Press Room

Nov 27, 1995
Crybaby Investors
By Danielle Herubin
The Palm Beach Post

From Savers To Suers--An Influx of small investors--followed by lawyers--has shareholder suits going up and up.

A scant two decades ago, Pop would just shake his head over a failed investment in "the market." Mom would say she had told him so, and the two would thank their lucky stars they had left most of their money where it belonged.

In a bank.

But when the same scene happens today, there are two significant differences.  First, the couple probably had sunk a huge chunk--if not all--of their retirement money into the bad investment.

Second, they sue.

Since 1987, the markets' last major crash, lawsuits and actions by shareholders against company executives, brokers and board members have soared, according to securities and market experts.  A recent study by National Economic Research Associates, an independent consulting firm, found that last year 183 class action securities lawsuits were concluded, a 20 percent increase over 1991.

The obvious conclusion: Investors are no longer content to admit they may have made a mistake. Instead, the lawsuits indicate they hold the broker, his firm and the company's executives responsible for any drop in stock prices.

Evidence of the trend is apparent all around Palm Beach County.  Investors have sued such companies as Brothers Gourmet Coffees, Inc., the chemical conglomerate W. R. Grace & Co., and perfume distributor Model Imperial Inc., to name a few. All accuse the corporate officers of mis-management and seek money to compensate them for losses on the stock price.

The lawsuits have reached such a level--in the form of huge payouts to investors--that there is legislation in Congress that would severely restrict when shareholders may sue and for how much.

To some extent, the lawsuits reflect today's hyper-litigious society.  But a host of brokers, lawyers and market watchers say the increase in lawsuits against companies is rooted in recent changes in the way America invests.

In the 1970s, inflation wrought havoc on the U.S. economy. Interest rates by the early 1980s reached breathtaking levels--imagine today thinking that a fixed-rate 18 percent mortgage was hard to find. People left their banks--the safe havens for money--and put it in the bond and money markets.

"They were high interest rate and no risk," said Roy Warren, a former branch manager for First Southeastern Securities Group Inc. "That created an expectation in the investor."

Then the balloon popped. Money markets dropped to the 3 percent range from 16 percent. Banks were no better.  The people, "savers" who had kept their money in banks, suddenly found themselves unable to get what they considered a decent return on their investments.

"Everybody was saying the same thing--give me some kind of decent return," Warren said.  "So the real smart guys--fund managers--were left answering the question: How are we going to meet the demands of our clients?"

The stock market, formerly the playground of sophisticated investors and institutions, suddenly became the savings account of the nation. Money put in the New York Stock Exchange alone has nearly tripled in the last 10 years, to $5.64 trillion. A recent New York Stock Exchange study found that by 1990, 51 million Americans owned shares in a publicly traded company, an increase of 70 percent during the decade.

"There's no question that you have a different type of investor," said Mike Pucillo, a leading West Palm Beach shareholder attorney.  "First of all you have a lot more individuals in the market, and you also have more traders than investors."

The "traders" are people still hunting for those big returns.  Investors used to be people who bought stock in companies such as Coca-Cola and held it for most of their lives.

Then, in 1987, two things happened.  First, the U.S. Supreme Court ruled in June on a case involving how clients may try to recover losses.  The court said in Shearson/American Express vs. McMahon that arbitration clauses written into firms' contracts were binding.

"That kind of opened the door to arbitration cases," said Lawrence L. Klayman, a shareholder attorney with West Palm Beach based Davis, Gordon & Doner.

Then, on Oct. 19, stock markets around the world crashed.  The Dow Jones Industrial Average--and index of 30 blue-chip stocks--plummeted 508 points. Overnight, some investors had lost their lifetime savings.

The two things were a potent combination: Heavy losses and an open legal door.

A recession in the early 1990s caused a migration of personal injury and real estate attorneys to cross over into securities litigation, said Robert Pearce, a securities lawyer at Lerner & Pearce in Fort Lauderdale. And a lot of people who weren't attorneys--such as former brokers--got into the consulting and arbitration business.

"These non-attorneys came in and heavily advertised," Pearce said. "And so you found yourself in a position where you had to compete with the non-attorneys."

The competition plays itself out every day in the pages of newspapers, on the back of the Yellow Pages, and on late-night television ads.  Just like the ads that read, "If you've been injured in an accident, you may be entitled to...", the ads to attract injured investors promise recovery of money.

Pearce said his firm was forced for competitive reasons to begin advertising for clients last year for the first time since it went into business in 1983.  The advertising, coupled with extensive coverage of major Wall Street scandals, have made investors aware that they don't have to take a beating in the stock market lying down.

"Investors are becoming more aware." Pearce said.

Pucillo said improvements in technology that brings news to investors also has played a role.  People with television sets or computers know what's happening on Wall Street almost the minute it happens.

The speed at which they absorb news has helped fuel a trader mentality.

"People used to buy a stock and hold it forever," Pucillo said.  "Now people have the attention span of the next quarter."