NBR Stock Loss

In 2001 and 2002, many clients lost a lot of money because their advisors recommended speculative technology stocks, most of which never earned a profit. Six years later, investors again are suffering from investment losses, this time due to similarly speculative recommendations to purchase various financial stocks. To quote Yogi Berra, “It’s deja vu all over again”

Lehman Brothers, AIG, Citigroup, Merrill Lynch, Bear Stearns, Fannie Mae and Freddie Mac are the new “dot coms” whose bubble has now burst.

What recourse does an investor have if a stockbroker or financial advisor recommended the purchase of any of the above-listed stocks? The answer, of course, depends upon the investment objectives of the investor at the time of the recommendation.

Over the past six months, most financial stocks have declined in value, due to their exposure to the subprime market. Take for example, Lehman Brothers, which has experienced massive losses over the past few months. Many stockbrokers recommended Lehman’s common stock, preferred stock, and bonds to their clients. Unless the clients were willing to speculate, and could afford to lose their entire investment, the recommendation was probably unsuitable.

With regard to recommending financial stocks, the stockbrokers negligence is clear: there was no reasonable basis for expecting that the financial services industry was finished with “writing-down” its subprime losses. As such, there was no reasonable basis for many investors to buy financial stocks during the past year.

Vincent Imbesi, the head securities attorney with the law firm of Napoli Bern Ripka, LLP, represents investors that lost money after their stockbrokers recommended the purchase a financial company’s stock, bonds, and preferred stocks. To contact Mr. Imbesi, please call 212-267-3700, or e-mail vimbesi@napolibern.com.

Commentary by Susan Antilla

Sept. 17 (Bloomberg) — 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.

Lawyers say that number will only get bigger before the year ends: “This isn’t the tip of the iceberg anymore,” says Philip M. Aidikoff, a lawyer at Aidikoff, Uhl & Bakhtiari in Beverly Hills, California. “Now the iceberg is out there — it’s big and everyone can see it.”

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’

Aidikoff says that, with the precipitous declines of shares of Fannie Mae and Freddie Mac this year, he is hearing from investors who contend they were sold the shares even though they were unsuitable for their investment profile. On Sept. 15, Aidikoff reviewed account documents for a retired man whose broker talked him into using proceeds from a maturing certificate of deposit to purchase shares of Fannie and Freddie.

“The broker told him it’s government-backed,” says Aidikoff. “He told him there was upside and 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.

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Susan Antilla in New York at santilla@bloomberg.net