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. Wolfe sued Merrill Lynch last year over US$172,000 in stock market losses in his 401k plan, and last month, arbitrators awarded him US$310,000, including legal expenses.
What happened to 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 Wolfe. They, too, pinned their hopes on the stock market in the 1990s 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 US$1 billion to settle accusations that much of their research has been tainted. Other bills from the 1990s 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," said Jacob Zamansky, a lawyer at Zamansky & Associates in New York who represents 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 1990s 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 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.
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