After getting rich together as they rode the great bull market of the 1990s, investors and their stockbrokers now are more frequently turning on each other as they sift the rubble of the market meltdown.
For the brokers-hit with personal market losses themselves and already battered by competition from online and self-directed trading and the growth in other types of financial advisers-an investor mutiny couldn't come at a worse time.
For the customers-some of whom lost small fortunes-even proving broker misconduct won't necessarily get them their money back.
Wall Street customers are on pace to file a record number of complaints against brokers this year as euphoria from the heady days of the bull market grinds to disappointment and finger-pointing all around. The complaints are many and varied-most commonly alleging breach of duty, negligence, misrepresentations, unsuitable investments and unauthorized trading.
This year, investors have filed 2,137 arbitration cases through April, a 24 percent spike from a year earlier-and more than were filed for an entire year as recently as 1986-according to the National Association of Securities Dealers, the industry's self-regulatory arm. Officials said the pace through April would easily surpass the annual record of 6,058 complaints in 1995, and May appears to have been a record month for filings.
Already, the organization has added staff teams in Chicago and New York to handle the rise in customer complaints, and more additions are being considered, said Linda Fienberg, president of the Dispute Resolution arm of the NASD, a forum that handles about 9 in 10 U.S. securities-related disputes.
Fienberg, however, notes that the overall number of cases reflects a tiny percentage of the millions of people investing in the markets.
In her view, that means the vast majority of customers must be satisfied with the integrity of the firms, even if they're disappointed with their returns. Critics, however, argue that the small odds of winning full restitution make some wronged investors reluctant to pay for an attorney to even fight-further exacerbating the tensions between brokers and customers.
The surge in filings is being fueled by several phenomena: More Americans now own stock, and more of them bought highflying tech stocks online and on margin just as the long bull market came to a choppy end. Greed clearly plays a role, too, though investors and brokers are at odds over just who gets tagged with that one.
"It is quite usual for the number of complaints to go up in a down market. People don't complain so much when they're making money," said David Ruder, the former Securities and Exchange Commission chairman who oversaw the agency during and after the stock market crash of 1987. Broker complaints soared 82 percent that year.
Although it is too early to tell if arbitrators will ultimately rule that brokers or their customers will bear more of the blame in the various disputes, the battle itself is already having an impact.
The NASD, for example, recently ruled that the industry standard for recommending only investments suitable to an investor's risk tolerance and profile also applies to electronic communications. Some brokerages have taken to recording more conversations with customers. Investment industry sources said the rising number of disputes also is prompting some firms to pressure brokers into "firing" people they consider to be risky customers to avoid complaints down the road.
In the opinion of one Chicago investor, John Stanford, the tensions boil down to much more than mere sour grapes over losing money.
The 48-year-old entrepreneur claims he lost $190,730 on trades made through his Merrill Lynch account between 1994 and 2000. His claim, filed Wednesday with NASD Dispute Resolution, makes several claims against his broker, Christine Negley, including allegations that she traded excessively, sold him unsuitable securities, traded without authorization and misrepresented and omitted information. He is seeking actual and punitive damages, said his attorney, Andrew J. Stoltmann of Maddox Koeller Hargett & Caruso, an Indianapolis-based firm with offices in Chicago.
Analyzing Stanford's account statements, Stoltmann's firm estimates the account would have had to return 22 percent annually just to cover the costs of commissions and margin trading, according to the filing.
The trading in Stanford's account became more aggressive in the middle of 1999 and focused on stock options, frequently on margin, according to the filing. The options were mostly on Internet or other tech stocks.
Stanford, a publishing industry consultant, said he relied on Negley's expertise to manage the account so he could focus on his business.
"I really believed she was out for my best interest," said Stanford, explaining why he stayed with Negley even as his losses mounted. "I'm on the road constantly, and I had to leave this up to her. I always believed things were going to be right in the end."
Merrill Lynch contends the trades were Stanford's own doing.
"This complaint is from an experienced investor who engaged in higher-risk investment strategies based primarily on his own decision-making," said spokesman Joe Cohen. "As a result of that and other factors, we believe the claim is meritless, and we intend to vigorously defend against it."
