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Arbitration Makes Flood of Brokerage Claims Unlikely

Los Angeles Business Journal

The recent conclusion of a couple of high profile arbitration cases raises the question: Will Wall Street be inundated with investor arbitration claims contending that brokerage analysts did them wrong? Will investors en masse charge that stockbrokers, following the recommendations of brokerage analysts, herded them into lousy stocks, benefiting not the investor but the brokerage’s underwriting department?

Likely not, said a Beverly Hills lawyer who is a

veteran of the arbitration wars.

True, the number of such claims is rising – and a recent successful case against Internet sector analyst Henry Blodget of Merrill Lynch & Co. garnered a lot of attention. But much militates against any one investor filing a claimFirst off is the simple cost of litigating.

The reality is, if the loss is less than $50,000, generally speaking, it will be difficult to find a lawyer to take the case.

Obviously, an investor maintaining diversity in a portfolio will be unlikely to have $50,000 in a single stock, unless the investor is well heeled. So a number of claims that might have merit are simply too small to litigate in a cost effective way.

As a result, the vast majority of analyst bias claims are shunted to the circular file. “In general, we take about one in eight cases brought our way. But with claims of analyst bias, it is much less than that,” he said. “I looked at a very interesting claim recently, but the loss was only $8,000. It was not worth pursuing.”

Still, practical cases are popping up. In the Internet bubble of 1998-1999, stockbrokers “got caught in the tech euphoria,” and thus advised clients into positions heavily concentrated in tech stocks recommended by brokerage analysts.

So when several criteria are met – a loss larger than $50,000, a stockbroker who advised concentration to boost gains, and an analyst whose “buy” recommendation is conflicted by a specific investment banking relationship – then a claim might thread the needle and bring a settlement.

The iffy nature of arbitrating means that the process will probably never be a big enough stick to beat Wall Street into reforming its system of research.