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Re: Getting Re-Screwed
Chapman, Spira & Carson

From: Robert Spira
Date: 2/16/99
Time: 7:08:21 AM


Sue, basically you are right. SIPC will take care of a certain amount of cash and securities that you do not get back when a brokerage house fails, but will not be responsible for your market loses. This is not illogical.

While SIPC sets limits on how much may be recovered from a single account, many brokerage firms have purchased additional insurance, covering up to $10 million per account and more under special circumstances. We would wonder though, if for instance, Merrill Lynch or Smith Barney went out of business if there is enough money in the world to cover what would be lost if it was all stolen.

Back to the issues at hand. So we find out after the fact that the stock has been rigged and when the brokerage house fails, the stock goes to little or nothing. SIPC doesn't want to take care of the loss, the NASD, the FBI, the SEC and the State are all over the firm's principals for security fraud and these guys face big-time jail terms which may give you some satisfaction but won't get you one penny back.

What do you do?

Well, the first thing that may be available is suing the principals. In law and primarily in securities law, they have acted as what we call "control persons" and for that reason you are able to pierce the "so called" corporate veil and go after them individually.

What makes up a control person has not been particularly defined, but it would certainly be a senior officer, possibly a director and usually a substantial share holder in the brokerage firm or possibly in a holding company which owns the brokerage firm. Generally speaking, these guys knew at the unset that they were only going to be able to get a way with fleecing the public for a limited time and were squirreling away whatever they took from the very start. A top flight lawyer can probably not only win the action but find the money as well. These guys are expensive but it is an alternative.

One other possibility that has only popped up recently is the vulnerability of the "clearing firm". In the SEC's case against Bear Stearns, the SEC seems to be saying that the brokerage firm knew or should have known that its correspondent, (brokerage firm clearing through it) in this case A. L. Baron, was doing naughty things and that the clearing firm should have made them stop of stop clearing. Kind of a constructive nuisance. They seem to indicate that the fact that Bear stood by and allowed clients of that firm to get fleeced is a crime. Thus, we have developed a new deep pocket.

Clearing firms are usually larger and more prestigious then their non-clearing counterparts and they don't want to get caught up in an action involving a bunch of sleazy criminals. It may be that you can make your point with them either through logic or legal action.

So Sue, maybe there isn't a Santa Claus, but there is hope.

Last changed: March 17, 2000