Break Away from the "Suit Happy" Clique

Physician's Money DigestFebruary15 2003
Volume 10
Issue 3

Many individuals, angered by losses inthe stock market, are now filingsuits (ie, shareholder lawsuits) againsttheir brokers or brokerage houses in anattempt to recover losses. In 2002, UScompanies paid out $1 billion to settlesuch suits. Before you find yourself joiningthe crowd aboard the shareholder lawsuitbandwagon, however, there are a fewthings you'll need to consider.


The National Association of SecuritiesDealers (NASD) Dispute Resolution sectionhandles most investor cases against brokers.And while the number of cases filedwith the NASD has increased over the past2 years, the percentage of cases making itthrough arbitration in favor of theinvestor is dropping. Of the claims thatreach a final NASD arbitration (30%),slightly more than half result in a judgmentagainst the broker. Even then, however,the monetary award usually fallsshort of actual investor losses.

The Journal of Finance

The point, say securities attorneys, isthat just because an investor lost moneydoesn't mean someone did somethingwrong. Last year, published the results of an in-depthstudy that found, over time, analysts'stock picks perform better than the market.The study found that for the years1985 through 1996, an investor whoseportfolio contained analysts' most highlyrecommended stocks, while shorting thelowest-rated ones, beat the market byapproximately 9% a year.

Of course, that's not to say that improprietiesdon't exist. New York AttorneyGeneral Eliot Spitzer's investigation ofMerrill Lynch uncovered company e-mailsthat contradicted analysts' public opinionsof some stocks. As a result, a courtorder required Merrill Lynch to disclosepossible conflicts of interest between itsinvestment research department and itsinvestment banking division. Spitzer isnow investigating other brokerage housesfor similar undisclosed conflicts.


Wall Street Journal

Other factors:

If you're considering staking a claim orjoining in a class-action suit, the first andmost important question to consider iswhether you have a valid complaint. Buthow do you know if you have a valid complaint?According to a article, the key factor is whether lossesresulted from wrongdoing by a broker orbrokerage firm, or whether they weredue to the investor's own poor decisionsor natural workings of the stock market.Exceptional things happeningto an account relative to a person'sinvestment history, financial situation,and risk tolerance.

Even if you have a legitimate claim, it'shighly unlikely you'll get to say your peacein court. Chances are that when youopened your brokerage account, yousigned an agreement that stated youwould settle disputes through arbitration.NASD Dispute Resolution handles approximately90% of all securities arbitrations,and the complaint process and appropriateforms can be found at

It's not unusual to want to assignblame for our investing woes. Nobodylikes to lose, especially not money. Butthere's a difference between losingmoney because of an analyst's wrongdoingand losing it because of a decliningstock market—which historically occursevery 3 or 4 years. Physicians need onlylook to the mounting legislation enablingpatients to sue their health plans tounderstand the damage that frivolouslawsuits can have on an industry.

It's vital for all investors to understandthat the recommendations they receivefrom an analyst should only be 1 factor intheir stock-purchasing process. And whenyou do make that decision to purchase aparticular stock, remember that wherethe market is concerned, what goes upcan also come down.

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