, including Bernard J. Ebbers, former chairman of WorldCom, to give back more than $1.5 billion in "ill gotten" personal gains to the shareholders of the companies they ran. That sum included $28 million in profits on shares of initial public offerings and far larger gains on stock and options of their own companies.
The other defendants were Joseph P. Nacchio, former chief executive of Qwest Communications International and Philip F. Anschutz, its former chairman; Stephen A. Garofalo, chairman of Metromedia Fiber Network; and Clark E. McLeod, former chief executive of McLeod USA. Each was named last year in a wrongful-termination lawsuit filed by David Chacon, a former Citigroup broker who contended that the firm favored corporate executives when allocating new stocks.
Mr. Spitzer's suit contends that each defendant reaped gains of several million dollars on shares allocated to him by the Salomon Smith Barney unit of Citigroup, through a practice known on Wall Street as spinning. In turn, Mr. Spitzer said, each of them directed his company to pay Citigroup tens of millions of dollars in investment banking fees.
"This case exposes further conflicts of interest on Wall Street," Mr. Spitzer said. "The spinning of hot I.P.O. shares was not a harmless corporate perk. Instead, it was an integral part of a fraudulent scheme to win new investment banking business."
In a Feb. 21, 2001, e-mail message cited in the complaint, Mr. Grubman threatened to "put the proper rating" on the stock of Focal Communications, which he said every smart institutional investor "feels is going to zero." Mr. Grubman had reiterated his buy rating that day, with the stock trading at $15.50 a share, but indicated he believed he should lower it three notches.
He kept his buy on Focal's stock for five more months. By then, it had dropped to $1.24, the complaint said.
But the complaint contended that the positive bias of Citigroup's stock-rating system bothered some of the firm's senior executives, citing one who called it "ridiculous on its face." Another, Jay Mandelbaum, who oversaw Salomon's brokerage division, threatened early last year to stop contributing to the firm's research budget because the research it produced was "worthless," according to the complaint.
"I think he's got significant evidence of fraud in these papers," Mr. Coffee said.
Jeffrey L. Liddle, a lawyer in New York who represents Mr. Chacon, said he was gratified to see Mr. Spitzer pursuing the allegations his client made more than a year ago.
"This is just plain old-fashioned bribery and extortion," Mr. Liddle said. "They're just using a different currency."
An Iceberg of Irate Investors
By GRETCHEN MORGENSON New York Times
FRANCIS EDWARD WOLFE, a close-cropped, soft-spoken family man who hoped to travel the country with his wife in a motor home when he retired, hardly seems intimidating. But this 58-year-old former truck driver from Fredericksburg, Ohio, and other investors like him, have become one big nightmare for Wall Street. Mr. Wolfe sued Merrill Lynch last year over $172,000 in stock market losses in his 401(k) plan, and last month, arbitrators awarded him $310,000, including legal expenses.
What happened to Mr. Wolfe may be particularly egregious — it involves an investment in an Internet fund that his broker bought at the top of the market that also enriched the daughter of a supervisor. But across the country, there are hundreds of thousands, perhaps even millions, of people like Mr. Wolfe. They, too, pinned their hopes on the stock market in the 1990's boom and then lost out as the brutal bear market ravaged their investments. Many are making claims against their brokers. And there are growing signs that arbitrators judging these cases are showing more sympathy to investors than the firms had expected.
The trend, if it holds, is yet another sign that the worst is not over for Wall Street, which breathed a big sigh of relief in December when its top firms agreed to pay almost $1 billion to settle accusations that much of their research has been tainted. Other bills from the 1990's market mania, like these covering customer complaints, continue to come in for payment.
"The Wolfe decision sends a message that big Wall Street firms, and their brokers, will be held accountable for destroying the retirement savings of unsuspecting customers by recommending risky high-tech stocks and funds," thundered Jacob Zamansky, a lawyer at Zamansky & Associates in New York who represents Mr. Wolfe.
It is impossible, of course, to know how much brokerage firms will wind up paying customers who are suing them. Investor complaints can take years to make their way through arbitration, and investors who claim to have been hurt by corrupt Wall Street research may be waiting to file their cases until securities regulators release documents related to investigations into the practices of brokerage firms.