Tech stock mania
Either way, the case highlights the fervor surrounding the white-hot Internet sector during the market peak, when technology analysts became media stars, cocktail party conversation centered on stock tips, and the old cautions against infantile stocks went out the window.
"The major issue here is the lack of a Chinese wall at investment banks," said Robert Z. Aliber, professor of international economics and finance at the University of Chicago's Graduate School of Business.
At issue is whether some stock analysts' wildly optimistic reports on the outlook for dot-com companies were influenced by their firms' involvement in investment banking deals with those same Internet concerns.
In turn, brokers-already battling for clients amid the rise of discount and online brokerage houses-didn't dare overlook the manic investor appetite for tech stocks.
Further contributing to the rising level of customer complaints has been an unsavory array of human weaknesses, ranging from greed and unwillingness to accept responsibility by some investors to questionable business practices and downright deceit by some brokers, according to industry observers and securities attorneys.
Placing the blame
"All the cases look the same," said Bruce Lewitas, a Chicago-based securities attorney who primarily represents brokers. "People wanted to be in technology stocks, and they made money in technology, but they didn't want to accept the downside and they looked for others to blame.
"That is not to say there were no brokers who were out of control at this time. There are always problem brokers, and presumably they were still operating during this time."
Arbitration panels will be responsible for sifting through this "he said/she said" debate, made ever more distorted by the tech bubble and its attendant hype.
In setting up their accounts, most brokerage clients sign agreements giving up the right to have courts decide subsequent disputes, but many who file claims retain private attorneys to prepare their cases. Decisions of the arbitration panels, made up of industry and non-industry experts, are binding. Experts say investors win about half of the cases.
Customers who seek redress have to demonstrate more than just a loss from market conditions. They have to show misconduct, ranging from unsuitable investment recommendations to overactive trading to unauthorized trading, said Paul J. Sussman, a Chicago-based securities attorney who mostly represents investors, "and unfortunately, these things happen every day."
What also happened every day during the new economy mania was a less sinister phenomenon. Many brokers, like their clients, were swept up in Internet fever and in the naïve notion that the long-running bull market would charge on forever.
In an arbitration ruling last fall, Kentucky schoolteacher Helen Crooks, now 57, won compensatory damages and court costs of $15,853 after filing a claim alleging that her broker, Suzanne Stavros of Hilliard Lyons Inc., improperly invested one-fifth of Crooks' money in a speculative stock.
Arbitrators praised Stavros, however, as a "well-meaning, honest, hard-working" broker with 25 years of experience who got caught up in the hype surrounding the speculative stock herself, to the point of investing her own funds.
The arbitrator admonished the firm for not having better systems in place to stop both an overzealous broker and an eager, though uninformed, customer. No punitive damages were awarded.
Stavros' is not the only such case.
"We had not had a significant down market since 1981, so I'm guessing two-thirds of the brokers out there had not experienced a down market," Aliber said. "I deal with a young broker, who's about 40 ... and when the market goes down, I almost get the feeling he's ready to see a psychiatrist. He just can't believe it."
Cases not easy to win
Neither could a lot of investors. But the ones who feel their losses were unjustified because of improper brokerage practices face an uphill battle in recouping their investments.
Investors who win arbitrations typically recover 50 percent to 60 percent of their actual losses, according to an estimate from the Securities Arbitration Commentator, a newsletter based in Maplewood, N.J. The figure would be lower if it included punitive damage requests.
"Statistically, it is not a forum that makes one whole," Sussman said. "Only in the most egregious situations, where you are dealing with the elderly, minors, and most important of all, people who have never had any investment experience, do people fare better."
Perhaps even more ominous for investors, their own empowerment via information over the Internet may be eroding their defense as ill-informed individuals.
"The availability of information could well turn into an increased responsibility for the investor," said Laurel Bellows, a Chicago securities attorney who represents both companies and customers. "How much widely available information can you ignore before you are labeled a sophisticated investor?"
E-mail jkstewart at tribune.com or kbergen at tribune.com