Citigroup, Merrill, CSFB May Face Investor Claims, Lawyers Say
By David E. Rovella
New York, April 30 (Bloomberg) -- Citigroup Inc., Merrill Lynch & Co. and other securities firms that sell stock may face thousands of new investor arbitration claims because of evidence released Monday in a settlement with regulators over analyst conflicts of interest, lawyers said.
Since the $1.4 billion settlement with 10 Wall Street firms was announced, investor lawyers have been taking calls from brokerage clients whose contracts force them to pursue loss claims through arbitration rather than the courts. Lawyers have been poring over settlement evidence to determine what documents may support an arbitration claim.
``Eventually you're going to see thousands of cases,'' said Atlanta attorney J. Pat Sadler, president of the Public Investors Arbitration Bar Association. ``There have been, probably, several thousand inquiries.''
Investors who weren't brokerage clients of three of the firms that settled -- Citigroup, Credit Suisse First Boston and Merrill Lynch & Co. -- may also use the evidence to file new suits that allege they were defrauded by biased analyst research issued to win investment-banking business, lawyers said.
There are more than 40 lawsuits pending in federal court against securities firms for such analyst wrongdoing, court dockets show. Most of these cases, which claim billions of dollars in damages, will be bolstered by settlement findings about ``fraudulent research'' at Citigroup, CSFB and Merrill Lynch, as would new suits, lawyers said.
Still, the biggest increase in analyst-based investor claims is likely to occur through binding arbitration, lawyers said. Successful arbitration claimants are likely to recover more of their losses than investors who file fraud lawsuits and may have an easier time winning, lawyers said.
Cheaper
``It's probably cheaper to get it this way'' said Marcel Kahan, a securities-law professor at New York University School of Law, of the new evidence at brokerage clients' disposal. Regulators ``will have done some of the work for them.''
New York lawyer Jacob Zamansky had to send two of his associates from his Wall Street-area law firm to the nearby office of New York Attorney General Eliot Spitzer to get 30 pounds of documents released in settlements involving Citigroup and Morgan Stanley.
``Luckily they're strong guys and didn't get a hernia,'' he said.
A 2001 arbitration claim that Zamansky filed for Dr. Debasis Kanjilal, a New York investor, against Merrill Lynch helped trigger Spitzer's initial investigation about the firm and its star analyst Henry Blodget. Zamansky said he is being very careful whom he chooses to represent, partly because not every investor is eligible to file under arbitration rules.
100 Calls
``An investor wanting to file a claim has to show that they relied on a research report or information from the analyst from their broker to buy or sell the stock,'' he said. ``In the last two days, I've gotten 100 calls and 50 to 60 e-mails a day.''
One advantage investors have in using evidence released pursuant to the settlement is that banks are more forthcoming with regulators than with investor lawyers.
``I have had to fight tooth and nail with these firms to get evidence in my cases,'' he said. ``Arbitrators don't have the power that Spitzer would. He put the fear of God in them.''
Lehman Brothers, Bear Stearns, Morgan Stanley, U.S. Bancorp and J.P. Morgan agreed to the same settlement as Citigroup, Credit Suisse and Merrill, also promising to separate analyst and investment-banking activities and to fund independent research. Represenatives of all eight firms declined to comment.
Paul Marrone, spokesman for UBS Warburg, another settlement party, was unavailable for comment. Lucas Van Praag, spokesman for Goldman Sachs Group Inc., another firm that settled, didn't return a call seeking comment.
Merrill Lynch is a passive minority investor in Bloomberg L.P., the parent of Bloomberg News.
Blodget, Grubman
Claims stemming from Monday's settlement, which barred Blodget and former Citigroup analyst Jack Grubman from working in the industry, may take six years to complete, Sadler said.
``As early as this summer you're going to see the first hearings,'' said Sadler, who said he has arbitration clients with individual claims as large as $800,000.
Another law firm's bank-related arbitrations number ``in the hundreds, if not the thousands,'' said J. Boyd Page of Atlanta's Page Gard Smiley & Bishop.
Page said yesterday's settlement is a ``treasure trove'' of evidence that ``underscores a lot of what had been suspected and reported.'' His firm represents investors in arbitrations against Merrill, Citigroup and CSFB. Page has filed claims related to investor losses on stock of WorldCom Inc., Infospace Inc. and Winstar Communications.
100 Calls a Day
Page's firm is receiving more than 100 calls a day from investors with potential arbitration claims and has sent out as many as 500 questionnaires to prospective clients, who must show they had actual losses not just a loss of profits.
For clients whom lawyers accept, a hearing will be requested before an arbitration panel in the investor's home state. Appointed by the New York Stock Exchange or NASD, each panel has three members: a lawyer, an industry member, such as a trader or broker, and a member of the public, Zamansky said. Hearings last three to five days and may not be appealed, he said.
`` When you open up a brokerage account you sign a customer agreement, and in the fine print at the end it requires you to go to arbitration,'' he said. ``This is what the industry wanted. They didn't want to go to court, and they thought this was damage- control.''
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