As the stock market continues to fluctuate, it is common for investors to keep a close eye on their money. And, when money is lost, it is natural to want to know what happened and who is to blame. However, these can be very difficult questions in something as inherently risky as the stock market.
“Where there has been a public outcry or investigation of particular activity, traditionally lawsuits generally follow involving the same type of activity,” says Lisa A. Nielsen, Esq., an officer with Greensfelder, Hemker & Gale, P.C.
Smart Business asked Nielsen how companies can prevent litigation, and be prepared for it when it becomes inevitable.
What is the difference between this economic downturn and the most recent one in 2000?
In 2000, many of the complaints and lawsuits that followed were related to the burst of the dot-com bubble, the decline of technology stocks or the lack of diversification of customer accounts.
The current market downturn is not quite as discriminating and has impacted all sectors, including those that have traditionally been characterized as safer than others. Almost everyone has been affected and investors appear to be focused on corporate behavior, as well as the behavior of the truly egregious, such as Bernard Madoff, rather than blaming their traditional brokers.
I do not think anyone could have predicted what happened in the market during the past year, with the Dow Jones plummeting to below 7,000 points. I have seen a difference in the nature and the character of the lawsuits and the arbitrations that have been filed recently. The Financial Industry Regulatory Authority (FINRA), the arbitration tribunal where most broker/dealer cases go to be heard, has seen a 90 percent jump in the number of new arbitration cases filed in the first couple of months in 2009, much of which is due to auction rate securities and collateralized debt/mortgage obligation cases. FINRA has set up a separate track for cases relating to auction rate securities to handle the volume in a more expedited manner.
So the recent increase in case load is not necessarily due to the case where a client’s portfolio has declined by more than 30 percent and they attempt to hold their broker responsible for no reason other than its decline.
When is the best time to get your lawyers involved in an issue?
Ideally, get your lawyers involved in a matter at the outset of a potential problem — before litigation has been filed. Whether it’s in regard to a compliance issue, a particular broker issue, a product failure or a regulatory inquiry, your lawyers will work with your compliance and legal departments to pursue the goal of preventing a matter from becoming larger than necessary. Generally, a party’s approach to a matter changes once litigation has been filed. After the regulators and the individual litigants have committed to their positions, people have a tendency to dig in their heels in anticipation of a battle.
By getting involved early in the process, your lawyers can assist you in securing better document management, maintenance and retention and they can assist you in fact gathering. I have found that when lawyers get involved early on, they can get right to the heart of the matter so that you know from the outset what the pros and cons of the case are. Therefore, you can make early decisions on your approach to the case before spending money on protracted litigation. It’s important to determine whether it is a matter you want to resolve quickly, or if it deserves to be fought and vehemently defended.
Your lawyers should also counsel you on the approach to the investigation and how to appropriately preserve attorney/client and work/product privileges. Often times, at the outset of the problem you are not thinking about the consequences of a future suit. Or, you will involve witnesses to the event who really should not be a part of the subsequent investigation. It is not your fault; you just are not thinking about subsequent litigation. You are thinking of immediate response.
Has the volume of litigation increased in a down economy?
Some litigation has become more common than others. We are seeing an increase in collection matters, foreclosures, bank and other lender matters. In terms of the securities arena, we are seeing an increase in regulatory matters, private litigation that follows regulatory investigations, and matters involving pension and retirement plans.
Is it harder to litigate in today’s economy?
I really do not think so. I do think, consistent with cross-effectiveness and overall cost issues that firms are experiencing, that businesses are taking a very hard look early on at whether or not it makes sense to arrive at a resolution early or litigate. Strong legal advice adds value for the clients before the resolution stage by assisting in their investigation, properly advising them of the matter and making an informed decision relating to that resolution.
Lisa A. Nielsen, Esq., is an officer with Greensfelder, Hemker & Gale, P.C. Reach her at (314) 516-2669 or [email protected].
