Personal-injury lawyers are once again jumping into the risky — and costly — arena of securities litigation, teaming up with plaintiff's attorneys to troll for clients who claim that broker-dealers wronged them when they bought auction rate securities.
Over the past two weeks, noted asbestos and mass tort law firm Williams Kherkher Law Firm LLP and veteran plaintiff's attorneys Shepherd Smith Edwards & Kantas LLP, both of Houston, ran a joint ad in The Wall Street Journal that practically screamed out to prospective clients: "If you can't access your money, you may have a claim!"
The ad hearkens back to an ugly moment on Wall Street — the collapse of the market for technology stocks in 2000. Once the dust began to settle, plaintiff's attorneys pounced on Wall Street firms, drumming up business with a vengeance through television and radio ads, and websites such as investorfraud.com, justice4investors.com and stock lawyer.com.
Those ads drew the ire of many registered reps, advisers and brokerage executives, and the new ones are having the same effect.
"It's awful. It's one more thing that points out the need this country has for tort reform," said Malcolm A. Makin, president of Professional Planning Group in Westerly, R.I.
Broker-dealers are "bending over backwards" to give liquidity back to the clients, he said.
"It's wrong, it's wrong, and it's wrong," said Mr. Makin, whose practice is affiliated with Raymond James Financial Services Inc. of St. Petersburg, Fla., and oversees close to $800 million in client assets. He added that he does not invest in auction rate securities for clients because of the inherent risk.
Despite protests from the industry, litigation over illiquid auction rate securities is increasing. On Thursday, William Gavin, Massachusetts' securities regulator, sued two units of UBS AG, charging the Zurich, Switzerland-based bank with fraud and dishonest conduct in its sales of auction rate securities.
Contending that investors are answering their call, the team of personal-injury attorneys and plaintiff's lawyers said that it receiving about 50 inquiries a day.
"The response has been tremendous," said Armistead Easterby, an attorney at Williams Kherkher who heads up commercial and consumer cases. "I've been flabbergasted by it."
"We've gotten calls from brokers who said, 'I want to go testify with my clients,'" he said.
Williams Kherkher's founder and managing partner, John Eddie Williams Jr., is one of the lawyers who negotiated the $15.3 billion settlement in 1998 between Texas and the tobacco industry.
The market for auction rate bonds, which has been estimated at $234 billion to $330 billion, seized up this winter, leaving investors unable to cash out of positions. In February, increasing losses in mortgages forced the dealers who underwrote and managed the market to stop acting as buyers of last resort.
Investors are claiming they were sold auction rate securities as a low-risk alternative to cash, with the ability to gain 0.3 to 0.4 percentage points above a standard money market fund.
Class action attorneys have filed at least two dozen lawsuits since then, and a task force of nine state regulators is examining how the firms sold the securities.
Even though it is unusual, the joining of forces by personal-injury attorneys and the plaintiff's bar for securities litigation is not new.
In 2003, tarnished telecommunications stock analyst Jack Grubman and his firm, Smith Barney of New York, faced a mass of individual arbitration claims by small investors over his stock picks.
That unprecedented legal assault, however, proved expensive and fruitless for attorneys and their clients, said one industry attorney, who asked not to be named.
Mr. Easterby said the auction rate securities claims are substantially different from cases filed in the tech and telecom stock crash.
"We didn't get involved five years ago" with those types of claims, he said. Those claims alleged that investments were not suitable for many investors, Mr. Easterby said. "It didn't meet our criteria for a mass action."
In claims involving auction rate securities, investors allege that broker-dealers and reps misrepresented the risk of the investment, Mr. Easterby said.
"Do the claims have teeth? Absolutely," Mr. Easterby said.
The attorneys' ads soliciting clients are also running on cable news channels, said Mr. Easterby, who declined to state the specific amount the firms are spending on advertising. "It's a substantial investment," he said.
And Mr. Easterby believes that his firm soon could see $250 million in claims from both individual investors and corporate clients.
"We'll eclipse that in two weeks," he said last Wednesday.
The potential market for individual arbitration claims is so strong that lawyers are cutting their customary fees. Typically, attorney's fees are 30% to 40% when an investor wins a securities arbitration claim against a broker-dealer or one of its reps.
In this instance, however, lawyers are charging 8% of a settlement or arbitration win for cases of $3 million or less, Mr. Easterby said.
E-mail Bruce Kelly at firstname.lastname@example.org.