Getting the Money Back; In the Wake of Wake of Wall Street Settlement, Thousands of Investors Look To Recoup

South Florida Sun – Sentinel

May 11, 2003

At the peak of his stock-picking days, Albert Hochstadt would scour the dense agate type of business sections by 7 a.m., cup of coffee in hand, searching for clues that helped the Boca Raton investor capture 1999 profits of $2 million through discount trading.

But several months later, in March 2000, he says a Merrill Lynch broker persuaded him to shift his $4.5 million account to one of Wall Street’s most powerful trading and research firms. The Merrill Lynch broker “told me they had the best analysts in the world” and offered astute research, says Hochstadt, now 70.

Hochstadt says on Merrill Lynch’s advice, he bought more shares in companies such as WorldCom, Lucent, AT&T and InfoSpace. The firm’s research and high rating on Global TeleSystems also persuaded Hochstadt, he says, to snap up 30,000 additional shares at $28 each because the Arlington, Va.-based firm’s stock was projected to hit $55. Instead, it fell below 55 cents, and the company was subsequently de-listed in June 2001 from the New York Stock Exchange.

“What the hell’s going on?” Hochstadt recalls asking the Merrill Lynch broker as stock prices plunged and his portfolio lost $3.5 million, roughly three-quarters of its value, in a 14-month span ending June 2001. Hochstadt says the broker told him, on several occasions, to hold tight because Merrill Lynch analysts had buy ratings on his stocks.

Feeling misled, six months ago Hochstadt filed an arbitration claim against Merrill Lynch and joined an early wave of investors seeking retribution from Wall Street brokerage houses accused of misguiding investors with tainted research crafted to land lucrative investment banking deals.

Hochstadt’s purchase of InfoSpace shares, in particular, also links him to thousands of other investors who may benefit from the April 28 settlement in which 10 Wall Street brokerage houses have agreed to pay $1.4 billion, of which $387.5 million is allocated for investor repayments. SEC documents list InfoSpace shares sold by Merrill Lynch as potentially having been corrupted by conflicted analyst research.

Following the settlement, South Florida securities attorneys say they are being flooded with calls from investors who want to know their rights.

Wall Street firms, which did not admit or deny guilt as part of the settlement, are deflecting the claims.

Mark Herr, a Merrill Lynch spokesman, said Friday that Hochstadt owned stock in the companies about which he alleges he was misled before transferring his account to Merrill Lynch. Also, Herr says Hochstadt repeatedly presented himself as a “sophisticated” investor who continued to trade “on his initiative, not Merrill Lynch’s.”

Hochstadt’s switch also hewed closely to a bull market peak, after which stocks across the board took a dive.

On the political front, some U.S. senators this week derided the Wall Street settlement as lax and insufficient to cover the amounts lost by investors or to change the attitudes of the nation’s top investment firms. Brokerage houses involved in the settlement include Merrill Lynch, Salomon Smith Barney, and Credit Suisse First Boston.

Despite the settlement, it may take investors months or years to possibly recover some portion of lost money and wade through legal options, including tapping the settlement fund, arbitration or class action lawsuits. Investors may see very little of the settlement itself, noted Mark F. Raymond, a securities attorney in Miami.

But he and other attorneys say the settlement has made it technically easier to file arbitration cases against the trading firms because a trove of information now in the public domain gives lawyers a blueprint from which to frame cases. The well-known evidence against Wall Street includes electronic messages in which some analysts privately disparaged shares they publicly championed, potentially costing investors billions of dollars in losses.

Locally, Darren Blum, a Plantation attorney, says he has $100 million in research-related arbitration claims pending against Wall Street firms, of which roughly half connect to the April settlement.

The National Association of Securities Dealers, which handles private arbitration claims, already has 125 cases related to analyst issues and expects the settlement will stimulate an additional 3,000 to 4,000 or more arbitration claims in the next two years, says Linda Fienberg, president of NASD’s dispute resolution arm.

As a result, the Washington D.C.-based group plans to expand its national roster of 8,000 arbitrators, who are independent contractors, by a still-undetermined number, Fienberg says. In Florida, the NASD hears arbitration cases in Boca Raton, Orlando and Tampa.

Under the settlement, investment firms have been forced to separate stock research from investment banking, offer independent research at no cost, and ban preferential treatment when handling initial public offerings. Financially, the settlement requires $487.5 million in penalty payments, $387.5 million to compensate investors, $432.5 million to fund independent research, and $80 million for investor education programs.

While dollar amounts and broad details have been spelled out, it’s unclear how the settlement will be administered.

The restitution fund lacks an administrator who will decide the rules outlining how investors can seek reimbursement. Until then, it’s unclear which stock purchases will qualify investors for compensation, the time periods involved, payout amounts or application steps.

So far, the SEC in broad terms has said qualifying investors must have purchased stock through one of the 10 brokerage houses involved in the settlement, and lost money on stocks that the fund administrator will later define.

SEC complaints have identified dozens of stocks that may fall under the settlement’s purview, including shares in Tyco International Ltd., Razorfish Inc., and Go2Net.

Investors who participate in the restitution fund can still file an arbitration case or join a class-action lawsuit.

Arbitration claims valued at less than $25,000 are usually handled via correspondence and are typically resolved in six months, according to NASD officials. Claims involving higher amounts are typically resolved in 18 months. Overall, 65 percent of arbitration cases are settled, which means investors recoup some funds, the NASD reports.

In general, securities attorneys say investors who have lost less than $100,000 are better off joining a class action suit to reduce their legal expenses. But these lawsuits can take years to resolve and investors may only retrieve a fraction of their losses, attorneys say.

