Laying Claim to Arbitration
Washington Post
August 20, 2003
By Brooke A. Masters
NEW YORK -- For Long Island plaintiffs' lawyer Robert H. Weiss, the current crop of research-analyst stock fraud cases is personal.
With his technology-stock portfolio swollen in March 2000, at the peak of the boom, Weiss sold his personal-injury practice, took early retirement and turned to day trading to pass the time. Then the bubble burst and he "got creamed," losing a nest egg worth well into the six figures, he recalled.
Now he's 44 and back at work as a lawyer, but this time his targets are the investment banks he believes ripped off him and other investors by issuing biased research reports designed to pump up weak stocks to win investment-banking business.
In the process, Weiss and his new partner, Florida lawyer James Richard Hooper, are shaking up the cozy world of securities arbitration, where most investors must take their claims.
"Wall Street is a black hole. . . . They were systematically selling out Main Street [by] using their brokerages to push products so that they could attract investment banking," said Weiss, of Jericho, N.Y. "They have all the money. They have all the clout. All we've got is that we are right and we aren't cowered by them."
Traditionally, lawyers for investors concentrate on bringing a few high-dollar claims at a time. They generally work quietly, negotiating settlements or presenting evidence to arbitration panels, which are closed to the public and run by NASD and the New York Stock Exchange.
Weiss and Hooper have a different approach.
They're trying to attract as many clients as possible. They've run television commercials vilifying outgoing Citigroup chairman Sanford I. Weill and set up a Web site at www.stockmarketfraud.com. When they filed their first 71 claims with NASD, an industry self-regulatory group, in January, they arrived in a rented truck loaded with documents and invited the media.
Hooper, 48, specializes in mass torts, the process of filing lots of similar claims based on the same corporate wrongdoing. He made his money suing the makers and distributors of breast implants and the diet-drug combination fen-phen
So far, Hooper said, he and Weiss have signed up 9,000 clients and forged an alliance with a Florida law firm that represents 6,000 more. The firms work on contingency, taking 25 to 40 percent of any win, and their assembly-line approach means no case is too small, Weiss said. The smallest claim so far is for $839.
"I wouldn't be surprised if we filed more [securities arbitration] cases next year than everyone else [combined] in the whole country," Weiss said.
NASD officials said this week that Hooper & Weiss is the law firm of record for more than half of the 386 research-related arbitration claims it has received so far this year. The firm has also filed an additional 100 or so cases that are not specifically research-related but allege that brokers recommended unsuitable stocks or other violations of securities law, Hooper said.
But the move that really shocked Wall Street and the Securities and Exchange Commission came in July when Hooper & Weiss filed a motion trying to insert two of their investor clients into the landmark $1.4 billion settlement forged by the SEC, state regulators and 10 major firms in April to end multiple investigations into allegations of biased research.
Hooper & Weiss has asked U.S District Judge William H. Pauley III, who oversees the settlement, to take the nearly $400 million set aside for investor restitution and use it to pay arbitration fees for investors who wanted to go after the banks themselves.
"Arbitration is an expensive forum [costing upwards of $1,000 for large claims]. What could be objectionable to making it affordable to investors who lost money?" asked Hooper.
Lawyers for the Wall Street firms complained in their response that Hooper & Weiss was simply trying to "rewrite certain terms . . . to be more favorable to them" and warned that the restitution pot could be "drained by arbitration costs," leaving nothing for investors who simply want to get some of their money back without having to file an arbitration claim.
Spokesmen for the SEC, which also opposed the request, and several major banks declined to comment on the Hooper & Weiss approach.
Pauley has not said when he will rule on the motion.
In the meantime, Weiss and Hooper are moving forward with their claims. None have been heard by an arbitration panel yet, so it is hard to tell whether their high-volume approach will work.
Traditional securities arbitration lawyers warn that arbitration cases don't generally lend themselves to a mass tort approach. That's because claimants usually argue that they should be compensated because they relied on their broker's bad advice, and proving "specific reliance" is a fact-intensive job that requires individualized research, they said.
"They're going to find that this is not like a breast-implant case [or] limited partnerships where the product was defective," said David E. Robbins, former head of arbitration at the American Stock Exchange and author of a book on securities arbitration. "I bet a lot of these cases are going to get settled [and] the customer will lose twice. First with his investment and second with his lawyer."
Weiss agreed that proving "specific reliance" is hard, but he and Hooper said the firm plans to file most of their claims based on state laws that allow customers to seek redress when brokers fail to disclose important facts -- in this case that the research was being used to help win investment-banking business.
Judges and arbitrators have been skeptical of that approach in a couple of recent federal class-action cases and NASD and New York Stock Exchange arbitration decisions. U.S. District Judge Milton Pollack dismissed a lawsuit against Merrill Lynch in June, issuing a scathing opinion that compared investing in technology stocks to gambling in Las Vegas and said the plaintiffs were trying to sue the croupier.
Hooper, whose Orlando office has an in-house television studio to make it easier to make commercials, takes issue with that characterization. He said he believes arbitrators, who are charged with doing justice rather than being required to follow legal precedent, will find his clients more sympathetic.
"Most of the folks I represent lost their money in retirement accounts. They did not intend to use the money to gamble in Atlantic City. My clients listened to a buy rating from their broker," Hooper said.
J. Pat Sadler, president of the Public Investors Arbitration Bar Association, said Hooper &Weiss "may be providing a terrific service for smaller investors [by] giving them a place to go. It's very hard for me to do a $30,000 case."
But he and other lawyers warned that investors with larger losses, upwards of $100,000, would do better with an attorney who examined all of their claims individually rather than focusing only on the research-analyst claims.
Hooper said his firm is filing a broad range of claims and doesn't plan to agree to mass settlements right away. "We don't deal in aggregate settlements," he said. "You have to start trying cases and look at the results. Then you get a feeling . . . as to what constitutes a reasonable settlement."
At that point, the Hooper & Weiss approach may pay off, said John R. Sachs, a New York lawyer who defends securities firms.
Mass tort firms "scare the hell out of the people on the other side and eventually there is a settlement. A lot of it goes to the lawyers," Sachs said.
But Weiss and Hooper say they expect to do well for their clients as well. They contrast their approach with class-action firms, which file one big case for a class of people, rather than lots of claims for lots of individuals.
"Class-action cases usually settle for five cents on the dollar. We have people who are devastated," Weiss said. "The securities industry is not the medical industry. It is not a vital part of this country. It needs to be held accountable."