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Burden of Proof

Stock Market Fallout: Are There Any Legal Remedies When You Lose?

Aired October 19, 2000 - 12:30 p.m. ET


ROGER COSSACK, CO-HOST: Today on BURDEN OF PROOF, the stock market: You pay your money, you take your chances, but are there any legal remedies when you lose?


MICHAEL MANDEL, AUTHOR, "THE COMING INTERNET DEPRESSION": We've had five years of prosperity in a rising stock market that experts didn't expect, and what's going to happen is that the stock market has turned down, and that's going to transmit itself to the tech sector. And as the tech sector goes down, so will the economy. We're entering into a new phase of the new economy.

MICHAEL HOLLAND, STOCK MARKET ANALYST: We've had so many bombshells which have knocked the stock market down so much, I think bombshells in the future will probably have less effect on the downside. I think what will actually have an effect now, is we've come to such low levels in the stock market, we'll probably have surprises on the upside.


COSSACK: Hello and welcome to BURDEN OF PROOF. Greta is off today.

Stocks are rebounding on Wall Street today after a 430-point plunge in early trading yesterday. That drop caused the Dow Jones Industrial Average to close below 10,000 points for the first time since March. The volatility in the stock market raises concerns about who pays for losses, especially for investors who may be relatively new to the market.

Joining us from New York is Bill Singer, a securities industry attorney and a member of an advisory group to the National Associations of Security Dealers. In Indianapolis is Mark Maddox, an investor attorney and former securities commissioner for the state of Indiana. And here in Washington, Juhi Vijay Vargia (ph); Howard Kurtz, "Washington Post" media reporter and author of the book, "The Fortune Tellers: Inside Wall Street's Game of Money, Media and Manipulation." He is also host of CNN's "RELIABLE SOURCES." Anna Dimattia (ph), and in the back row, Tom McIntyre (ph) and Jeff Verhoff (ph). I want to go right to you, Bill. Let's talk a little bit about the responsibilities of the broker-dealer to the investor. And let's set up some hypotheticals. I'm going to create this hypothetical person who is relatively new to the stock market, has about five or $10,000 that he or she wishes to invest, looks around in the phone book and sees one of the names that seems to be recognizable, walks in with this check for $5,000 and says: I would like to meet a broker, what do I do?

BILL SINGER, SECURITIES INDUSTRY ATTORNEY: Well, what you are going to do is you are going to be introduced to a broker, and unfortunately most people will spend less time interviewing a broker than they will looking for a used car. So, the first thing any attorney in the securities industry would tell you is if you are going to a brokerage firm that you never heard of, dealing with a broker you have never met, and recommended to buy a stock that you've never heard of, be very, very careful.

You need to use your own instincts. You need to be concerned about the relationship. Basically, a broker is going to make money on every trade that you do, so it is in the broker's best interest to recommend that you trade more, rather than less. Unfortunately, the more you trade, it doesn't necessarily mean that you make more money, but you can be guaranteed that the broker will make more money because the broker generates more commissions. So, you need to approach the relationship with a very healthy skepticism.

COSSACK: All right, now, I've gone into this brokerage house and I've met this broker and we've had a few minutes worth of conversation. I've signed a few pieces of paper. He or she has taken my check for $5,000.

Have I bought any stocks, and what should I know about what I've done?

SINGER: Well, first of all, absolutely no order should ever be entered on your behalf without you first speaking to the broker. If you get a monthly statement or a confirmation at home and it indicates that you bought or sold stock that you never authorized, immediately contact the brokerage firm or a lawyer because there's a big problem there. You should not have anybody trading other than on your express direction. That's the first thing.

Number two, when you open up a brokerage account, there's no reason that you should be buying or selling any stock unless you've discussed that with your broker and gave he or she a specific order to buy or sell stock. So, the first thing is there should be no surprises. If there is a surprise, you are going to have trouble, shut down the account, go somewhere else and get professional help.

COSSACK: Mark, I get my statement at the end of the month, Mark, and I suddenly see that I had 100 shares of ABC corporation and I had 50 shares of the DEF corporation and I had 75 shares of the GHI corporation and, guess what, they were all sold and two other stocks were bought and four other stocks were sold. But I'm up a few dollars, but I've paid a lot of money in commissions. Is that OK?

MARK MADDOX, INVESTOR ATTORNEY: Well, that's not OK, Roger. You've got a problem at that point because you've got a broker who has demonstrated that he or she is willing to do things in your account without getting your prior approval. The first thing you need to do is you need to communicate your objections to that to your broker, and you need to do it in writing, and you need to keep a copy of that piece of paper, so that, if you have additional problems down the road, you are protected.

