Bear Stearns Is Ordered to Pay Damages to A.R. Baron Customers
By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
An arbitration panel ordered Wall Street's Bear Stearns Cos. to pay $1
million in punitive damages to two customers of A.R. Baron & Co., saying
the big New York brokerage house "aided and abetted, with knowledge, a
criminal and fraudulent enterprise."
The 36-page decision is notable because it involved Bear Stearns's role as a
clearing firm. Clearing firms typically process trades, but the arbitration
panel found that Bear Stearns's actions went beyond normal practices and
"helped cause" customer losses.
A.R. Baron was a small New York brokerage house that was shut down in
1996 by regulators who accused it of defrauding investors out of $75 million
by manipulating stock prices and initiating trades without investor authority.
The award came in a case filed by Bernard and Maureen McDaniel of
Ireland, who invested about $1 million with A.R. Baron. The McDaniels
ended up losing nearly $800,000. In addition to $1 million in punitive
damages, they were awarded $168,000 in legal fees and interest.
Elizabeth Ventura, a spokeswoman for Bear Stearns, said the investment
bank intends "to take all available legal options to overturn this decision." Ms.
Ventura added, "We believe the result was wrong, particularly in its award
of punitive damages. It appears that the panel rehashed and accepted as
true, without real proof, allegations" made by the Securities and Exchange
Commission.
In the decision, a three-member arbitration panel said Bear Stearns's actions
were "carried out by or with the knowledge of top Bear managers" and
"demonstrated reckless and callous disregard or indifference to the rights of
its customers."
In August 1999, Bear Stearns agreed to pay $38.5 million to settle civil
allegations that it contributed to securities fraud by A.R. Baron. In settling
those allegations, Bear Stearns neither admitted nor denied wrongdoing. The
SEC had alleged that Bear Stearns helped facilitate improper trading at
Baron.
Clearing firms such as Bear Stearns execute trades, maintain client records
and send out trade confirmations for securities firms that don't have the size
or capital to do so.
Bear Stearns, the panel said, was "aware of Baron fraud and took numerous
actions to involve itself in Baron's business and financial affairs and assist
Baron, above and beyond those involved in a normal back office, clearing
operation." Had Bear stopped clearing trades, the panel said, A.R. Baron
"would have been forced to cease trading and probably been put out of
business."
Though arbitration awards don't set legal precedents, "What you're seeing is
a shift in liability," said Jonathan Kord Lagemann, an attorney for the
McDaniels. "I think there will be more and more clearing broker liability
[cases] brought, and more and more findings of liability."
In February, an Oregon district court judge upheld an arbitration decision that
allowed six investors to collect $1.8 million in damages from Fiserv Inc., a
clearing firm that processed trades for the now-defunct Duke & Co.
brokerage house of New York. That case is under appeal. |
