Cashing in on a stockbroker loophole leads to retirement fund recovery

Issue April 2006 By Ann Karpenski, Esq.

Imagine you have a certain amount of savings set aside for retirement. Suddenly and unexpectedly, you come into a sizeable amount of money. Like many, you decide to invest your funds with a stockbroker at a reputable brokerage house with the understanding that the investment is for your retirement fund. Naturally, you sit back and wait, expecting to see your portfolio grow. Yet, instead of making money, your portfolio is shrinking in size, with not just minimal, but substantial, losses.

That was the scenario presented to Danvers attorney Lawrence B. Morse when he accepted a case referred by the MBA's Lawyers Referral Service. Morse, a North Shore business litigation, corporate and employment law attorney, immediately saw the problem. The investments made on behalf of his client appeared much too risky.

"The investments were not appropriate for the client's immediate needs and long-term needs for income in retirement. They were not conservative. The stockbroker instead placed funds in overly aggressive — and therefore, not appropriate — securities and funds for a retirement portfolio. As a result, my client lost a substantial amount of money," he said.

Morse quickly saw additional issues of concern involved, including: a violation of the contractual agreement between his client and the brokerage house; that the investment risks were not fully represented to his client; and a failure by the brokerage firm to disclose enough information to his client to make informed decisions.

When Morse took the case, it was within six months of the tolling of the statute of limitations, so he knew he had to act quickly. Morse filed suit, which stopped the statute of limitations, and included claims for common law and statutory fraud, breach of contract, as well as securities fraud pursuant to M.G.L. ch. 110A, section 410. The defendant denied all allegations.

Morse credits the expert he employed, a specialist in analyzing and testifying in securities cases, with assisting and advising him in this case. As a result, when Morse filed suit, he strategically named only the brokerage house as a defendant.

As is done in most investment accounts, Morse's client signed a contract when he initially entered into agreement with the stockbroker. Contained in the contract, as with virtually all such contracts, was an arbitration clause in the event of a dispute between the parties.

Securities arbitration cases are generally heard by the National Association of Securities Dealers arbitration panels. Morse became aware of an unsettling pattern that showed "few significant awards" had emerged from the NASD, particularly in the Northeast region of the country.

Morse felt that his client could get a better result with mediation, and therefore suggested mediation to the defendant. Interestingly, Morse was only able to suggest mediation because he had not named the stockbroker individually in the original complaint, and therefore, his client wasn't bound by the contractual arbitration clause.

The defendant agreed to mediation and, eventually, the mediator whom Morse's expert had recommended. Four hours into the mediation, the parties had reached a settlement.

Morse stated two specific tactics used during this case were significant in determining the outcome. The first was choosing a good expert to advise him on securities issues about which he needed a financial impact analysis and to testify on other aspects of the case. The second was using mediation instead of arbitration to settle the case on favorable terms.

"If we had gone to arbitration, my client would have gotten only a fraction of what he received. It wasn't a huge settlement, but it was better than my client would have received at NASD arbitration," said Morse.

Through mediation, Morse was able to get his client approximately 70 percent of the undisputed damages. His client avoided the delay and additional costs of a multi-day arbitration procedure with an uncertain outcome. The client was delighted and avoided the emotional and financial costs of a prolonged dispute. And according to Morse, the mediator made a potentially tense adversarial situation into an, at times, pleasant event.

"The MBA Lawyer's Referral Service has sent a number of interesting cases to me over several years, generating some great clients, and I appreciate it. These clients didn't know where to turn, and they often have been satisfied with the outcome," said Morse.

LRS makes more than 25,000 referrals each year to its 1,200 attorneys across the state. If you are interested in becoming a member of LRS to obtain referrals, please call the Lawyer Referral Service at (617) 338-0556.