A bear market bonanza
How investors' losses can convert into lawyers' gains
A client nicknamed him "The Hammer" for his aggressive courtroom demeanor. Indeed, Hollywood, Fla., lawyer Jim Shapiro claims to have won well over $100 million for clients in 18 years of personal-injury lawsuits ranging from common car crashes to complex asbestos cases. Lately, though, he has focused on a new class of "victims": investors who lost big on technology stocks. "Investment-loss cases just took off in January," says Shapiro, who represents about 700 investors in arbitration courts established by the major stock markets. Some $5 trillion in paper wealth disappeared in the 20-month-old bear market, and someone, somewhere, is to blame, Shapiro says. "People think they don't have a case because they assumed the risk of Nasdaq going down, but they do." Brokers who let clients load up on tech stocks were negligent, he argues, even if clients demanded it. Cases before the National Association of Securities Dealers will reach 6,800, up 23 percent from 2000, and cost Wall Street hundreds of millions of dollars. "The first thing you need for litigation is losses, and we certainly have that now," says John C. Coffee, a securities-law expert at Columbia University.
One Shapiro client, a retired veteran in Deerfield Beach, Fla., listened when his broker advised selling stocks like General Electric and Merck and buying Palm Inc. and MicroStrategy. Now he wants restitution for over $500,000 in losses. "He misled me," says the retiree, who requests anonymity. "Those weren't the right stocks for me."
Real class. The big money, though, is in class action lawsuits, 415 of which have been filed this year, shattering the previous record of 236 suits. Such cases, which routinely fetch settlements exceeding $10 million, are initiated by firms like Milberg Weiss Bershad Hynes & Lerach, which has class actions pending against about 300 companies, from Accelerated Networks to Z-Tel Technologies. In general, class action law firms sue companies on behalf of stockholders when their stocks plummet, citing fraud such as insider trading or improper accounting. Enron, the Houston energy firm that saw its stock plummet 99 percent as a result of dubious accounting and bad investments, faces multiple lawsuits from employees and shareholders, as well as a Securities and Exchange Commission investigation.
This year there's a new class action twist. Investors are targeting stock underwriters and at least 300 companies, claiming investment banks gave preferred clients access to coveted shares in initial public offerings in exchange for inflated commissions. They also allege the banks manipulated the market by asking favored customers to buy shares in the aftermarket, driving up prices. The SEC is investigating the matter. Jim Newman of Securities Class Action Alert Services predicts a settlement of as much as $6 billion. "It's probably the largest situation I've been in, in terms of complexity and size," says Melvyn I. Weiss of Milberg Weiss, who was recently appointed head of the IPO plaintiffs' group.
Wall Street protests its innocence. "When the market tanks, people go looking for scapegoats," says Securities Industry Association spokesman James Spellman. Plaintiffs' lawyer Shapiro takes a different spin. "The crash is what made their mistakes show," he says.
This story appears in the December 17, 2001 print edition of U.S. News & World Report.