An Iceberg of Irate Investors

RANCIS EDWARD WOLFE, a close-cropped, soft-spoken family man who hoped to travel the country with his wife in a motor home when he retired, hardly seems intimidating. But this 58-year-old former truck driver from Fredericksburg, Ohio, and other investors like him, have become one big nightmare for Wall Street. Mr. Wolfe sued Merrill Lynch last year over $172,000 in stock market losses in his 401(k) plan, and last month, arbitrators awarded him $310,000, including legal expenses.

What happened to Mr. Wolfe may be particularly egregious — it involves an investment in an Internet fund that his broker bought at the top of the market that also enriched the daughter of a supervisor. But across the country, there are hundreds of thousands, perhaps even millions, of people like Mr. Wolfe. They, too, pinned their hopes on the stock market in the 1990's boom and then lost out as the brutal bear market ravaged their investments. Many are making claims against their brokers. And there are growing signs that arbitrators judging these cases are showing more sympathy to investors than the firms had expected.

The trend, if it holds, is yet another sign that the worst is not over for Wall Street, which breathed a big sigh of relief in December when its top firms agreed to pay almost $1 billion to settle accusations that much of their research has been tainted. Other bills from the 1990's market mania, like these covering customer complaints, continue to come in for payment.

"The Wolfe decision sends a message that big Wall Street firms, and their brokers, will be held accountable for destroying the retirement savings of unsuspecting customers by recommending risky high-tech stocks and funds," thundered Jacob Zamansky, a lawyer at Zamansky & Associates in New York who represents Mr. Wolfe.

It is impossible, of course, to know how much brokerage firms will wind up paying customers who are suing them. Investor complaints can take years to make their way through arbitration, and investors who claim to have been hurt by corrupt Wall Street research may be waiting to file their cases until securities regulators release documents related to investigations into the practices of brokerage firms.

But some securities lawyers and experts in arbitration cases say the flood of newcomers to the stock market in the late 1990's may be prompting arbitrators to take the side of investors more often. Unsophisticated and inexperienced investors who took enormous losses in speculative stocks peddled by brokers appear to be arguing with more success that the recommendations were unsuitable.

"When you get newcomers to the stock market, this adds a factor favoring the customer which may not have been as prevalent as before," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. "The element of a newcomer's inexperience in investing builds on other factors which are weighed in determining suitability." Regulators require brokers to suggest only those investments that are appropriate or well suited to their clients' needs and circumstances.

Accusations by customers that brokerage firms recommended unsuitable investments rocketed last year. According to NASD, which oversees the nation's largest securities arbitration forum, 2,644 cases in 2002 claimed unsuitability, 73 percent more than in the previous year.

NASD statistics also show that customers are winning a greater percentage of cases than in previous years. Of the roughly 1,500 cases that were decided last year, 55 percent involved customer awards. In both 2000 and 2001, 53 percent of cases generated awards.

Not surprisingly, given the losses incurred in the bear market, arbitration awards were also higher in 2002. Customers received $139 million in awards, up 43 percent from 2001 and almost double the level of 2000.

There is more. The NASD's figures do not include class-action cases brought in state or federal courts; those cases are hard to track. They also do not include arbitrations going before the New York Stock Exchange or other arbitration forums. According to the Big Board, customer complaints almost doubled last year from 2001, rising to 1,009 cases.

Richard Ryder, editor of the Securities Arbitration Commentator, an industry publication in Maplewood, N.J., agreed that the higher customer awards indicated a shift in sentiment of arbitration panelists. But he cautioned that the greater numbers of cases in arbitration and the higher awards might also be a result of brokerage firms' inability to settle cases before arbitration. Lawyers for the brokerage houses are overwhelmed by the flood of cases, he said, and have less leeway to offer settlements because their firms, also hit hard by the bear market, have much less cash to throw around.

"There is always a greater risk to the firm in going to the fact-finder for determination than in settling the case," Mr. Ryder said.

ONSIDER the arbitration decided a few weeks ago in favor of Mr. Wolfe. He sued Merrill a year ago, and the New York Stock Exchange arbitration panel that heard his case awarded him $235,000 in compensatory damages and $75,000 to cover lawyers' fees. Arbitration awards are binding and are rarely overturned.

Although every customer's case is different, Mr. Wolfe's situation mirrors that of many neophyte investors across America who were convinced by overly optimistic stockbrokers that the only risk associated with the stock market was not being in it.

Mr. Wolfe's case is very close to that of dozens of other Merrill Lynch customers who invested with Joel Cessna, a stockbroker at the firm's office in nearby Wooster, Ohio.

Mr. Wolfe was one of almost 200 people who in January 2000 took early retirement deals from Rubbermaid. At least 50 of them went with their payouts to Merrill Lynch, where Mr. Cessna and a colleague advised them to buy Internet and technology stocks, said Mr. Zamansky, who also represents some of Mr. Wolfe's former colleagues who have filed claims against Merrill, which are pending.

"Hard-working Rubbermaid retirees like Ed trusted Merrill Lynch to invest their retirement savings responsibly," Mr. Zamansky said. "Instead, the firm betrayed that trust and wiped out their savings in about a year."