COSSACK: Let me ask you this, when I go in and sign that contract with my brokerage house, you know it's normally maybe a page or two or three pages, kind of small print. My hypothetical person is not a lawyer. He's inside this kind of imposing place and signs his name.

What exactly is he signing or she signing when they make this agreement with the brokerage house?

MADDOX: Well, the most important thing that they are signing and virtually all the customer agreements today is some language that says that if you have a dispute with your stockbroker, you're not going to be able to go to your local courthouse down on Main Street but you're going to end up in a securities arbitration proceeding in order to pursue your rights. And that's a much different process than most people are familiar with. It's also will be the case that you are going to have to sign that piece of paper before that brokerage firm's going to be willing to do business with you.

COSSACK: All right.

HOWARD KURTZ, HOST, CNN "RELIABLE SOURCES": Keep in mind, Roger, that in the Internet age, a lot of people are going alone without a broker. They're trading online for eight or 10 bucks a pop and they are keeping the TV on and they are watching CNNfn or CNBC and they are executing those trades based on, you know, what some expert or guru or the people that I call the fortune tellers, comes on line and offers advice about a particular stock.

The problem is, when that stock goes down or if they don't catch the right wave, they can lose a lot of money. They don't have a broker to blame. Sometimes they blame the online brokerage firm because with the traffic on the Internet and the stock is going up, you don't get your trade executed in time, end up paying a much higher price or you get out a much lower price. You could lose some money there. So, we are in a kind of a brave new world where you don't have to use a broker in order to play this game, but it's a dangerous game.

COSSACK: All right, let's talk a little bit, Mark, in terms of Internet trading, is there anyone to blame but yourself?

MADDOX: Well, there can be times when the Internet company itself may have some liability to investors, even though investors are making a lot of the decisions online themselves. Couple of examples: over the last couple of years we've seen a lot of computer system failures by the online firms. And when you have computer system failures, there's a good chance that the online firm is going to have some liability. In addition to that we've also seen a lot of situations where the online brokerage firms are extending margin to basically anybody with a pulse and a couple thousand dollars.

COSSACK: Margin means where they lend you money to buy stocks, is that correct?

MADDOX: That's correct.

COSSACK: And they use your stocks as security for that loan?

MADDOX: That's correct. We had a case of a medical student here in Indianapolis about a year ago who completely over-margined his account with Ameritrade and at the end of the day he was able to recover $40,000 against Ameritrade, so those situations do oftentimes give investors opportunities to go against the online firms.

COSSACK: All right. Let's take a break.

Up next, those stock tipsters on television. How much should you trust them or how much should you believe them? Stay with us.


Two men, who were indicted yesterday on charges of attempted arson of a New York synagogue, will be the first to be tried under the state's new hate-crime bill.

The bill stiffen's penalties for crimes committed because of a bias towards the victim's race or religion.



COSSACK: Good news for our Internet-savvy viewers. You can now watch BURDEN OF PROOF live on the World Wide Web. Just log-on to We now provide a live video feed Monday through Friday at 12:30 p.m. Eastern time; and if you miss that live show, the program is available on the site at any time via video-on-demand. You can also interact with our show and even join our chat room.

There are plenty of people on the television these days telling you how to invest your money. But who are these folks? Well, Howard, you've just written a book that tries to describe who these folks really are.

Should we pay attention to them?

KURTZ: Well, lots of people do, Roger; in part because all the cable networks, including CNN, put them on constantly and have turned them, kind of, into mini-celebrities.

And the people who are most often built up in this fashion -- I'm talking about folks like Ralph Acampora and Henry Blodgett and Abby Joseph Cohen -- are the analysts who work for the big Wall Street brokerage houses. And the two problems I have with them becoming, kind of, a piece of programming in the media world is, one: Some of these folks have very mixed track records.

Henry Blodgett of Merrill Lynch, for example, last fall recommended eToys as a stock he said people should buy; eToys has since dropped 59 percent. Nobody is right all the time, but I don't think the journalists do a very good job of pressing the analyst and sharing with viewers what the track record is -- when they were right, when they were wrong.

Problem No 2: When people come on from Goldman Sachs, Morgan Stanley, PaineWebber, you name it -- oftentimes they're talking about companies, stocks of companies, that their own investment banking firms do banking business with. This is very rarely disclosed; the journalists don't press the point. In any other field it'd be considered a pretty blatant conflict of interest. I, as a viewer, want to know that before I decide whether to take somebody's advice on whether to by AOL or Yahoo! or Microsoft.

