Saving Small Investors

Law professor Robert Talbot heard story after story about small investors hit with devastating losses due to unscrupulous brokers' actions. In response, he launched the Investor Justice Project, in which students and faculty work on behalf of people who don't have the legal savvy or financial means to fight. The clinic has become nationally known as a legal services resource -- and it's barely keeping up with demand.

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Law professor Robert Talbot heard story after story about small investors hit with devastating losses who didn’t have the legal savvy or financial wherewithal to fight. “We were hearing a lot about unauthorized trades and brokers selling stocks because the companies pushed it or because they would make a high commission on it,” said Talbot, who teaches at the University of San Francisco School of Law. “I felt we could help the people who are on a fixed income with their claims.” In the fall, Talbot launched the Investor Justice Project, in which students and faculty members work on behalf of people with household incomes of $50,000 or less. The clinic bills itself as the first of its kind west of the Mississippi. Third-year student Erin Meagher, 27, is working on two cases for the clinic, one involving a 72-year-old retired San Francisco teacher whose retirement account dropped from $108,000 to $30,000. Meagher said the broker ignored the woman’s pleas for eight months to get her into less high-risk investments. Meagher, who is interested in pursuing a career in corporate and securities law, said the clinic gives her a chance to experience the practice area from a unique perspective. “It’s been great,” she said. “I look at their paperwork and think, ‘I can help you with this problem.’ Especially with everything going on in the corporate world right now, this is a great hands-on experience.” People are helped through the complaint-filing process and are prepped for arbitration, the route a majority of claims take to resolution. The clinic has received an overwhelming response. Both the U.S. Securities and Exchange Commission and the National Association of Securities Dealers have listed it as a resource for small investors looking for legal representation. For claims under $30,000, a single arbitrator oversees the process; a panel of arbitrators is used for larger claims. On New Year’s Eve, CBS Evening News broadcast a story about the clinic. Since then, it has been inundated with calls and letters from investors seeking legal assistance. According to NASD data, there’s good reason for the popularity. Last year, the NASD said, nearly 8,000 claims were filed by investors seeking damages for unauthorized trading, breach of fiduciary duty or other claims of negligence. The NASD reported that 10 percent to 15 percent of all claims filed in 2002 were for amounts under $30,000. In 1998 the NASD reported 869 negligence “controversies.” In 2002, that number nearly tripled, to 2,529. Claims for breach of fiduciary spiked from 1,655 to 4,208 over the same period. Because attorneys typically take about one-third of any settlement as fees, most small investors have a hard time finding affordable legal representation for claims against stockbrokers — most attorneys won’t take them because they aren’t financially rewarding enough. However, Kenneth Andrichik, vice president of dispute resolution for NASD, says it’s a good idea for investors to be represented by counsel. “There are skills in presenting evidence in mediation or arbitration, and small investors should assume that brokers on the other side will have counsel representing them.” With a long line of people anxious to become clients, the clinic has had to institute a pretty rigorous screening process. The would-be claimant is sent a questionnaire that covers such ground as the amount of loss and whether the investor gave specific instructions that were flouted. Most of the cases the clinic sees involve suitability claims — both the NASD and the New York Stock Exchange have suitability rules that require stockbrokers to make trades and recommendations that are suitable to their client. For example, if a broker recommends or executes a high-risk investment for an elderly person living solely off retirement savings, the transaction would be deemed unsuitable because it doesn’t match the financial situation or needs of the client. The suitability rules state that brokers “shall make reasonable efforts” to obtain information regarding their clients’ financial status, tax status and investment objectives before investing their money. The letters that the clinic receives all tell a similar story: “My only directions [to the broker] were to protect my retirement money and no high-risk investments,” one woman wrote. She said she lost almost $100,000 because her broker put her in high-risk stocks anyway. “I will be 62 years old in January of 2003 and my retirement account is almost gone. Can you help?” The clinic is also encountering cases stemming from some of the largest corporate scandals making today’s headlines. One man said he lost a large portion of his retirement account because his broker pushed Enron stock on him. According to Talbot, records show that despite being told not to purchase Enron stock, the man’s broker did so anyway — the very next day. “These dealers are like used car salesmen, just trying to run up commissions,” said Talbot after ending a call with a potential new client. “It makes you mad at all the greed floating around.” Jordana Thigpen, 25, a second-year student working at the clinic, said she got involved after hearing about people who were financially hurt and had nowhere else to turn. “It’s amazing there are so many unscrupulous brokers out there,” Thigpen said. While USF is running the only small investors clinic on the West Coast, Brooklyn Law School in New York and Duquesne University School of Law in Pittsburgh have started similar clinics.

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