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| July 2004 | The
Monthly Newspaper of the NYSSCPA |
Vol.
7, No.10 |
CPAs Can Help in Broker/Dealer Cases
Defending Brokers in a Rash of Securities Arbitration
By Simon Eskow
Richard Roth, an attorney specializing in securities cases, uses a story from the annals of insurance fraud to illustrate what he calls the “craziness” of the current securities arbitration environment.
A cigar aficionado, Roth begins, decided to insure a box of expensive stogies, even against fire. After smoking the cigars, the man filed a claim with the insurance company, stating that his acquisitions had been lost in a series of small fires. The insurance company, rather than spend resources to fight the claim, wrote the man a check.
Roth indirectly likened such brazenness to the rising trend of claims filed against broker/dealers by investors who lost in the great dot.com bubble burst. Roth, the keynote speaker at the Foundation for Accounting Education’s Broker/Dealer Conference on May 13, illustrated how some investors have used securities laws as a kind of insurance policy against their own risk-taking.
“Not all cases are frivolous,” Roth said, “but the pendulum has swung too far.”
Investors sue to recover investments based on certain claims, such as that a broker traded excessively on an investor’s account, made unauthorized trades for an investor or dealt in stocks with a level of risk unsuitable to the investor. In one such suitability case, Roth said, the investor stated that he was risk averse, despite having separately put money into dozens of casinos.
“Many lost money and now they want a ‘re-do,’ so they sue the broker,” Roth said.
Roth, said that CPAs can “help” by providing services for defense lawyers in securities arbitration, by doing cash-in and cash-out performance evaluations to determine how much money was actually lost by the investor versus how much was thought or claimed to be lost. Broker/dealers involved in cases often look for experts who can provide services like P&Ls by transaction or turnover analyses, both of which are services CPAs can easily provide.
A 2003 ruling may have been a sign that the tide is turning in securities arbitration. A judge threw out a particular case against Merrill Lynch, stating that the investors were speculators laying the blame of their losses at the feet of the brokers.
A telling metaphor for this shift against frivolous securities arbitration can be found in the end of Roth’s cigar aficionado story. When the man cashed his insurance check for the burned cigars, the insurance company had him arrested on 24 counts of arson, one for each cigar he smoked. He was later sentenced to a year in prison, and fined for the cost of the settlement.
Over 200 people attended the all-day conference in New York City.
The NYSSCPA’s Stock Brokerage Committee sponsored the conference. Committee Chair Robert Kaufmann cochaired the event with Marc Stoltz.