Mark Herr, a Merrill spokesman, said: "It would be a mistake to assume that because the number of claims has gone up, that industrywide the amount of wrongdoing has gone up. What plainly is at work here is a prolonged bear market. And you also see a number of investors who were heretofore not experienced in the market and are experiencing their first downturn and casting about for a cause."

For more than 32 years, Mr. Wolfe worked for Rubbermaid, doing everything from driving a truck and working on the company's assembly line to mowing its yard. But in early 2000, when the company offered retirement packages to him and other workers, Mr. Wolfe signed up. In each of his years at Rubbermaid, Mr. Wolfe had never made more than $50,000, but with company contributions he had managed to amass a 401(k) worth $325,000.

In his final days at Rubbermaid, Mr. Wolfe said, he had heard other workers talking about a seminar they had attended for new retirees that was sponsored by Merrill Lynch. Mr. Wolfe and his wife made an appointment to talk about their finances with a Merrill representative at the firm's office in a strip mall in town. After an hour with Mr. Cessna, the branch manager at the two-man Wooster office, they decided to switch their account from Fidelity, where it had been placed in a conservative bond fund.

"He convinced us that we could have a pretty safe investment with an 8 percent return on our money," Mr. Wolfe recalled. "We wanted no risk. I told him, `No gambling with my money.' "

Despite that instruction, he said, Mr. Cessna immediately put him into technology stocks and three tech-stock mutual funds, two of which were concentrated in Internet stocks. One fund that Mr. Cessna recommended, Merrill Lynch Internet Strategies, was the firm's ill-timed attempt to participate in the boom for Internet stocks.

Merrill brokers were pushed hard by their superiors to sell the fund. In March 2000, the very month the stock market reached its pinnacle, the fund took in about $1 billion. The sales push included a half-day series of presentations in San Francisco that were beamed to the computer screens of Merrill's 14,000 brokers across the nation. Among the presenters were Henry Blodget, Merrill's celebrity Internet analyst, and top executives from two technology companies. The firm also flew in Michael Lewis, author of "The New New Thing: A Silicon Valley Story," a book celebrating the new economy, from Paris for the event.

In just a few weeks, however, investors who had bought the fund when it was offered were down 25 percent on their money. Soon the fund became known as the Internet Tragedy fund; Merrill closed it less than two years later, after it lost almost all its value.

Testifying before the arbitration panel in the Wolfe case, Mr. Cessna explained that he had more than 1,400 clients and that he had routinely recommended the Internet Strategies fund to many of them. Mr. Cessna counted many retirees from local companies among his clients; he had sponsored a series of seminars in town offering retirement guidance to those attending.

In his testimony, Mr. Cessna cited two other Merrill employees. One was David Ruckman, Merrill's district director for the Ohio region.

The other Merrill employee was Mr. Ruckman's daughter, Nicole Elizabeth Dobbins. She worked for the fund management group that sponsored the Internet Strategies fund and was responsible for having brokers in Ohio sign up their customers for it. Her compensation was based at least in part on how many brokers in the region did so.

Mr. Herr of Merrill said: "We deny that there was any conflict of interest." Merrill maintains that Mr. Wolfe's success in arbitration will not be repeated by other former clients of Mr. Cessna in similar circumstances. "We win the preponderance of our arbitrations," Mr. Herr added.

bONNIE BURNS, 56, was another Rubbermaid retiree who invested with Mr. Cessna. When she accepted the company's early-retirement offer in April 2000, she was a machine operator earning $32,000 a year. She had worked for Rubbermaid for almost 34 years.

Ms. Burns attended one of Mr. Cessna's seminars along with roughly 30 other Rubbermaid workers. When she met with Mr. Cessna, he discussed the ins and outs of I.R.A.'s but never said what he would invest in. "There was no mention of stocks or how he was going to invest it," Ms. Burns recalled. "He said, `You worked for that money; now your money is going to work for you.' "

She deposited $357,421 with Merrill in mid-April 2000. When her first brokerage statement came, she saw that Mr. Cessna had bought technology stocks and stock funds, including the Internet Strategies fund. "I didn't question it," she said.

But with each new statement, Ms. Burns saw that she was losing money. In October, she called Mr. Cessna to ask what was going on. "He would say, `I know we're in trouble, but don't you worry, the market's going to come back,' " Ms. Burns said.

It did not, of course. She lost $250,000 in stocks like Cisco Systems, JDS Uniphase, Xilinx and Oracle. The final blow came last year when Exodus Communications, a company whose stock she held, filed for bankruptcy.

Ms. Burns's case against Merrill Lynch is pending. She has gone back to work as a teacher's aid in the Wooster school system.

"I know about 40 people in this circumstance, and there's more to come," she said. "We're all so embarrassed because we were so stupid to let this happen. Every one of us are back to work; some of us are making $6 an hour because the economy's not good around here. One guy has to work till he's 67 now because he lost everything."

the Internet Tragedy fund

It sounds as if his broker was not much better than a con man. When you read the details you understand the award.

