Investor complaints on record pace

The Nasdaq stock market may be stone cold, but investors are hot as hell.

They are filing complaints at a record pace, accusing brokers, brokerage houses and in some cases financial advisers of negligence for loading up their portfolios with tech stocks during the wild bull market.

Fueling the wave of recrimination, the Nasdaq Composite Index has fallen 60% in the 13 months since the market peaked, destroying trillions of dollars in investor wealth.

Considering the technology craze and unprecedented bull market – both now just memories – it might not be that hard to prove negligence, says Scot Bernstein, an attorney in Sacramento, Calif.

“It’s devastating to people,” says Mr. Bernstein, who is involved in a handful of cases making their way through arbitration.

busier than ever

Investor complaints always rise after a market slump (see chart, Page 25), but the number of filings this time around is clearly shaping up to be a record.

Year-to-date through March, arbitration cases were up 15% over the comparable period last year, according to NASD Regulation Inc., the independent regulatory arm of the National Association of Securities Dealers.

Officials with the organization say the number of filings has picked up to such an extent that it could equal or exceed the record set in 1995, when 6,058 cases were filed.

Proving negligence

Although he declined to talk about specifics, Mike Hume, a litigation consultant for the National Association for Securities Arbitration Counselors in Incline Village, Nev., says everyone – from small brokerages to wirehouses – is being hit with complaints.

Mr. Hume says he is currently working on cases that involve Merrill Lynch & Co. Inc., Morgan Stanley Dean Witter & Co. and Prudential Securities Inc., all in New York.

In the latest wave of filings, Dr. Mark Rubin’s case appears to be typical of those related to the tech stock crash.

The 35-year-old Scottsdale, Ariz., doctor filed a complaint with NASD Regulation last month accusing his broker of overweighting his portfolio with technology offerings.

Dr. Rubin says he handed over about $250,000 to a Merrill Lynch broker because it had become too time consuming to manage his investments on his own.

He says they discussed diversification, but in the end, the broker placed everything in technology.

“It was done with my knowledge, but I relied on him,” Dr. Rubin says. “That was his area of expertise, and I hired him to run the thing. The reason I got him was so I didn’t have to run it anymore.”

Unless Dr. Rubin told his broker to pull out of technology, some attorneys say, he’ll have a hard time proving his case. Others say he has a chance of at least recouping his initial $250,000 investment if he can prove the broker was negligent.

aggressive posture

Mr. Hume says he is working on a case that involves a 65-year-old industrial toolmaker.

In February his portfolio was worth $4.4 million, but by April most of his gains had been wiped out.

He’s seeking $4 million in his arbitration complaint because he alleges that his broker ignored an order in April to shift his technology holdings into more-value-oriented investments.

“He’d had a long-term relationship with the particular broker, and then in about 1998 the style changed to a much more aggressive posture – aggressive being the type of stocks, the introduction of margins and the introduction of selling naked put options,” Mr. Hume says.

He says he is currently working on a few cases that involve financial advisers, but they normally prove less fruitful.

Advisers usually don’t have deep pockets like brokerages do, and many of them must be tried in court rather than through arbitration, because they aren’t NASD members.

Following directions

Last year, arbitrators closed 5,473 cases and awarded $76 million in damages. In 1999, NASD Regulation closed 4,767 cases and awarded $126 million in damages.

And in 1998, a year influenced by a few unusually large punitive-damage awards, 5,484 cases were closed, and $163 million in damages were doled out.

This year, attorneys for investors confirm that they’re busier then ever.

“I think [the trend] is an outgrowth of a variety of things, including an aging bull market and a brokerage industry that consists largely of a bunch of young guys who have never lived through a bear market and don’t know what it is,” Mr. Bernstein says.

Brokers and advisers, however, say the filings are largely sour grapes.

lightning striking

While some in their ranks may have made mistakes, in most cases they were just following directions and shouldn’t be held accountable, they assert.

“Just because a customer alleges that they were misadvised doesn’t mean that customer is right,” says Alan Davidson, president of the Independent Broker-Dealer Association in Smithtown, N.Y.

“I’ve been on district committee cases, and I’ve heard customers lie. Any experienced member of a district committee knows that a customer is capable of lying,” he adds.

Despite the spike in complaints, they involve only a fraction of a percent of the brokers who are advising clients, and most are resolved without any action, Mr. Davidson says.

“You have a better chance of getting hit by lightning on a golf course than being mistreated by an investment firm,” he adds.