August 26, 2003
By David A. Gaffen
Registered Rep.
A million dollars.
That’s the amount brokerage firm Smith Barney agreed to pay in a settlement with the New York Stock Exchange in an investigation of improper conduct at an Atlanta branch of the firm related to WorldCom employee/shareholders. A former branch manager at the firm received a suspension for failure to supervise employees at his Atlanta branch. Regulatory filings indicate that Smith Barney consented to the NYSE’s findings that it had failed to “adequately ensure that certain activities of the WorldCom brokers in a branch of the firm were reasonably supervised.” They agreed to a censure, a sanction and the $1 million fine. While that amount may seem like chump change for a firm that was forced to fork over $400 million in an investigation into misleading research practices by the New York Attorney General’s office, plaintiffs’ lawyers seeking compensation for clients who lost money felt the fine and concurrent rulings were significant. “The signal it sends to me is that the NYSE took this very seriously and they graded it appropriately,” says Seth Lipner, a Garden City, N.Y.-based lawyer who is handling several arbitration claims against Smith Barney, along with current and former registered representatives of the firm.
Two of those representatives, Philip Spartis and Amy Elias, continue to fight the cases filed against them by various plaintiffs’ attorneys, along with the NYSE investigation, and are proceeding with their lawsuit against Smith Barney in addition.
The pair was fired from Smith Barney in early 2002 due to allegations of improper handling of options accounts for WorldCom employees. Spartis was the director of those options accounts at Smith Barney—a $2 billion book of business—and he, along with Elias, have been charged with several violations by the NYSE.
According to regulatory documents, they include unsuitable recommendations, sending communications to customers without prior approval, and sending misleading communications to clients. Their attorney, Jeffrey Liddle of New York, says he has filed a response to the NYSE’s formal charges and expects to hear some sort of ruling on that within a couple of weeks.
The pair had counter-sued their old firm and former telecom analyst Jack Grubman for what they believed were misleading recommendations by Grubman that prevented the brokers from adequately doing their jobs. Spartis and Elias subsequently filed $100 million lawsuits against their former employers.
Individual investor cases against analysts have had difficulty swaying judges—it’s hard to prove that an analyst made a person buy certain stocks—and this ruling could lengthen the odds against Liddle’s clients, because it acknowledges regulatory action against Spartis’ former supervisor, Michael Grace, for failure to supervise. Liddle claims, however, that formal charges against Grace and Smith Barney were never filed—that those parties merely agreed to a settlement prior to formal charges being written. “This is not even a penalty,” Liddle says, referring to the fine. “It does nothing for any customers and it doesn’t reflect on Phil at all.”
Grace, the former branch manager of the Atlanta office, accepted a three-month supervisory suspension, which is moot anyhow, as he’s already been demoted and is no longer in management.
The scattered arbitration cases against the firm continue to proceed, a number of which will be heard later this year. “There were supervisors who failed, and those who had obligations to the clients and the firms—it could have been prevented,” says Boca Raton, Fla.-based attorney Lawrence Klayman, who represents about $75 million in investor claims against Smith Barney. “This was a sales practice violation case…these accounts were mishandled regardless of the Grubman issue.”
Grubman was banned from the industry for life and forced to pay a $15 million fine as a result of New York State A.G. Eliot Spitzer’s investigations into Wall Street.
A Smith Barney spokeswoman would only comment that they were pleased to have the matter resolved. For Liddle and his clients, however, the issue remains unresolved.