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Opinion by Kathy Kristof : Personal Finance Law students fill gap in securities arbitrations

Opinion by Kathy Kristof
Tucson, Arizona | Published: 10.15.2006
After the last dollar was drained from Grace Purnia's investment account, the 74-year-old retiree responded to a securities lawyer's television advertisement that offered to get her money back.
There was just one problem with her case against her investment adviser: Purnia didn't lose enough money.
Purnia, a former file clerk from Fontana, Calif., had lost her life savings, but that amounted to less than $63,000. The TV attorney she consulted said she had a strong case but politely declined to help.
That's a common occurrence, experts say, for even clear-cut securities cases. They can cost tens of thousands of dollars to take through arbitration, the most common way to resolve serious legal disputes between brokers and their clients.
Fortunately for thousands of investors like Purnia, there is another alternative.
About a dozen law schools offer securities arbitration and mediation clinics. The clinics, launched in New York less than a decade ago, take small cases like Purnia's free of charge.
The arbitration cases are prepared by second- and third-year law students, under the supervision of seasoned lawyers. The students may represent the investor at hearings or complete the case through written filings.
The clinics have no interest in competing with the securities lawyers who represent investors for a living, said Margaret M. Flint of the John Jay Legal Services clinic at Pace University's School of Law in White Plains, N.Y. They aim to help only low- and moderate-income individuals whose losses are too small to interest a securities lawyer.
The John Jay clinic, for example, won't handle a case for anyone earning more than $75,000 annually or whose securities claims exceed $50,000.
Several other universities, such as the University of San Francisco, where Purnia sought help, have even lower limits. USF says it takes only cases that involve losses of less than $25,000. Its clients should earn less than $50,000.
But that limit is loose, said Robert Talbot, who heads USF's Investor Justice Project. Purnia's case exceeded the limit but met all the other criteria.
The tougher standard to meet is determining whether the client has been the victim of wrongdoing, he said.
"It's not enough to lose money," the law professor said. "We go through cases, analyze them and decide whether the investor's rights have been violated. Sometimes we won't take a case because even though the investor lost money, no one did anything wrong."
To seek an arbitration award for a securities violation, investors generally must prove that their broker ignored their wishes, put them in unsuitable investments or traded solely to generate commissions for the broker rather than profits for the investors, Talbot said.
Purnia's situation filled the bill.
She retired from a $12-an-hour job at Kaiser Permanente in 1996, when she was 65.
Kaiser cashed out her retirement account, which gave her a check for $63,078.99. She had never before invested but had no other source of income. She contacted Smith Barney, the brokerage arm of Citigroup Global Markets Inc., on the recommendation of a friend.
Initially, her broker did exactly what she asked, according to her complaint. She said she needed $500 a month to supplement her monthly Social Security check. And she told the broker that she had no ability to absorb a loss.
The broker put her money in bond mutual funds and money market accounts that paid $500 to $650 a month. Purnia paid an upfront fee to get into the bond funds, and the only other cost was a $40 annual maintenance charge.
In 2000, the broker convinced Purnia that she ought to give him discretionary trading authority and switch to a "wrap" account, in which he would do everything for a set annual fee. She said that she didn't understand but that she'd trust him.
The maintenance fee for Purnia's account went from $40 annually to more than $500 every three months, the complaint said. Worse yet, the broker switched her out of the staid fixed-income investments into growth stocks, which quickly lost three-quarters of their value.
Unbeknown to Purnia, her monthly stipend of $500 a month was then being generated by the sale of her securities, not from the investment income earned on her account.
"The account was just dwindling away," Purnia said. The broker's secretary "called me up and said, real apologetic, that they were just going to have to cash me out."
Without her investment income, Purnia has had to live the last three years on Social Security. Her son, a plumber, helped her make ends meet by paying her utility bills.
"Grace literally lost everything," said Brett Alcala, a San Mateo, Calif., lawyer who represented Purnia at the arbitration hearing. "She had $22 in her checking account when we were sitting in that hearing. She lost her entire retirement nest egg."
The students at USF believed that there was serious wrongdoing in how she lost her money. The school ignored its rule about taking only cases worth $25,000 or less and filed a claim for more than $72,000 — the value of Purnia's investment, plus interest.
The school has no budget to go to court, however, so it contracted with Alcala to take the case to arbitration. Purnia granted Alcala permission to be paid a portion of the damages if she won the case.
And she did. The settlement, awarded this year, was about $60,000. After court costs and fees, Purnia will get just over $33,000.
● Contact Kathy Kristof by e-mail at kathy.kristof@latimes.com or by mail at Kathy Kristof, c/o The Los Angeles Times, 202 W. First St., Los Angeles, CA 90012.
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