But all this money has to come from somewhere. If the brokerage firms pay, then no doubt the insurance companies will also pay, insurance rates and brokerage fees will go up and people will be laid off, and the economy will suffer a further drain of assets.

I can't work up a lot of sympathy for Merrill Lynch, which seems to have gone from being a fairly solid company to a bucket shop run by yuppies. Nevertheless, this only adds to the general meltdown.

Actually, I plan on taking legal action too. Company's like American Express were providing only their own funds during the up-market and bust. Well after the bust they started offering competetive funds.

The Amex advisor was working under a conflict of interest. If he/she were to advise you to sell a fund, it was at a direct conflict to the health of the fund who the advisor was directly and exclusively bound. When fund assets were dipping and needed propping up, the "rally the broker charge would sound" to buy. The advisor was charging you huge management fees, but not really managing anything except the interests of American Express, not the investor.

Now they offer funds from other companies. In my opinion this was done as a remedy to the potential conflict of interest liability. Charging someone $100 per month to advise them, while the broker is being told by American Express what to sell within their own product line is criminal. I either expect my management fees back, or damages.

Hey, these brokers in question here are all a bunch of scumbags. There is no doubt about it. However, anyone who gives his money to someone they don't know is a fool. If you don't have the time or the will to do your own investing, then individual stocks are out of the question for you. Spend some time researching mutual funds.

If you don't have the time, ability, or inclination to research mutual funds, then just buy Vanguard index funds.

If you don't have the time or ability to know what an index fund is, what the benfits and drawbacks are, and that you should not invest your entire lifes savings in one, then just put your money into CD's at the bank.

I can't work up a lot of sympathy for Merrill Lynch, which seems to have gone from being a fairly solid company to a bucket shop run by yuppies. Nevertheless, this only adds to the general meltdown.

In very reluctant defense of these scumbags: The problem with the wild Bull Markets is that if everyone else is riding the bubble, then you have to also if you don't want to lose all of your clients.

I worked at a Hedge Fund from 1995-1999. We had a very strong long term record. That record continued through the 90's. The problem was that returning 20% was no longer good enough. Everybody wanted 40%. Either you jumped on the bandwagon and invested in phony internet stocks, or you lost all of your clients.

We lost all of our clients and for the most part shut down. I went back to school.

The point is to remember with these bubbles is that they don't just enrich a few bad guys. The good guys have to play along as well or they lose their jobs.

The same holds true for these Wall Street analysts. I don't have any sympathy for them either. However, it is worth noting that if you didn't follow Blodget and the others reccomending the POS internet stocks, you lost your job and therefore perhaps your house, etc. DLJ was the worst about firing analysts who didn't go along with the scam. Somehow they have avoided the public scrutiny. DLJ would reccomend a sh*t sandwich if they thought it would bring banking fees.

Couple of observations.

First, it was obvious to me that something unsustainable was going on during the 90's. I don't know what shennanigans were being pulled, but when internet companies with five used warehouses had a higher book value than Sears, something was wrong. There was a huge influx of money that caused an almost totally incomprehensible increase in the total stock market value. I always invested pretty conservatively, mostly S&P 500 index funds. In December 1999, I sold all of my stocks and went into fixed accounts, currently paying maybe 2%. However, the S&P was, I believe somewhere around 1500 when I sold, so the current rate of return doesn't look that bad.

Bill and Hill, of course, walked, but although Bush never made cleaning up Wall Street a big campaign issue, since he got in office, some of the major firms have been slapped hard. This is why I say some shennanigans were going on, and I don't know what they were. The total amount of money invested in the market exceeded that which consumers had to spend, even with the loose monetary policy of the Feds during the 90's. Massive amounts of fake money were coming in from somewhere, and I haven't seen anything which explains it, although investment in more traditional (bank notes, cd's etc., did drop). In 1998, it seemed pretty stupid to have money in CD's when guys were taking $10,000 investments and becoming millionaires (I knew a couple of people in Austin, TX, who were what we called "Dellionaires", people who became millionaires by investing in Dell stock exclusively)

The stock market is falling, but I don't think there was any way to avoid this. Many of the companies with a book value in the hundreds of millions had no profit plan except for a method to attract investors. Capital investment requires that at some point in time goods or services MUST be produced that exceed the value of the initial investment for there to be a return on that investment. This was totally ignored in the 90's exuberance.

Although I'm certainly no financial genius, I stated last year on Freep that I thought the actual value of the stock market should have been around 6500, and that I didn't think it was wise to get back in until the market dropped to that point.

I've been re-evaluating that position, and am concerned that 6500 may be too high. The economic engine was being fueled by people buying commodoties on credit, and counting on their investments to cover the costs. With the investment capital they thought they had being gone, many consumers are tapped out to the extent that further lowering of interest rates by the Fed will have little effect. Consumers are at the limit of their monthly payment ability, IF they keep their jobs. Consumer spending is falling. Government cannot continue to deficit spend to pull us out of the recession, (although they will try), and most manufacturing jobs in the US are gone, eliminating exports as a method of increasing capital.

I don't want to be a pessimist, but are there any Freeps out there who see what could create a recovery?

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