SUNDAYBUSINESS
INSIDE THE NEWS; When Stock Tips Go Bad, Is the Broker to Blame?IF you've seen more than one suspense movie, you know that it's just when a character is standing on the deck of his new boat, calm and confident and looking out into the sunset, that everything generally goes wrong. So, maybe, in retrospect, that should have been the tip-off. In August 2000, Gene Murdock was, in fact, standing on the deck of his new houseboat, docked on the shore of Clarks Hill Lake on the Georgia-South Carolina border. He was on the cellphone to his broker and friend, Joseph Harris of the Merrill Lynch office in Augusta, Ga., a few miles away. Mr. Murdock opened an account at Merrill in 1990, after he reconnected with Mr. Harris at a college alumni dinner. The money he invested grew steadily. At its peak, at the height of the dot-com frenzy, the total value of Mr. Murdock's accounts hit $3 million. As he stood on his new boat, it was still at $2.8 million. A onetime Army colonel and now a nurse anesthetist and instructor at the Medical College of Georgia in Augusta, Mr. Murdock said that when he called Mr. Harris, he was considering taking out roughly $1 million in cash from his Merrill accounts. He planned to use the money to cover his daughter's college education; pay off the mortgage on his six-bedroom, 6,000-square-foot house on the edge of a golf course in Evans, Ga.; pay for the boat; and put about $250,000 into a safe, interest-bearing account. As it happened, Mr. Harris was himself headed for a cruise in Alaska, a trip paid for by Merrill Lynch to reward a successful broker. Mr. Murdock said Mr. Harris told him not to worry about the falling market. Markets go back up, he said he was told. Mr. Murdock saw no reason to stop trusting Mr. Harris. The two had been so close that when Mr. Murdock was called up for military service as a reserve officer in 1996, he not only left Mr. Harris a written authorization to manage his investments, but he also asked Mr. Harris to check up on his wife and daughter. He said he saw Mr. Harris as a professional, not unlike himself, and trusted his judgment accordingly. ''I wouldn't want somebody coming into the hospital and second-guessing me,'' Mr. Murdock says now. In 2005, it's easy to forget that even as the air started seeping out of the technology balloon, the nation was still in a stock market frenzy. So Mr. Murdock decided against the $1 million withdrawal and sold about $100,000 in stock to cover the boat, but kept most of his money in stocks, at Merrill. The market kept going down. On Mr. Harris's advice, Mr. Murdock bought Broadcom, then a hot computer chip maker. It crashed. So did other stocks Mr. Murdock bought on Mr. Harris's recommendation as prices fell, including PMC Sierra and JDS Uniphase -- household names of the boom years. They were stocks that Mr. Harris held in his own account and, according to Mr. Murdock, believed would bounce back. By February 2001, Mr. Murdock's account had lost an additional million dollars, leaving about $1.7 million. Six months later, the account was down to less than $1 million. By mid-2002, it had settled below $500,000. WHO is responsible when an investor loses money in the market? In the old days, before the Internet bubble burst, the answer was pretty clear. Absent egregious fraud on the part of the broker, an investor had to accept that investing in the market involved risk. In the wake of the technology crash, it appeared as if those standards might change. The New York State attorney general's office found that analysts -- those in financial firms responsible for researching the health of the companies whose stock their investors buy -- routinely gave positive recommendations on companies that they disparaged in private. Often, the financial firms where the analysts worked were seeking the banking business of those same companies, and the public recommendations were seen as a way to curry favor. One Merrill analyst, for example, publicly recommended an Internet darling called InfoSpace even as he privately called the stock a ''powder keg'' or worse. In a settlement with the Securities and Exchange Commission in April 2003, Merrill Lynch and other big firms agreed to pay $1 billion in fines and put $433 million into a fund to compensate some of their clients. That's a tiny fraction of the trillions of dollars that investors lost in the tech crash. After the settlements, law firms rushed to file class-action suits against brokerage firms