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Stunned Investors Spur Bull Market in Complaints


It isn’t the bull market Wall Street might have wished for, but it’s barreling along all the same.

Striking it rich on the blunders of the financial world: The lawyers who represent investors looking to sue their brokerage firm.

“Bad markets expose bad portfolios,” says Vincent Imbesi, who handles securities cases at the New York law firm Napoli Bern Ripka LLP. “When the market goes down, our business goes up.”

Lawyers who specialize in representing investors in securities arbitration were swamped even before market-rocking news this week that included the bankruptcy of Lehman Brothers Holdings Inc. All year, bruised investors have been filing complaints with the Financial Industry Regulatory Authority, or Finra, after purportedly safe investments such as auction-rate securities turned out to be anything but.

“I now have more claimants than at any time in my career,” says Charles M. Thompson, a plaintiffs’ lawyer in Birmingham, Alabama, who has been practicing law for 35 years. Most of Thompson’s cases involve retirees who thought they were buying low-risk bond funds that turned out to be heavily invested in mortgage and equipment-leasing obligations.

With Lehman’s bankruptcy filing, the Merrill Lynch & Co. fire sale to Bank of America Corp., and American International Group Inc. facing a doubtful future, financial markets plunged, unearthing fresh examples of mismanaged portfolios.

“In 2007, we probably averaged four calls a week,” says Imbesi. “Now I’m getting about 20 calls a day.”

No Choice

Investors with a complaint have no choice but to use Finra’s arbitration system, because brokerage firms insist that customers sign agreements that they will forgo court in a dispute. Finra received 3,011 new arbitration requests through the end of August this year, up 39 percent from the same period in 2006.

Not all unhappy investors are calling a lawyer looking to file a claim. Many are calling local securities regulators, trying to get a handle on trouble that might be ahead. In Massachusetts, “We are getting calls from nervous investors asking `Are my Neuberger Berman funds safe? What happens to my Merrill account when the companies merge? I have an annuity with AIG — should I worry?” says Bryan J. Lantagne, director of the state’s securities division.

`No Real Downside’

Jake Zamansky, a lawyer in New York, says he has been talking to investors who were advised to buy the preferred stocks of Fannie, Freddie and other financial institutions. “A lot of these preferred holders were your proverbial little old ladies and retirees who were moved into preferreds by brokers seeking higher commissions,” he says.

Investors’ lawyers may be getting more cases that look like winners, but that doesn’t mean they have confidence that their clients will actually be made whole. Steve Gard, a lawyer in Ponte Vedra, Florida, says his phone has been ringing with clients who worry that they might win their arbitration hearing, but not be able to collect. With Lehman seeking bankruptcy protection, who knows which firms might be next?

“After being in this line of work for 30 years, I could paper my wall with arbitration awards and judgments that my clients were unable to collect,” he says. Even a lawyers’ bull market comes with its risks.