But some securities lawyers and experts in arbitration cases say the flood of newcomers to the stock market in the late 1990's may be prompting arbitrators to take the side of investors more often. Unsophisticated and inexperienced investors who took enormous losses in speculative stocks peddled by brokers appear to be arguing with more success that the recommendations were unsuitable.
"When you get newcomers to the stock market, this adds a factor favoring the customer which may not have been as prevalent as before," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. "The element of a newcomer's inexperience in investing builds on other factors which are weighed in determining suitability." Regulators require brokers to suggest only those investments that are appropriate or well suited to their clients' needs and circumstances.
Accusations by customers that brokerage firms recommended unsuitable investments rocketed last year. According to NASD, which oversees the nation's largest securities arbitration forum, 2,644 cases in 2002 claimed unsuitability, 73 percent more than in the previous year.
NASD statistics also show that customers are winning a greater percentage of cases than in previous years. Of the roughly 1,500 cases that were decided last year, 55 percent involved customer awards. In both 2000 and 2001, 53 percent of cases generated awards.
Not surprisingly, given the losses incurred in the bear market, arbitration awards were also higher in 2002. Customers received $139 million in awards, up 43 percent from 2001 and almost double the level of 2000.
There is more. The NASD's figures do not include class-action cases brought in state or federal courts; those cases are hard to track. They also do not include arbitrations going before the New York Stock Exchange or other arbitration forums. According to the Big Board, customer complaints almost doubled last year from 2001, rising to 1,009 cases.
Richard Ryder, editor of the Securities Arbitration Commentator, an industry publication in Maplewood, N.J., agreed that the higher customer awards indicated a shift in sentiment of arbitration panelists. But he cautioned that the greater numbers of cases in arbitration and the higher awards might also be a result of brokerage firms' inability to settle cases before arbitration. Lawyers for the brokerage houses are overwhelmed by the flood of cases, he said, and have less leeway to offer settlements because their firms, also hit hard by the bear market, have much less cash to throw around.
"There is always a greater risk to the firm in going to the fact-finder for determination than in settling the case," Mr. Ryder said.
CONSIDER the arbitration decided a few weeks ago in favor of Mr. Wolfe. He sued Merrill a year ago, and the New York Stock Exchange arbitration panel that heard his case awarded him $235,000 in compensatory damages and $75,000 to cover lawyers' fees. Arbitration awards are binding and are rarely overturned.
Although every customer's case is different, Mr. Wolfe's situation mirrors that of many neophyte investors across America who were convinced by overly optimistic stockbrokers that the only risk associated with the stock market was not being in it.
Mr. Wolfe's case is very close to that of dozens of other Merrill Lynch customers who invested with Joel Cessna, a stockbroker at the firm's office in nearby Wooster, Ohio.
Mr. Wolfe was one of almost 200 people who in January 2000 took early retirement deals from Rubbermaid. At least 50 of them went with their payouts to Merrill Lynch, where Mr. Cessna and a colleague advised them to buy Internet and technology stocks, said Mr. Zamansky, who also represents some of Mr. Wolfe's former colleagues who have filed claims against Merrill, which are pending.
"Hard-working Rubbermaid retirees like Ed trusted Merrill Lynch to invest their retirement savings responsibly," Mr. Zamansky said. "Instead, the firm betrayed that trust and wiped out their savings in about a year."
Mark Herr, a Merrill spokesman, said: "It would be a mistake to assume that because the number of claims has gone up, that industrywide the amount of wrongdoing has gone up. What plainly is at work here is a prolonged bear market. And you also see a number of investors who were heretofore not experienced in the market and are experiencing their first downturn and casting about for a cause."
For more than 32 years, Mr. Wolfe worked for Rubbermaid, doing everything from driving a truck and working on the company's assembly line to mowing its yard. But in early 2000, when the company offered retirement packages to him and other workers, Mr. Wolfe signed up. In each of his years at Rubbermaid, Mr. Wolfe had never made more than $50,000, but with company contributions he had managed to amass a 401(k) worth $325,000.
