Angry over investment losses resulting from the bankruptcy of WorldCom Inc. and the perceived lack of government action on their behalf, more than 100 small investors filed arbitration claims against Salomon Smith Barney (Salomon) Inc.'s parent company, Citigroup Inc., on Monday, asking for the return of the full value of their investment.
Attorneys representing the small investors, each of whom lost less than US$25,000 on WorldCom stock, delivered documents for the initial cases to the offices of the National Association of Securities Dealers in New York City Monday morning.
Among other things, the documents allege that Salomon engaged in fraud by making material misrepresentations of its relationship to WorldCom. The company failed to disclose to investors the business ties between Salomon and WorldCom, as well as the personal and business relationship between star analyst Jack Grubman and WorldCom founder and former Chief Executive Officer Bernard Ebbers, according to Robert Weiss an attorney from the firm Hooper & Weiss, which is representing the claimants.
Asked about the development, Salomon Smith Barney said that the company believes the claims are similar to others that have been filed and maintains that the claims made against it are untrue.
"While we have yet to see the claims, we expect them to mimic other filings, which we continue to believe are without merit," said Susan Thomson, a spokeswoman for Salomon Smith Barney.
The documents filed today, over 1,000 pounds altogether, are just the beginning in what will be a flood of thousands of individual arbitration cases brought against Citigroup and Salomon, Weiss said.
The purpose of the arbitration cases is to give small investors a chance to recover more of their original investment than would be possible in traditional class action suits, according to Weiss.
"In a class action suit, people get pennies on dollar. In arbitration, it depends on a variety of factors, but the average recovery is much higher," Weiss said.
However, it is also hoped that the large number of claims will point out the shortcomings of arbitration as a way to handle widespread malfeasance on the part of financial institutions like Salomon and their brokers, Weiss said.
Like other brokerages, Salomon requires its customers to agree to waive their right to sue, requiring them to use industry-sponsored arbitration to resolve conflicts.
"With widespread fraud like this, where you have millions of people who were misled and lost money, arbitration is not a good strategy for the investor class," Weiss said.
In addition, arbitration is less advantageous than the courts for those who are making claims, according to Weiss.
"Arbitration is a stacked deck. The whole process is administered by an industry trade group," Weiss said.
The high profile filing of thousands of separate arbitration claims, it is hoped, will highlight the problem and help politicize the issue of requiring investors to engage in arbitration, Weiss said.
Weiss said that, despite being the focus of the Bush economic stimulus plan, the so-called "investor class" was forgotten in the U.S. Securities and Exchange Commission's (SEC's) US$1.4 billion global settlement with top investment firms, which was announced in December.
"None of US$1.4 billion settlement with the SEC went to investors. There were no attorneys for investors involved in that. It was basically just giving money that was earmarked for government agencies," Weiss said. "That money should go to investors. I want them to pay the money back."
To qualify as a claimant, individuals need to have purchased WorldCom stock through Salomon Smith Barney and relied on research provided by the company, especially by analyst Jack Grubman, Weiss said.
While WorldCom is also culpable for misrepresenting its own financial standing, the company has declared bankruptcy and is not a promising target for those who are looking to recoup their original investments, Weiss said.
The same cannot be said of Citigroup, who said that the company has $1.5 billion set aside for settling such claims.
"They have the money and the liability and they're going to have to pay," Weiss said.