You Might Get Some of It Back
Want to make your brokerage firm pay for giving you bum advice? Well, get in line. Investors' attorneys say that in the past two weeks, they have fielded hundreds of calls from brokerage clients angered by the recent revelations of the government's widening investigation into stock analysts' practices at Merrill, Lynch & Co. (MER ) and other big brokerages. "Our phones are ringing off the hook," says Steven B. Caruso, a New York investors' attorney who represents several Merrill Lynch clients.
But just because you lost money in the stock market doesn't mean you qualify for a payout. Before you leap, take a moment to figure out whether your beef with your broker is legitimate. If so, the next step is determining which type of legal recourse is likely to be most effective. Your strategy will depend on how much money you lost and whether Merrill Lynch and other brokerage firms create restitution funds as part of a settlement agreement with the government, as is widely expected. Here are some guidelines for investors:
Is your claim for real?
So you bought InfoSpace Inc. (INSP ) shares based on what Merrill's Internet analyst, Henry Blodget, said on CNBC. Too bad. "Unless you were a Merrill client, you don't have a claim," says David E. Robbins, a New York attorney who has written books on securities arbitration. "A brokerage firm is only liable to its customers."
What's a strong case?
That depends on whether you can prove you relied on analysts' tainted advice. "If a Merrill client can show that he or she bought a stock based solely on the firm's research reports, then that customer has a good chance of prevailing," Robbins says. However, if you're a client of Salomon Smith Barney or another firm in the same situation, your case will be tougher to prove because only damning e-mails from Merrill have become public so far. That could change as the probes continue, though.
What are your legal options?
You may not realize it, but when you opened your brokerage account, you agreed to take disputes to arbitration. Usually, the only way around arbitration is to be part of a class action. Investors' attorneys expect to see a flood of such lawsuits in coming months. Legal experts think Merrill, and other firms if needed, will set up special funds to make restitution to aggrieved investors. For most people, that may be the fastest and surest way to get some recovery.
Should you pursue arbitration?
If you have a loss of $75,000 or more, file an arbitration claim as quickly as possible. You're likely to get the biggest award by going to arbitration. Investors win something in about 55% to 60% of arbitration cases.
Don't go into arbitration alone because you'll be up against the firms' lawyers. But top arbitration lawyers usually don't accept cases unless damages are $75,000 or more, since they take 30% to 40% of the award as their fee. Why file quickly? Because the National Association of Securities Dealers and the New York Stock Exchange, which handle most securities arbitrations, could be swamped by an influx of new cases.
If your losses are under $75,000 and you want arbitration, you may find an attorney to work on an hourly basis. Expect to pay $200 to $350 an hour.
What about a class action?
Suppose you get a letter informing you that a class action has been filed on behalf of Merrill investors, including you, who bought a particular stock during a particular time period. This is no bonanza. The amount investors usually recover in such suits is small--just pennies on the dollar.
Believe it or not, your best bet might be to remove yourself from the suit, a procedure that should be outlined in the notification letter. Removal will let you seek arbitration. And though no restitution funds have yet been created, it's likely that you won't be able to go that route if you are also in the class action.
Getting satisfaction may wind up being a long and frustrating process. But doing your homework will increase your odds of victory.
By Susan Scherreik in New York