COSSACK: Bill Singer, is there conflict of interest regulations about these people, these sort of individuals that Howie points out, who might be touting a stock that their own brokerage house has an interest in?

SINGER: There are a number of levels of regulation.

First of all, the most common would be anti-fraud statutes. If you go on television and you make a statement and it's wrong and it's fraudulent, you can still be prosecuted for that, you can be sued for it.

More specifically, however; self-regulatory organizations, such as the National Association of Securities Dealers, regulate advertising content and, to an extent that you go on television, talk about stocks, talk about companies, the NASD takes a view that, in a sense, you're engaging in advertising or making representations that they consider marketing, and they do regulate it. And the regulation is very simple: You must have a reasonable basis for whatever you're saying.

As to the conflicts which we are discussing, obviously they must, and should be, disclosed; but as we've been pointing out, they are not always disclosed. Recently the SEC has begun investigating and prosecuting the failures to disclose these conflicts.

COSSACK: Is there an obligation, under the securities and exchange laws, to announce these conflicts?

SINGER: Well, that's really what makes a lawsuit. I'm representing a number of clients right now that have been accused of failing to make the announcements. They take the position that they don't need to disclose it. The commission takes the position they do.

Quite clearly, it is a developing area of law, and my opinion is that, likely, the commission is going to be sustained over the future. COSSACK: Let's take this a little step forward.

Mark, I've just come into your office and I said, you know, I was watching this guy on television the other day and, you know, he had a dark suit on and he was on one of the cable stations and looked like he knew what he was talking about; and he came on and he told me to buy this corporation and I did it; and not only have I lost money, but I just read in the newspaper that he had a big stake in this corporation, too; and it went up for a few day, he sold out, nobody told me he sold out and I didn't get that information.

Do I have a lawsuit?

MADDOX: Well, Roger, I think you very well might.

The first thing I'd try to do is educate you a little bit and really try to explain to you that, you know, this investment business is all guessing; it's not even, necessarily, educated guessing. It is smoke and mirrors, crystal balls, and at the end of the day, nobody's crystal ball is really any better than somebody else's. Nobody can scientifically prove to you or anyone else that they know where the market's going to go in an hour, a week, a month or five years from now.

It's all basically guessing. So the first thing I'm going to try to do is to try to educate you a little bit and get your standard of thinking in line with reality. Then after that, we're going to take a look at your case. It certainly is the kind of case that very well could be actionable, and we'd want to gather a little bit more information from you to evaluate it.

KURTZ: An SEC official told me this morning that the commission is working with the industry to prod them further, insisting that analysts disclose any banking ties to the companies whose stocks they're talking about when they go publicly, or speak on television.

There's also a larger problem, that seems to be. The most important statistic in my book, "The Fortune Tellers," is that 99 1/2 percent of all recommendations by all Wall Street analysts is to buy, buy, buy stocks. By the time an analyst uses the "S" word, tells you to sell, that stock is probably already in the toilet.

When Intel blew up a couple of weeks ago -- went down 20 or 22 percent -- the next day all the analysts who had a strong buy rating on it, with one exception, a guy who I write about in my book who's a little more candid -- they all came out and downgraded the stock. Well, thanks a lot, it's too late at that point.

What's missed here, I think, is that these analyst -- some of them are very smart and savvy people -- are under a lot of pressure from their own companies not to be too negative, not to be too candid about stocks that are weak; and a couple have even gotten fired by their own companies for being too negative -- I would say too honest -- about stocks in general.

COSSACK: Bill, is there, as Howie points out -- is there a self- fulfilling prophecy within this industry to get people to buy because, as we know, you know, it's all buy -- it's all supply and demand. The more you buy, the higher the price is going to go.

is that part of the securities business that, whether it be a broker in your brokerage house, or someone on television that we're watching -- this notion to say buy, buy, buy because it's better for all of us.

SINGER: If the industry was college, that would be "Brokerage 101." The first thing you're told is to sell. That's all you're really trained to do as a broker. And the bottom line is that's what runs the entire machinery.

You don't sell stock, nobody makes any money. Nobody is in the business of giving advice simply to give advice. They're in the business to give advice, as Howard points out, to get somebody to buy stock and, unfortunately, many times the stock that they're pushing you to buy is stock that the brokerage firm technically owns or is pushing. That's the business.

COSSACK: All right, let me take a break and we'll continue on in this in just a minute; because when we return, one of the questions I'm going to be asking is, should we be getting more protection from the government? Stay with us.


