A.G. Edwards loses arbitration hearing

A St. Louis physician filed claim against A.G. Edwards due to losses she sustained from investments in technology sector securities recommended by the company’s representatives. She claimed that the investments were not appropriate based on her risk tolerance and understanding of the investments.

An arbitration panel of the National Association of Securities Dealers agreed, saying A.G. Edwards failed to properly supervise the accounts because of the broker’s dual role as both supervisor and active broker. The firm was ordered to pay more than $243,000 to the investor in compensatory damages in the May 18 judgment.

However, the panel awarded no punitive damages, “under the belief that Edwards will review the wisdom of having a co-manager of a large branch attempting to service 1,000 accounts while still providing appropriate branch supervision,” according to the NASD Dispute Resolution.

Joseph D. “Chip” Sheppard of Springfield law firm Carnahan, Evans, Cantwell & Brown PC, who represented the plaintiff, had the case referred to him by a colleague in St. Louis. He said that he and his client, who he declined to name, have mixed feelings about the result.

“We’re very pleased that we got anything because the process is biased in favor of the firms,” Sheppard said. “We should have received punitive damages, but the panel decided that A.G. Edwards would change its procedures just based on an award of actual damages, and I don’t think that will happen in a million years.”

The procedures Sheppard referred to involve the dual role of investors such as Gerald Cooper, the broker named in the case, as both a co-manager responsible for supervising several other investment managers and a broker personally handling nearly 1,000 client accounts.

Sheppard questioned both the wisdom and the ethicality of allowing one person to have both jobs.

“The other problem I had with the setup was that the supervisor/policeman – the one who’s supposed to be policing the other financial consultants – is getting heavily compensated based on the profitability of those same people he’s policing,” he said. “So how is he supposed to shut those people down for inappropriate conduct when he could be making money from that conduct? It’s a conflict of interest.”

Sheppard added that punitive damages would have to have been “somewhere between $10 million and $50 million” to be truly punitive for Edwards.

But Janis Prewitt Auner, business professor at Drury University and a former arbitrator, said she thinks awards like the one in this case do have an impact.

“I’ve seen it in a couple of the big cases that caused a nationwide change in policy,” she said. “I think what the panel was doing was saying, ‘You had a conflict of interest. It wasn’t really illegal; it just didn’t represent your client very well. So we won’t award punitive damages, but we strongly encourage you to change your practice or else you are going to get hit.’”

Arbitration and mediation hearings are nothing new for NASD; in fact, they’re becoming more prevalent.

The number of NASD arbitration cases has increased 66 percent since 1998. Award amounts also have jumped, from $76 million in 2000 to $194 million last year. Auner said high-profile cases such as Enron and Worldcom have made investors more aware of what she calls “corporate irresponsibility.”

“We’re now aware that people aren’t always ethical, and we’re all a little nervous. So once securities start going sour, you say ‘What’s going on here?’” she said.

A spokesperson for A.G. Edwards was unavailable for comment by press time.

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