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February 03, 2010 |
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Investors Target Former Lehman Brokers |
(Dow Jones) Some former Lehman Brothers brokers are getting caught in the tide of
arbitration cases involving principal-protected notes issued by their
parent company.
The cases are creating yet another headache for them: Now,
in addition to hunting for or adjusting to new jobs after the company's
collapse, they must hire lawyers to defend themselves against angry
investors.
The arbitration claims are typically a last-ditch effort to
recoup some of the money invested in Lehman Brothers Holdings Inc.
principal-protected notes.
Investors say the fixed-income securities were "guaranteed"
to return at least the equivalent of the investor's principal, as the
product's name suggests. The securities instead proved highly risky:
Investors who bought the notes lost nearly everything when the
once-venerable institution declared bankruptcy in 2008. They could
ultimately collect as unsecured creditors in Lehman's bankruptcy
proceedings, say lawyers, but that may take years and yield, if
anything, pennies on the dollar.
Those who bought the Lehman notes through brokers at UBS AG, which also sold them, are in a better position to collect, since
the firm is still in business, say securities lawyers. In December, a
Financial Industry Regulatory Authority arbitration panel awarded a
retail investor $200,000 after deciding a UBS broker inappropriately
sold her Lehman principal-protected notes. The case was one of the
first involving the Lehman notes to be heard by a Finra arbitration
panel.
Investors who bought the notes from Lehman brokers, however, face a steep uphill struggle to recover their money.
Barclays PLC purchased assets related to Lehman's North
American investment-banking division, as well as its New York
headquarters, in the bankruptcy proceedings. It bought only a very
limited class of Lehman's liabilities, however, which didn't include
principal-protected notes. That leaves former clients with few, if any,
avenues of relief. Many investors also are filing claims against
Barclays, but any chance of recovery is unlikely, say lawyers.
Brokers, who have been named in a small number of cases, can
expect to spend between $40,000 to $50,000 for legal fees to defend
themselves during a four-day hearing, according to Marc Dobin, a
securities lawyer in Jupiter, Fla.
Longer cases may cost an additional $5,000 to $6,000 per
day, he said. Brokers who win can ask the panel to order the investor
to pay their legal fees, but such victories are rare, he said.
Dobin said he's now defending a former Lehman broker in a
case involving "significant" losses. The broker, he said, recommended
certain principal-protected notes to clients based on information he
received from the company about the quality of the notes just prior to
the bankruptcy filing. Dobin declined to name the broker.
Paulino Nunez, a securities lawyer in Miami, Fla., is
representing two investors, including an 88-year-old man, against a
former Lehman broker who, he says, sold them more than $2.5 million of
Lehman notes when the firm knew it was failing.
Nunez also declined to identify the broker, or to comment on
specifics. But he said a firm's bankruptcy generally leaves investors
few alternatives but to pursue the broker, as long as there's a
reasonable basis for recovery, such as breach of fiduciary duty or
selling unsuitable investments.
Other lawyers, however, say naming a broker is often
fruitless because most don't have professional liability insurance.
"Generally, you have an individual that may not be able to answer to a
big award," said Jacob Zamansky, a New York-based securities lawyer.
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