Q: Why has a lawsuit been filed in a Philadelphia court on behalf of 298 former Holmesburg Prison inmates?

A: The lawsuit claims that inmates were used for medical testing from 1951 until the practice was banned in 1974.



COSSACK: We're talking about whether there should be tougher laws monitoring the securities industry.

Mark, let me go right to you. Let me just describe the securities industry this way: This is an industry in which it's been described that the people that you're buying from are taught to sell. The people that are buying usually, some of the time if not most of the time, know very little about what they're buying and are relying quite a bit on what the person who is taught to sell is telling them.

As a lawyer who represents investors, you've already told us that we as investors usually don't have the right to get into court so we have to go to an arbitration board. What laws should be changed, if any, to protect investors?

MADDOX: Well, one of the most important things is probably putting some more money towards securities regulation in the United States. You know, it's my view that the securities regulatory scheme in the U.S. is probably the second worst in the whole world, and everybody else is tied for first.

Richard Breeden, the former SEC chairman, used to say that the United States spent more money on military bands than it did on securities regulation through the SEC's budget.

The reality is that the cops that are on the beat at the SEC, the NASD and the state regulators simply don't have significant resources in order to adequately police the area. So what happens is one of the most important aspects of policing the area is the individual investor, you know, pursuing their rights when they think they've been defrauded.

COSSACK: Bill, we've all read stories now about people who have used the Internet in order to promote their own stocks in chat rooms, messages; you know, buy this stock, this is the hot one, this is the one to go. Do we need regulations to cover that or do we just need more police?

SINGER: Well, to the extent that mark and I do disagree is I think we have more than enough regulators. I think the problem is the agenda. And as far as the Internet goes, that's a classic example. There's nothing new on the Internet that hasn't been done off the Internet. Fraud is fraud. What's new is that it's being done on a different medium.

We have laws on the books to deal with fraud. I don't believe we need to go out and create a whole new set of laws. More importantly, we don't have enough brainpower to know all of the laws that we currently have. So I think we need to recognize that there are new means of distributing information, namely the Internet, and we have to be more sensitive to them.

But I don't think the problem is throwing more money, I think we have to improve the system we already have. But I do agree with Mark it's a terrible system.

KURTZ: Roger.

COSSACK: All right, let me just go to Howard for a second -- Howard.

KURTZ: The Securities Exchange Commission is, in fact, stepping up its efforts in the Internet area, including the charge against the 15-year-old kid who apparently, for a teenager, proved to be quite an expert stock manipulator.

But I would agree that I don't think all the government regulation in the world is going to protect people who steps into the Wall Street casino based on the experts and prognosticators and analysts they see on television. They can make money; they can lose a bundle in a hurry.

What I'd like to see is the media voluntarily holding more of these experts accountable by telling us about their track records, by disclosing the conflicts of interests, and by stop trying to pretend that simply by tuning into some television show are you going to instantly acquire enough wisdom to be able to beat all the professionals and make lots of money. That may have been easier to do in a big bull market. With the market the way it's been in the last six months, it's an awful lot harder to do.

COSSACK: Howie, should there be disclaimers by people on television, by perhaps even networks that maybe should run across the screen when these people are talking?

KURTZ: I'd like to see every analyst who comes on the tube have the figure 99 1/2 percent put under his face to remind people that 99 1/2 percent of all of these recommendation are to buy stocks. And, yes, both through anchor and reporter comments and graphics on television, we need to be reminded that although these are smart and savvy folks, analysts sometimes don't get it right, sometimes have these hidden agendas. That, I think, would do as much as putting a few more cops on the beat to help us in this area.

COSSACK: Mark, I know you had something you wanted to add. Go ahead.

MADDOX: Well, in the discussion about whether there are any new laws that it's time to consider, the group I belong to, PIABA, favors Congress taking a hard look at reforming SIPC, the Securities Investor Protection Corporation. The banking world has FDIC insurance, the securities world has a very weak step-sister called SIPC. And SIPC is really designed right now to hardly pay any claims for investors that are.

And now that Americans have a lot more money in the securities markets than they do in banks, we think it's high time to take a hard look at SIPC reform.

COSSACK: All right, that's all the time we have for today. Thanks to our guests and thank you for watching.

Later today on "TALKBACK LIVE," the debate over standardized tests: Are they the best way to judge your child's learning? E-mail, fax or call with your opinion and tune in at 3:00 p.m. Eastern.

And don't forget to join us again tomorrow at 12:30 p.m. Eastern for another edition of BURDEN OF PROOF. We'll see you then.



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