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Firms Get Tough; File Counterclaims Against Disgruntled Customers

Weary from investigations and bad press, the securities industry has gotten tougher with clients who threaten legal actions. Plaintiffs’ attorneys say firms have, for one thing, begun counterclaiming disgruntled investors. This is usually done by requesting that the claimant pay the firm’s attorneys’ fees.

One such counterclaim by Merrill Lynch has had a “real chilling effect” on the clients of Diane Nygaard, a Kansas City plaintiffs attorney.

“Should [my clients] take the lowball offer, or risk it?” Nygaard asks. “They can’t afford the cost of Merrill’s New York law firm.”

While Merrill seems to be the most aggressive, Morgan Stanley and Salomon Smith Barney have also used this tactic, says Seth Lipner, a New York City lawyer. Lipner and other plaintiffs’ lawyers say claims for attorneys’ fees by firms are improper and not supported by law.

A Wachovia spokesperson says the firm does sometimes counterclaim investors “where we feel we have a valid claim.” A UBS spokesperson says it is “not a general practice” for the firm to sue clients.

Merrill Lynch, Salomon Smith Barney and Morgan Stanley did not respond to requests for comment by press time.

Firms are also playing keep-away with documents. Morgan Stanley has claimed that many client records were lost in the World Trade Center attacks. Firms are also simply refusing to provide account statements and new-account forms prior to a claim being filed, attorneys say, or they are trying to implement new fees for providing these records.

Wachovia tries to charge $25 for each statement and check, Nygaard says. UBS wants the same amount for statements, says Robert Weiss, a Jericho, N.Y., attorney. And Robert Uhl, a Beverly Hills, Calif., plaintiffs’ lawyer, says Morgan Stanley wants $5 for each search for a monthly statement.

The UBS spokesperson denies that the firm charges clients $25 for statements. The Wachovia spokesperson says the firm does have a fee schedule for copies above a certain number, but that the charges are not new.

Plaintiffs’ lawyers say the fees are a recent development designed to dissuade lawsuits. Some investors “just don’t want to pay” to get the documentation to ensure they have a case, Uhl says.

Merrill Lynch also recently has begun pushing for broader confidentiality agreements that cover all documents produced in arbitration–even publicly available records. Stuart Meissner, a New York City attorney, says when he resisted such a request outside counsel for Merrill expressed concern that the information would be shared with the New York attorney general.

The growing number of cases–and the threat of larger cases–is driving the get-tough attitude. Firms are particularly worried about the big trial lawyers coming after them, Weiss says, instead of the usual small securities practitioners.

“These are the Fen-Phen, tobacco and asbestos guys,” he says. “They’ve just discovered a new pot of gold in conflicted Wall Street research.”

For their part, brokers don’t mind the get-tough posture. After getting beaten up for so long, says one Merrill rep, the firm “has finally got its fighting face back on.”