In his final days at Rubbermaid, Mr. Wolfe said, he had heard other workers talking about a seminar they had attended for new retirees that was sponsored by Merrill Lynch. Mr. Wolfe and his wife made an appointment to talk about their finances with a Merrill representative at the firm's office in a strip mall in town. After an hour with Mr. Cessna, the branch manager at the two-man Wooster office, they decided to switch their account from Fidelity, where it had been placed in a conservative bond fund.
"He convinced us that we could have a pretty safe investment with an 8 percent return on our money," Mr. Wolfe recalled. "We wanted no risk. I told him, `No gambling with my money.' "
Despite that instruction, he said, Mr. Cessna immediately put him into technology stocks and three tech-stock mutual funds, two of which were concentrated in Internet stocks. One fund that Mr. Cessna recommended, Merrill Lynch Internet Strategies, was the firm's ill-timed attempt to participate in the boom for Internet stocks.
Merrill brokers were pushed hard by their superiors to sell the fund. In March 2000, the very month the stock market reached its pinnacle, the fund took in about $1 billion. The sales push included a half-day series of presentations in San Francisco that were beamed to the computer screens of Merrill's 14,000 brokers across the nation. Among the presenters were Henry Blodget, Merrill's celebrity Internet analyst, and top executives from two technology companies. The firm also flew in Michael Lewis, author of "The New New Thing: A Silicon Valley Story," a book celebrating the new economy, from Paris for the event.
In just a few weeks, however, investors who had bought the fund when it was offered were down 25 percent on their money. Soon the fund became known as the Internet Tragedy fund; Merrill closed it less than two years later, after it lost almost all its value.
Testifying before the arbitration panel in the Wolfe case, Mr. Cessna explained that he had more than 1,400 clients and that he had routinely recommended the Internet Strategies fund to many of them. Mr. Cessna counted many retirees from local companies among his clients; he had sponsored a series of seminars in town offering retirement guidance to those attending.
In his testimony, Mr. Cessna cited two other Merrill employees. One was David Ruckman, Merrill's district director for the Ohio region.
vThe other Merrill employee was Mr. Ruckman's daughter, Nicole Elizabeth Dobbins. She worked for the fund management group that sponsored the Internet Strategies fund and was responsible for having brokers in Ohio sign up their customers for it. Her compensation was based at least in part on how many brokers in the region did so.
Mr. Herr of Merrill said: "We deny that there was any conflict of interest." Merrill maintains that Mr. Wolfe's success in arbitration will not be repeated by other former clients of Mr. Cessna in similar circumstances. "We win the preponderance of our arbitrations," Mr. Herr added.
BONNIE BURNS, 56, was another Rubbermaid retiree who invested with Mr. Cessna. When she accepted the company's early-retirement offer in April 2000, she was a machine operator earning $32,000 a year. She had worked for Rubbermaid for almost 34 years.
Ms. Burns attended one of Mr. Cessna's seminars along with roughly 30 other Rubbermaid workers. When she met with Mr. Cessna, he discussed the ins and outs of I.R.A.'s but never said what he would invest in. "There was no mention of stocks or how he was going to invest it," Ms. Burns recalled. "He said, `You worked for that money; now your money is going to work for you.' "
She deposited $357,421 with Merrill in mid-April 2000. When her first brokerage statement came, she saw that Mr. Cessna had bought technology stocks and stock funds, including the Internet Strategies fund. "I didn't question it," she said.
But with each new statement, Ms. Burns saw that she was losing money. In October, she called Mr. Cessna to ask what was going on. "He would say, `I know we're in trouble, but don't you worry, the market's going to come back,' " Ms. Burns said.
It did not, of course. She lost $250,000 in stocks like Cisco Systems, JDS Uniphase, Xilinx and Oracle. The final blow came last year when Exodus Communications, a company whose stock she held, filed for bankruptcy.
Ms. Burns's case against Merrill Lynch is pending. She has gone back to work as a teacher's aid in the Wooster school system.
"I know about 40 people in this circumstance, and there's more to come," she said. "We're all so embarrassed because we were so stupid to let this happen. Every one of us are back to work; some of us are making $6 an hour because the economy's not good around here. One guy has to work till he's 67 now because he lost everything."
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