on investors' behalf. The courts, however, were less favorable to the claims than they had hoped. One federal judge, dismissing a class-action lawsuit against Merrill Lynch and other brokerage firms, denounced plaintiffs as ''speculators'' who were trying to ''twist federal securities laws into a scheme of cost-free speculators' insurance.'' Far from generating a mass of class-action lawsuits, disputes between clients and their brokers -- including Mr. Murdock's with Merrill Lynch -- have largely been decided in securities arbitration, an independent dispute-resolution system set up by the industry to apportion responsibility in these disputes. Investors agree to submit to arbitration when they open an account. The reports of conflicts in investment bank research have turned out to be largely irrelevant in arbitration: few clients can show convincingly that they regularly read the brokerage firms' research reports, and fewer still that they actually relied on them to make their investment choices. Ultimately, however, it is the brokers' advice that arbitrations like Mr. Murdock's are really about. Mr. Murdock said that as the market was falling, his friends thought he was crazy to continue taking Mr. Harris's advice. But for Mr. Murdock, the point of having a financial adviser is that his advice should be better than his friends'. ''I would expect Merrill Lynch to be like the New York Yankees,'' he said, ''because they say they're like the New York Yankees. They say, 'We play in the big leagues; we're Merrill Lynch. Nobody has a better analyst division; no one has a better anything.' ''If I didn't believe that, why would I stay with them? If I thought they were the Florida Marlins, who've only won two pennants, why would I stick with them?'' Advice is the essence of why clients like Mr. Murdock go to full-service brokers. But one thing that is not commonly argued in arbitration is the very question that sends people like Mr. Murdock into arbitration in the first place: whether the broker's stock-picking advice was, in fact, good or bad. Even in the post-bubble world, that can be a hard sell to arbitration panels. LAWYERS for Merrill dismissed the question of stock-picking advice in their statement to the arbitration panel hearing Mr. Murdock's case. ''A statement of opinion or prediction about the anticipated future course of the securities markets is not actionable,'' Merrill's lawyers wrote. ''Such a speculative claim has no place in securities arbitration.'' Mr. Murdock filed for arbitration in 2003. In January 2005, the arbitration panel awarded him $525,000, of which $200,000 went to his lawyer and $25,000 to pay for the arbitration process. It was a significant award by arbitration standards, though far less than what he'd sought -- as much as $2.3 million. His award, as well as most of the rest of Mr. Murdock's savings, is now invested by an independent financial adviser -- a former broker -- who has placed it in annuities and mutual funds. Arbitration panels give no written explanations of their decisions or awards. Mr. Murdock is perplexed about why, having won, he didn't get a bigger award. Not surprisingly, Mr. Murdock says his friendship with Mr. Harris is over. Mr. Harris referred a request for comment to Merrill Lynch. Merrill says that this was a case of an investor who was lucky that an arbitration panel compensated him for losses that were his own fault. The firm says Mr. Murdock missed several chances to diversify into safe municipal bonds. ''Mr. Murdock identified himself as an 'aggressive investor' and lived up to it,'' said Mark Herr, a Merrill spokesman. That Mr. Murdock got any award at all, he added, was ''a case of catching lightning in a bottle.'' Mr. Herr said that the ''inarguable fact is that most people lost money because of the worst bear market since the Depression.'' The risk of a bear market, of course, is something that all investors should consider. Invariably, some brokerage clients lose money. But that might not be something you see in commercials for Merrill Lynch or any other brokerage firm. Early in 2003, Merrill started a new ad campaign, ''Total Merrill,'' that offers its advice -- its ''trusted guidance'' -- for navigating uncertain markets. ''My parents retired on just their pension,'' one actor says in a commercial. ''Now even 401(k)'s and I.R.A.'s won't be enough.'' At the end of the commercial, the famous Merrill bull runs across a field and crashes through a glass stock ticker. |