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Investment Fraud Settlements

April, 2004 marks the 2 year anniversary of the discovery of some of the worst financial frauds in history. That was when the New York Attorney General Elliott Spitzer released the findings of rampant fraud on Wall Street, including the 10 of the largest and formerly most respected names in America. Included were Merrill Lynch, Solomon Smith Barney, J.P. Morgan, Prudential to name a few. Documents were released as a part of a $1.4 billion Wall Street settlement, which included a $387.5 million fund for customers of the ten settling brokerage firms. Spitzer said, “It is now up to them(investors) and their lawyers to go to court, make their case, establish the facts.”

Since that announcement, many more settlements have been reached, including the following:

9/12/2003: A.I.G. pays $10 Million penalty for accounting fraud allegations.
9/4/2003: Canary Capital Partners agreed to pay $40 million in fines and restitution.
3/20/2004: Global Crossing settles for $325 million
10/1/2003: Prudential brokers and managers ousted due to improper mutual fund trading.
7/28/2003: J.P. Morgan andCitigroup pay $135 million to settle Enron and Dynegy involvement.
12/20/2003: Janus agrees to pay $31.5 million in mutual fund scandal.
4/8/2004: Putnam agrees to pay $110 million for mutual fund scandal
3/15/2004: Bank of America and Fleet Boston agree to pay $675 million. (Spitzers total at that time was $1.65 billion in settlements)

What has happened since Spitzer’s disclosure?

Grievances filed by investors against brokers hit an all-time record high in 2003, with the amount of damages they won nearly tying a record. A record 8,945 cases were filed with the National Association of Securities Dealers in 2003, 16% more than 2002.

The average turnaround time for a case going through a full hearing hit 17.4 months during the year. However turnaround time for less complex cases through the NASD simplified decision process was only 6.1 months. The cases that closed in 2003 totalled $162 million in damages, with damages awarded to investors in 54% of the cases closed.

For example the NASD arbitration panel found Smith Barney liable for failing to monitor the portfolio of a California investor and awarded $274,000. This case demonstrated that brokerage firms will be held accountable for failing to take prompt and responsible action when they manage a client’s portfolio.

What kind of loss can be recovered?

Cases being awarded in arbitrations take many forms. First there is the “conflict of interest” case where such as the cases against Solomon Smith Barney for losses in Worldcom stock. There are dozens of such conflict cases against many brokerage firms for many stocks.

Next, there is the “suitability” case, where the broker invests a customer’s funds in unsuitable investments for the clients age, risk tolerance, and position in life.

There are other categories of cases including variable annuities to certain older clients, Class B funds, or failure of the broker to follow instructions or failure to take evasive action to stop or prevent losses from growing.

More information can be obtained from the following websites:

*Geoff Gempeler is an attorney practicing in Colorado handling investor recovery cases, pharmaceutical cases, and civil litigation. For more information, call 866-547-0009 or contact us.

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