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No End In Sight to Arbitration Bonanza

Investment News

Dozens of plaintiffs suing brokerage firms this month and last have seen a veritable gusher of multimillion-dollar awards – leaving some plaintiff’s attorneys anticipating a continued stream of such arbitration rulings.

The awards, all decided by Financial Industry Authority Inc. arbitration panels in September and October include: Larry “J.R. Ewing” Hagman’s $11.5 million award vs. Citigroup Global Markets Inc.; Morgan Keegan & Co. Inc. losing a $9.2 million decision over its bond funds to 18 investors; and Lincoln Financial Advisors Corp. being handed a $4.4 million loss in a “selling away” case that involved about two dozen investors.

The three awards, totaling $25.1 million, came within 11 days of each other. Some lawyers and observers said they had never seen such a spate of arbitration awards before.

While a number of attorneys and industry observers say the list of huge awards – the Hagman award was one of the ten biggest in Finra arbitration history – is merely coincidence, others note that the timing of the decisions, two years after the financial collapse of 2008, should be expected.

“I’ve been noticing this all year,” said Rick Ryder, president of Securities Arbitration Commentator Inc., which publishes industry newsletters. A headline from an August newsletter read, in part: “It struck us that multimillion-dollar awards in arbitration have been issuing with some frequency.”

“The stakes are higher,” Mr. Ryder said in an interview, noting that an increase of institutions suing brokerage firms over auction rate securities and structured products have also amped up the number of multimillion-dollar claims.

The timing of the large awards was a coincidence, but there was no disputing that the dollar amounts are higher than in the past, said plaintiff’s attorney Ted Eppenstein, a senior partner at Eppenstein and Eppenstein PLLC. “The number of [investor] claims is higher, and the number of awards is higher. I think the process is becoming fairer,” he said, adding that that may lead to “decent awards” for claimants.

And Wall Street and securities firms facing investor lawsuits due to products that imploded will continue to lose, and lose big, attorneys said.

Mr. Hagman’s claim stemmed from unspecified securities in accounts he controlled and the purchase of a life insurance policy, according to the arbitration award. “We are disappointed and disagree with the panel’s finding, and are reviewing our options,” said Citigroup spokesman Alexander Samuelson.

The biggest danger to broker-dealers potentially losing millions in arbitration stems not from rogue brokers but from investment products that soured or imploded during the downturn. “It’s just beginning on the product side,” he said, noting upcoming cases stemming from broker-dealers’ selling Medical Capital Holdings notes. “In product cases, the more you sell, the bigger the liability.”

Dozens, if not hundreds, of clients who bought Medical Capital notes are suing their broker-dealers.

On Oct. 5, Morgan Keegan lost a $9.2 million arbitration decision to lead plaintiff John J. Garrett and 17 other investors over losses in bond funds. Those funds, which have been the target of dozens of past investor complaints, were allegedly unsuitable because they invested in illiquid mortgage-backed loans and collateralized debt obligations.

Investors had asked for $10.5 million in damages. The $9.2 million award was the largest a Finra panel has decided against Morgan Keegan in the bond cases.

“We are certainly disappointed with the panel’s decision in the Garrett case and have filed a motion to vacate this award,” wrote Eric Bran, a Morgan Keegan spokesman in an e-mail to InvestmentNews.

Morgan Keegan has seen favorable results in arbitration, he wrote. “To date, 110 arbitration cases have been heard, with half resulting in outright dismissals of all claims against Morgan Keegan. Claimants in the 110 cases have sought approximately $88 million in compensatory damages and have received $21.7 million in awards.”

A three-person Finra panel ruled Sept. 27 that Lincoln Financial Advisors was “negligent in not preventing” the actions of Scott Gordon, who, while registered with the firm, was raising money from investors for an outside business.

“It’s a matter of corporate policy that we don’t comment” on arbitration decisions, said Eric Samansky, a spokesman for Lincoln.