Shock waves of 2008 reverberate in arbitration awards

Three rulings in 11 days for a total of $25.1M; expect more big cases to come

Oct 17, 2010 @ 12:01 am

By Bruce Kelly

Dozens of plaintiffs suing brokerage firms this month have seen a veritable gusher of multimillion-dollar awards, leaving some plaintiff's attorneys anticipating a continued stream of such arbitration rulings.

The awards, all decided by Financial Industry Regulatory Authority Inc. arbitration panels in September and October, include: Larry “J.R. Ewing” Hagman's $11.5 million award versus Citigroup Global Markets Inc., Morgan Keegan & Co. Inc.'s loss to 18 investors in a $9.2 million decision over its bond funds, and Lincoln Financial Advisors Corp.'s defeat in a $4.4 million “selling away” case that involved about two dozen investors.

The three awards, totaling $25.1 million, came within a span of 11 days, leading some lawyers and observers to say that they had never before seen such a spate of arbitration awards.

Although some attorneys and industry observers said that the list of huge awards — the Hagman case was one of the 10 biggest in Finra arbitration history for an investor — is merely coincidence, others noted that the timing of the decisions, two years after the 2008 collapse, should be expected.


“I've been noticing this all year,” said Rick Ryder, president of Securities Arbitration Commentator Inc., which publishes industry newsletters. A headline from an August newsletter read, in part: “It struck us that multimillion-dollar awards in arbitration have been issuing with some frequency.”

“The stakes are higher,” said Mr. Ryder, noting that an increase in institutions' suing brokerage firms over auction-rate securities and structured products also has amped up the number of multimillion-dollar claims.

The timing of the large awards is a coincidence, but there is no disputing that the dollar amounts are higher than in the past, said plaintiff's attorney Ted Eppenstein, a senior partner at Eppenstein & Eppenstein PLLC.

“The number of [investor] claims is higher, and the number of awards is higher. I think the process is becoming fairer,” he said, adding that that may lead to “decent awards” for claimants.

And Wall Street and securities firms facing investor lawsuits due to products that imploded will continue to lose — and lose big, attorneys said.

“I can't remember these kinds of awards' arriving at the same time before,” said Philip Aidikoff, a partner at Aidikoff Uhl & Bakhtiari and Mr. Hagman's attorney in the arbitration against Citigroup.

Mr. Hagman's claim stemmed from unspecified securities in accounts that he controlled and the purchase of a life insurance policy, according to the arbitration award. On Oct. 6, a three-member Finra panel awarded two trusts in his name and two retirement accounts in his name the following: $1.1 million in compensatory damages and $440,000 in legal fees, as well as $10 million in punitive damages to be paid to charities of his choice.

“We are disappointed and disagree with the panel's finding, and are reviewing our options,” said Citigroup spokesman Alexander Samuelson.

Mr. Aidikoff said that the biggest danger to broker-dealers in arbitration cases stems not from rogue brokers but from investment products that soured or imploded during the downturn.

“It's just beginning on the product side,” he said, citing upcoming cases stemming from broker-dealers' selling Medical Capital Holdings Inc. notes. “In product cases, the more you sell, the bigger the liability.”

Initial arbitration hearings for many of those investor claims against broker-dealers start in November and December, Mr. Aidikoff and other attorneys noted. Dozens, if not hundreds, of clients who bought MedCap notes are suing their broker-dealers.

In July 2009, the Securities and Exchange Commission charged Medical Capital and two of its top executives with fraud. The company sold $2.2 billion in notes through more than 40 broker-dealers, and about half that money was wiped out in an alleged Ponzi scheme.

On Oct. 5, Morgan Keegan lost a $9.2 million arbitration decision to 18 investors who sued over losses in bond funds. Those bond funds, which have been the target of dozens of past investor complaints, were allegedly unsuitable because they invested in illiquid mortgage-backed loans and collateralized debt obligations.

Investors had asked for $10.5 million in damages. The $9.2 million award was the largest a Finra panel has decided against Morgan Keegan.

“We are certainly disappointed with the panel's decision in [this case] and have filed a motion to vacate this award,” Eric Bran, a Morgan Keegan spokesman, wrote in an e-mail.

Mr. Bran noted that Morgan Keegan recently won two other large arbitration claims, alleging damages of $7.1 million and $2.1 million.

Morgan Keegan has seen favorable results in arbitration, he wrote.

“To date, 110 arbitration cases have been heard, with half resulting in outright dismissals of all claims against Morgan Keegan,” Mr. Bran wrote. “Claimants in the 110 cases have sought approximately $88 million in compensatory damages and have received $21.7 million in awards.”

A three-person Finra panel ruled Sept. 27 that Lincoln Financial Advisors was “negligent in not preventing” the actions of Scott Gordon, who, while registered with the firm, was raising money from investors for an outside business.

Selling away is industry shorthand for brokers' offering a product to clients without the broker-dealer's knowledge or approval.

Some broker-dealers allow their representatives to have outside businesses, as long as the activity is disclosed.

“It's a matter of corporate policy that we don't comment” on arbitration decisions, said Eric Samansky, a spokesman for Lincoln.

E-mail Bruce Kelly at


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