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Imperfect Advocate: Investors With Gripes Gripe About a Firm That Pleads Their Case

November 14, 1995

It’s a seductive pitch to injured investors who distrust lawyers: A firm led by former brokers _ not lawyers _ will represent you in your brokerage dispute, pledging low fees and high returns.

Investors Arbitration Services Inc. guarantees clients refunds of their upfront retainer fees if it doesn’t accept their case, loses it or can’t settle it. In a promotional tape set to singer Cyndi Lauper’s ``Money Changes Everything,″ IAS Chairman William Levine boasts that ``we know what’s under the carpet because we used to be the carpet cleaners.″

But a group of IAS clients and former employees complain that the Woodland Hills, Calif., investment-recovery firm has instead found a variety of ways to take them to the cleaners.

Some clients say IAS, after accepting a fee but failing to file a claim accepted by an arbitration forum, wouldn’t repay the fee. Some say IAS made procedural blunders. And other clients claim that IAS browbeat them into settling cases quickly for meager amounts.

``These people were burned by their broker. Now they’re being burned by their representative,″ says Stuart Berkowitz, a St. Louis lawyer who has taken over several cases for former IAS clients. ``These are all small-potato people, and most of them have lost their life savings.″

The complaints don’t come just from clients. Alan Friedenthal, a former IAS vice president and senior case manager, says he seethed last year at a stack of about 15 stale claims sitting on the desk of Michael Paule, then IAS president. The firm had accepted the cases but deemed them to have scant chance of a recovery, and it had neither filed a claim nor returned the clients’ retainers, Mr. Friedenthal says. A former enforcement lawyer with the Securities and Exchange Commission, he recalls bristling: ``Mike, this is wrong ethically, it’s wrong businesswise _ it’s just wrong.″

Mr. Paule says, ``We had some cashflow difficulties. ... Refunds weren’t always made as quickly as we would have liked.″ But, he adds, ``there weren’t any stale claims. In all the cases ultimately rejected by the firm, those moneys were returned to the client in full.″

IAS rejects the other criticisms as well. Mr. Levine, the chairman, contends Mr. Friedenthal is among several disgruntled ex-employees who ``have been working in concert to seek retribution for their dismissals by vilifying IAS.″ The firm has won more than $13 million for clients in six years, adds Sheldon Dubow, executive vice president, who notes: ``This is $13 million the hard way _ 20s, 30s, 40s and 50s. We’re the champion of the small guy.″

The furor comes amid a broader controversy about whether nonlawyers ought to be allowed to represent investors in arbitration cases at all. Investors generally must agree when they open an account to arbitrate any dispute rather than go to court. Until the late 1980s, few investors were represented by anyone other than a lawyer. While nonattorney firms still handle just a small portion of cases, such firms clearly are growing, and IAS is the largest of them. It claims to handle 30 percent of new arbitration cases filed in Florida with the National Association of Securities Dealers and 10 percent of new NASD cases in California.

Some critics question the competence of nonattorney advisers to deal with an increasingly complex securities-arbitration process. Lawyers complain, for one thing, about the lack of oversight. ``If we do something wrong, we’re out of here; if they do something wrong, they just move on to the next victim,″ charges H. Thomas Fehn, a Los Angeles lawyer. He sued IAS in Los Angeles superior court, alleging that it engages in the unauthorized practice of law, but the suit was dismissed. The Securities Industry Conference on Arbitration, which drafts arbitration codes, refused a recent push to bar nonattorneys.

Clearly, it is in the interest of securities lawyers to question competitors’ skills. Securities work is a big business for the bar. The number of arbitration cases filed by investors against Wall Street firms has exploded in recent years, and so has the number of big awards _ awards in which the lawyers share.

But they aren’t the only critics. Even at the NASD, the forum for the bulk of arbitrations, senior officials have expressed reservations about how nonattorney investment-recovery firms do business.

IAS does hire lawyers to handle at least some cases, in a bid to counter the criticism. ``These damn lawyers and Wall Street forced me to get into this mode,″ Mr. Levine says. ``Wall Street plays the legal game _ so we play the legal game.″

What IAS also plays, according to some clients, is a waiting game. Maureen Lupachino says she hired IAS in 1993 after she and her late husband lost more than $500,000 _ their entire retirement nest egg _ with a financial planner in Sun City, Ariz., who put much of their money in oil and gas limited partnerships.

Ms. Lupachino, 65, says she paid IAS a $2,000 fee, to be returned if her claim didn’t go to a hearing or get resolved. Months passed without a word, she says, and when she pressed, she was told her case was ``progressing.″

After more than a year, Ms. Lupachino continues, she got a call from Bruce Garfield, an IAS case manager, telling her the financial planner had hired a big Phoenix law firm and was threatening to sue her and IAS. ``We think you really should withdraw″ the case, she says he told her. She eventually did. She adds that IAS refuses to return the retainer, saying it has done plenty of work in the matter.

Mr. Garfield denies pressuring Ms. Lupachino to yank her claim; he says IAS couldn’t pursue the case because it lacked the proper account documentation from the client. ``I didn’t want her to withdraw, but we didn’t have a choice,″ Mr. Garfield says. ``To be honest, I thought she was refunded the money,″ he adds, but ``I didn’t know if she was entitled to it or not. I didn’t know the procedure for refunds.″