Brian Smiley: “99 times out of 100, if a broker is liable, the firm is.”
In the spring of 2000, just as the 2 1/2-year stock market slide was getting under way, Rickey Miller of Homer City was a little uneasy about his portfolio as he headed off on a cruise to Tahiti. So he called his broker, Paul N. Lehnert of Beckman Investment Securities in Cranberry, and ordered him to sell everything.Miller returned a week later tan and fit — fit to be tied, that is.
Not only did Lehnert fail to sell, Miller’s stocks went south in a hurry. Satellite TV provider Echostar Communications, the centerpiece of his portfolio, fell from $73 to the low $40s, so Miller’s 2,000 shares were worth nearly $60,000 less than they were when he sailed.
Miller claims Lehnert promised to get it all back through a series of risky trades involving buying options on margin. Options allow investors to make huge bets on swings in stock prices with relatively little cash. By buying on margin, Lehnert and Miller were betting with borrowed money.
It was a sucker’s bet. By Aug. 31, Miller’s $123,044 portfolio was worth $1,056.
Under the terms of his account with Beckman and its parent company, Emmett A. Larkin Co., Miller couldn’t take Lehnert or Larkin to court. He had to submit the dispute to arbitration sponsored by the National Association of Securities Dealers. The three arbitrators awarded Miller $56,187.50. More importantly, they ordered Lehnert, not Emmett Larkin, to pay Miller.
Do you see where this is headed?
Miller doesn’t get his cash because Lehnert moves to Tennessee and files for bankruptcy. He is currently a broker for Caldwell International Securities.
“It’s the most ludicrous decision I’ve seen in practicing law for more than 20 years,” says Miller’s attorney, Stanley P. DeGory. “If this case were to be widely publicized, people would be more concerned, even more so than they are now, about the stock market.”
He can’t understand why Larkin wasn’t found responsible for Lehnert’s actions, which is what most investors expect would be the case.
“Legally, 99 times out of a 100, if a broker is liable, the firm is,” says Brian N. Smiley, an Atlanta attorney who represents investors.
Smiley says whenever investors spot unauthorized trades or their broker fails to execute an order, they should immediately complain to the branch manager in writing. Failure to do so doesn’t necessarily prevent an investor from recovering, but it does raise issues that can complicate the process, he says.
Lehnert and Larkin insist Miller never ordered Lehnert to sell. Their recollection is that a decision was to be made when Miller returned from Tahiti. Moreover, Miller didn’t go over Lehnert’s head and complain to Larkin until two months later, after the catch-up strategy failed.
“He [Miller] made the whole story up,” says Lehnert. “I had no choice but to file for bankruptcy.”
Melvin L. Peterson, Larkin’s executive vice president, told arbitrators that “this is a classic case of attempting to recover losses as a result of market declines and Miller’s attempt to blame Lehnert by saying he failed to liquidate in time is factually not true.”
It’s not unusual for brokers in Lehnert’s predicament to seek bankruptcy court protection, says former SEC and NASD attorney Christopher J. Bebel, now in private practice in Houston. He says investors don’t collect what arbitrators award them in a significant number of cases. As for why Larkin wasn’t liable, Bebel says arbitrators don’t have to explain the rationale for their decisions, so there’s no telling whose version of the story they believed.
The merits of Miller’s case aside, the number of complaints against brokers has risen as far as the market has fallen. Through the end of September, 5,680 cases had been submitted to NASD this year, up 14 percent and exceeding the 5,608 cases filed for all of 1999.
So what should investors do when considering a broker?
The NASD has a Central Registration Depository, or CRD, that is supposed to inform investors of criminal and disciplinary actions, unpaid judgments, bankruptcies and other broker shortcomings. The information is available through NASD’s public disclosure program at www.nasdr.com.
Keep in mind that the program is NASD’s way of regulating its own members. So there’s reason to question how eager the agency is to do that.
“The public disclosure program is nothing but a farce,” says Edward Siedle, a former SEC attorney whose Florida company advises institutional investors.
Siedle estimates that only 15 percent of NASD arbitration cases are ever disclosed, largely because it’s up to NASD members to do the reporting. As a result, there’s a “widespread failure to report,” Siedle maintains.
“Do not rely on the industry’s disclosure system,” he warns.
In Lehnert’s case, NASD records disclose the arbitration award against him, but do not indicate that he avoided paying it by filing for bankruptcy.
Miller has filed suit in federal court in Pittsburgh seeking to put Larkin on the hook for the $56,187.50 arbitrators awarded him. However, lawyers who sue brokers for a living say judges rarely overturn arbitrator decisions. Mark Maddox, an Indianapolis lawyer,, rates Miller’s chances of winning in federal court at less than 1 percent.
Still, DeGory, Miller’s attorney, plows on, convinced he can prove that arbitrators displayed a “manifest disregard of the law,” one of the standards courts use to reverse such decisions.
“In this case,” he says, “I can’t conclude there was anything but a manifest disregard of the law.”
By Len Boselovic