- The Washington Times - Thursday, August 30, 2001

Investor complaints and lawsuits are mounting in the wake of heavy market losses and reports of conflicts of interest by financial advisers and analysts.

The number of complaints filed with the National Association of Securities Dealers, one of the nation's largest investing groups that also runs an arbitration system, grew 24 percent through July from a year earlier.

The association is working on an estimated 7,000 cases this year, up from 5,500 last year, which has been the average since 1993, said Linda Feinberg, president of the NASD's dispute-resolution division.

The stock market's downturn has contributed to the rise in the number of complaints, but so has the news surrounding unobjective recommendations from research analysts, which led to the regulatory scrutiny of nine large brokerage firms and became the subject of congressional hearings this summer.

But grievances about analysts profiting from their advice to investors have risen partly because more people than ever are trading on the stock market, said Susan Widerko, director of the Office of Investor Education and Assistance with the Securities and Exchange Commission.

"Our claims have been increasing over the past couple of years along with the rising market," she said. "But last year for the first time, we saw what we categorize as sales-practice complaints."

Data from the NASD show the same trend.

"Now we're having an increase of claims about margin calls and execution of orders," Miss Feinberg said.

Merrill Lynch & Co., the nation's largest investment-research firm, last month settled a high-profile arbitration case brought by a former client who claimed he was misled by a technology analyst at the firm.

Merrill Lynch paid the investor $400,000, paving the way for more complaints from aggrieved investors across the country, industry insiders say.

"The allegations are that analysts gave bad advice. And until now, no one really recognized that as a cause of action," said Steven Shockett, a partner at the Baltimore law firm Salkin & Shockett. "But that's really wide open now."

The main investor complaints are misrepresentation, unauthorized transactions and unsuitable recommendations.

Brokers large and small are being attacked, from large New York firms to regional advisers to Internet traders.

Investors are taking their grievances mainly to arbitrators rather than lawyers, because investors in court cases must prove the brokers intended to mislead them. But an arbitration panel can rule against a firm for recommending unsuitable stocks or failing to supervise brokers more closely.

Miss Feinberg estimates that 70 percent of the cases examined by the NASD are settled before its three-member arbitration panel issues a ruling. About 60 percent of the rulings support the clients, she said.

One law firm capitalizing on the recent trend is Salkin & Shockett.

A month ago, the Baltimore firm began advertising to investors who believed they had been wronged by their brokers. The response has been so substantial that the firm has opened an office in Columbia, Md., and next week will open one in Omaha, Neb., Mr. Shockett said.

"The crux of it is that in the last 15, 18, 20 years it was a bull market, and the brokers got fat and the compliance arm got lax," he said. "So we've been seeing very suspicious trading and people just getting killed on all kinds of sophisticated options. We've had accounts gone from an excess of $10 million to zero."

The firm takes the cases of about 10 percent of the estimated 150 calls its receives a week, and only about half of those are actionable, Mr. Shockett said.

As of yesterday, the firm had not heard from four brokerage firms it had contacted with client complaints. It plans to file suit Tuesday if it still hasn't heard from the businesses, which Mr. Shockett would not name.

"The unsuitability issue is just huge," he said, speaking of the most common types of problems he is seeing. "You've got 80-, 85-year-olds put in very risky investment schemes … . So lots of it isn't just crying over spilled milk."

But while some grievances stem from legitimate broker malpractice, others result from simple miscommunication, Miss Widerko said.

"Many disputes with brokers often boil down to a 'he said, she said' kind of situation that is difficult to resolve," she said. "So we advise investors to take note of all conversations they have with their brokers, and understand fully what it is that the broker is recommending and why."


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