Pursuing arbitration costs more, but the cases are resolved quicker than lawsuits and are better suited for investors who have lost more than $100,000 because of the potential for full reimbursement, attorneys say.

For Michael Grimley, 60, Wall Street’s meltdown forced him last year to sell his home to raise cash, and make plans to come out of retirement.

Grimley, a former telecom executive from Fort Lauderdale, alleges he lost 60 percent of his retirement money because of dubious Salomon Smith Barney research touting WorldCom stock.

Grimley, who declined to identify how much he lost, says he believes the Wall Street settlement would strengthen his arbitration case against Salomon Smith Barney.

“How is it that so much wrong happens and people walk away?” Grimley asks.

Rafael Gerena-Morales can be reached at rgerena@sun-sentinel.com or 954-356-4614. Purva Patel can be reached at ppatel@sun-sentinel.com or 954-356-4667.

CHART; Caption: Staff photo/Nam Y. Huh (color) RETRIBUTION: Albert Hochstadt of Boca Raton, left, visits the Plantation office of his lawyer, Darren Blum. Hochstadt has filed an arbitration claim against Merrill Lynch, claiming he was misled by the firm’s advice. Blum says he has $100 million in arbitration claims pending against Wall Street firms, about half related to the April settlement. RESTITUTION CANDIDATES The Securities and Exchange Commission is still determining the process by which investors can file claims under the settlement with 10 Wall Street firms and receive some of the $387.5 million set aside for restitution. The SEC has to determine who qualifies, the stocks and time frames involved and what information investors must provide. These stocks were cited in the SEC complaints against the individual brokerage firms and might be included in the final list the SEC develops: US Bancorp Piper Jaffray: Natural Microsystems Inc., Esperion Therapeutics Inc., Triton Network Systems, JDS Uniphase Corp., Comverse Technology Inc., Onyx Pharmaceuticals, Buca Inc., Therasense Inc., Metromedia Fiber Network Inc., Emisphere Technologies Inc. Morgan Stanley and Co.: Loudcloud Inc., Concord/ EFS Inc., eBay Inc., iBeam Broadcasting Corp., Transmeta Corp., AT&T Latin America , Convergys Corp., Veritas Software Corp., Sabre Group, Agile Software Corp., Chemdex, Drugstore.com, Priceline.com., Ask Jeeves, Marimba, Homestore.com, Vignette, Verisign, Akamai, Women.com, CNET, Inktomi, FreeMarkets. Lehman Brothers Inc.: Razorfish Inc., RSL Communications Inc., RealNetworks Inc., Broadwing Inc., DDi Corp. Merrill Lynch: 24/7 Media Inc., LifeMinders Inc., Homestore.com Inc., Excite@Home, Internet Capital Group Inc., InfoSpace, Go2Net, GoTo.com Inc., Tyco International Ltd., Aether, SPX Corp. JP Morgan Securities Inc.: KV Pharma, King Pharmaceuticals, Technology Partners International, International Rectifier, Epicor Software Corp., Participate.com, Wireless Facilities, AppNet, Concord EFS, CCC Info. Services, Vicinity, Intertrust, Mypoints.com. Goldman Sachs & Co.: Crown Castle, Willis Group, Crosswave Communications, WebEx, Exodus, Loudcloud, Global Crossing Ltd., 360Networks, Winstar Communications, WorldCom, AT&T, StorageNetworks. UBS Warburg LLC: JDS Uniphase, Avant Immunotherapeutics Inc., Triangle Pharmaceuticals, Interspeed, Flextronics International Ltd., Atmel Inc., Netopia Inc., Espeed. Citigroup Global Markets Inc. (formerly Salomon Smith Barney Inc.): Focal Communications Corp., Metromedia Fiber Networks Inc., Winstar Communications Inc., McLeod USA Inc., Level 3 Communications Inc., Williams Communications Group Inc., XO Communications Inc., Adelphia Business Solutions Inc., RCN Corp., AT&T Corp., WorldCom, Global Crossing, Qwest, Rhythm NetConnections Credit Suisse First Boston LLC: Digital Impact Inc., Synopsys Inc., Numerical Technologies Inc., Agilent Technologies Inc., Winstar Communications Inc., NewPower Holdings Inc., Gemstar-TV Guide International Inc., Aether Systems Inc., Razorfish Inc., Allaire Corp. Bear, Stearns & Co. Inc.: Ancor Communications, JNI Corp., Vixel Corp, iAppliances, Agilent Technologies, CAIS Internet Inc., CacheFlo, Pets.com, go.com, SonicWall, Micromuse, Internet Security Systems, Digital River, Andrx Corp. STRATEGIES DIFFER FOR BIG, SMALL INVESTORS

Q: How Can I Recoup Money if I Bought Stock Based on Dubious Research?

A: First, you could wait and see if you qualify for a payment under the $387.5 million restitution fund. Second, you could file an independent arbitration claim. Third, you could join a class action lawsuit.

Q: Which Option Is Best?

A: Investors can file an arbitration claim or join a lawsuit even if they participate in the restitution fund. It’s unclear who will qualify for fund payments because the rules have not been set. Attorneys say investors who have lost less than $100,000 are better off joining a class-action suit to reduce legal expenses. But lawsuits can take years to resolve and may return only a fraction of losses. Pursuing arbitration costs more, but the cases are resolved in six to 18 months and are better suited for investors who have lost more than $100,000 because of the potential for full reimbursement.

Q: How Can I Learn More?

A: Visit www.sec.gov for restitution fund updates. Visit www.nasdadr.com for information on filing arbitration claims, Web sites such as http://securities.stanford.edu, www.classactionamerica.com or www.gilardi.com for lawsuit information.

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