Press Room

Monday April 28, 2:40 pm ET
Brokerage Settlement Likely To Lead To More Lawsuits
By Tom Becker
Dow Jones Newswires

NEW YORK (Dow Jones)--Attorneys representing plaintiffs in class-action lawsuits against  brokerage firms just got a boatload of free discovery.

The $1.4 billion settlement between 10 brokerage firms and regulators announced Monday provides a  wealth of evidence for plaintiffs in class-action lawsuit cases against the brokerage firms and  increases the plaintiffs' likelihood of recovery, several attorneys said.

Lawrence Klayman, an attorney at Klayman & Toskes, said the settlement "will put into the investors' hands a lot of ammunition to pursue claims against brokerage firms."

The deal was reached among the Securities and  Exchange Commission (News - Websites), the New York  state attorney general, state securities regulators,  Bear Stearns & Co. , Credit Suisse First Boston LLC , Goldman Sachs & Co. , Lehman Brothers Inc. (NYSE:LEH - News) , J.P. Morgan Securities Inc. , Merrill  Lynch , Morgan Stanley & Co. , Citigroup Global Markets Inc. , UBS Warburg (News - Websites) , and U.S. Bancorp Piper Jaffray Inc.

As part of the settlement, e-mails in which analysts privately derided stocks they touted to clients will be disclosed to the public. These e-mails can be used in lawsuits pending against the brokerage  firms, attorneys said.

"(The settlement) will provide a tremendous amount of evidence at a low cost to ongoing litigation," said Samuel H. Rudman, an attorney with Cauley Geller Bowman Coates & Rudman LLP, a firm that often represents shareholders in class- action lawsuits.
"The most beneficial effect (of the settlement) will be for people bringing arbitration claims whose lawyers don't have the resources to conduct the same kind of discovery a firm like mine can," said Melvyn I. Weiss, a partner with Milberg Weiss Bershad Hynes & Lerach, a firm that represents plaintiffs in shareholder lawsuits seeking billions of dollars in damages. "They will be able to use this evidence in  their cases."

Arbitration cases are generally cases where an individual is suing one of the firms, as opposed to class-action cases which can involve hundreds of plaintiffs.

This free discovery should do two things - improve the likelihood of recovery in the lawsuits and lead  to an increase in the number of suits filed against the firms implicated in the e-mails, said James E.  Miller, an attorney with Shepherd Finkelman Miller &  Shah LLC, another firm which often represents shareholders

"In any case where a customer purchased a stock  based on a broker's biased recommendation, it's my  opinion it will be hard for (the brokerages) to defend the conduct in recommending the stock,"  Miller said. "I think the class cases will become stronger and it will improve the customer's ability  to recover."

Miller said the quality of the evidence will speak to whether recovery amounts are increased.

One thing that is clear is that the number of  class-action lawsuits against the firms will likely surge, Rudman said. Thousands of these cases are pending in courts nationwide and thousands more may follow.

"It'll be much easier to bring a case when the evidence is there already," Rudman said. "As a  result, I suspect that we are going to see a lot  more of these lawsuits."

Rudman added the settlement doesn't guarantee  victory for shareholders in other class-action cases because the Wall Street firms still have their legal defenses intact.

"The settlement doesn't mean (recovery) is a sure  thing," he said.

With the government settlement out of the way, Weiss said the Wall Street firms can now turn their attention to those cases, a fact that should speed up pending litigation.

The key legal question will be whether the e-mails can be treated as fact or simply as evidence in the  states' cases against the firms, said James E. Owers, professor of finance at the Robinson College of Business at Georgia State University in Atlanta. Courts will have to decide whether or not the  e-mails are fact prior to their use in other  litigation.

If the e-mails are designated as fact, they can be used as undisputed evidence in other cases, Owers said. Defense attorneys can't argue against fact.

"I am sure that in the settlement discussions the  question of fact has been something the sides have been wrangling over," Owers said. "If they are designated as fact, I think it's reasonable to conclude the e-mails will go a long way to speeding  up resolution of other lawsuits."

Shareholders won't wait for the question of fact to  be resolved before filing additional lawsuits,  attorneys said.

"Plaintiffs are going to start filing lawsuits the second the e-mails are disclosed," said an attorney who often defends firms in shareholder litigation. "This is the type of information that can totally undermine an attorney's ability to defend his  client. It's almost like a confession."

-Tom Becker; Dow Jones Newswires; 201-938-2020
-Lingling Wei contributed to this report.