Securities Arbitration Clinic Aids Small Investors

Securities Arbitration Clinic on Dan Rather Reports, December 16, 2009

View the clip here.

Description: Dan Rather continues his investigation into truck driver training schools,
this time in Michigan, where former trucking students claim they were defrauded out of
thousands of dollars for a new start that ended up to be a dead end. Also, small investors
who lost big to Wall Street giants try to get their money back.

KRISTEN O'CONNOR, STUDENT
This is something that ends people’s careers.

DAN RATHER (VOICE OVER)
AND IT’S LAW STUDENTS VS. WALL STREET IN THE WAKE OF THE
FINANCIAL STORM.

PROFESSOR KATSORIS
They try cases against some of the leading attorneys in the country. And this is
experience that you just could not duplicate. And they hold their own.

RATHER (VOICE OVER)
WE’LL BRING YOU THE NEWS. TONIGHT. ON DAN RATHER REPORTS.
*****
RATHER (ON CAMERA)
OVER THE PAST YEAR MILLIONS OF AMERICANS HAVE WATCHED THEIR
NEST EGGS DISAPPEAR – SOMETIMES OVERNIGHT – IN THE TURBULENT
FINANCIAL MARKETS. FOR THE MOST PART, INVESTORS GO INTO THE
STOCK MARKET KNOWING THE RISKS – THEY KNOW THERE ARE NO
GUARANTEES – AND THAT IF THEIR INVESTMENTS DROP IN VALUE, THEY
HAVE TO LIVE WITH THE LOSSES. BUT NOT ALL FINANCIAL LOSSES ARE A
NATURAL PART OF THE UPS AND DOWNS OF THE STOCK MARKET, SOME
INVESTORS ARE TAKEN ADVANTAGE OF OR THEY SAY, EVEN CONNED BY
THEIR BROKERS.

RATHER (VOICEOVER)
IN 2005 GERRY LANZALOTTO, A RETIRED FINANCIAL OFFICER LIVING IN
NORTHERN NEW JERSEY, WANTED TO INVEST SOME OF HIS LIFE
SAVINGS…SO HE CALLED UP CHARLES SCHWAB, THE NATION’S LARGEST
DISCOUNT BROKERAGE FIRM AND WAS CONNECTED TO A BROKER.

GERRY LANZALOTTO, INVESTOR
I'm basically a conservative investor. A traditional investor. And I said, "You know-- I
don't want to lose any money here. I want to make sure this is secured." And he
reaffirmed that. In fact, he said, "This-- this fund offers a minimal risk with a better than
average return.” I was very emphatic about being safe with the investment. Again,
because I'm retired. And- for me to lose a chunk of money would be difficult for me to
recover.

RATHER
Well when you started saving for your retirement, what were your goals?

LANZALOTTO
Financial independence. My intention was to-- to make sure I had enough to last me -
whatever my lifetime was gonna be.

RATHER (ON CAMERA)
HE SAYS HE WAS ACTING ON INFORMATION PROVIDED BY A BROKER
WHEN HE INVESTED 158 THOUSAND DOLLARS IN A BOND FUND
PROMOTED AS LOW RISK. HE SAYS THE BROKER’S PITCH WAS THAT HE’D
GET A SLIGHTLY BETTER RETURN THAN A SAVINGS ACCOUNT, WITHOUT
THE VOLATILITY OF THE STOCK MARKET.

RATHER (VOICEOVER)
THEN IN THE SPRING OF 2008 ITS VALUE TOOK A SUDDEN NOSEDIVE.

LANZALOTTO
Dramatic drop, it lost about like 19 percent…

RATHER
Well, you open it up and you say “19 percent."

LANZALOTTO
Wow. And then in a space of about a month and a half, in-- between March and April--
middle of April, I lost 23 percent.

RATHER
More than a fifth?

LANZALOTTO
Yeah. And-- and that isn't my definition of minimal loss or minimal risk.

RATHER (VOICE OVER )
THE FUND IS CALLED YIELD PLUS. SCHWAB DESCRIBED THE FUND AS A
"MONEY MARKET EQUIVALENT" AND AS A "SMART ALTERNATIVE TO
CASH." YIELD PLUS WAS MARKETED AS A GOOD INVESTMENT FOR
RETIREES, OR FOR FAMILIES THAT WANTED TO KEEP THEIR CASH SAFE
FOR FUTURE EXPENSES LIKE COLLEGE TUITION. IN 2007, THE YIELD PLUS
FUND WAS ONE OF LARGEST BOND FUNDS OF ITS KIND IN THE COUNTRY,
WITH ASSETS OF MORE THAN 13 BILLION DOLLARS. BUT IN MARCH OF
2008, ITS VALUE BEGAN TO SINK. TURNS OUT THAT WHILE SCHWAB
MARKETED YIELD PLUS AS SAFE, IT ACTUALLY HAD A WHOPPING 45% OF
THE FUNDS ASSETS IN MORTGAGE BACKED SECURITIES, THE RISKY
INVESTMENTS THAT BROUGHT ABOUT THE HOUSING COLLAPSE.
INVESTORS LIKE LANZALOTTO LOST A TIDY SUM.

LANZALOTTO
I wound up selling the fund-- and took a loss of about 30 percent. Roughly about a third
of the fund, 47, $48,000, something like that.

RATHER
If-- underscore the word if-- if he had said to you, "Understand this could go down 20
percent, could go down 30 percent, you're at risk of that kind of loss." Would you have
bought it?

LANZALOTTO
No. Categorically, unequivocally no.

RATHER (VOICE OVER)
LANZALOTTO SAYS HIS BROKER MISLED HIM AND HE WANTS
RESTITUTION. HE’S NOT ALONE. SINCE 2007, THERE HAS BEEN A 200%
INCREASE IN SECURITIES COMPLAINTS FROM INVESTORS WHO LOST BIG.
WEALTHIER INVESTORS WHOSE LOSSES ARE MORE THAN A HUNDRED
THOUSAND DOLLARS ARE LIKELY TO BE TAKEN ON BY A HIGH PRICED
SECURITIES LAWYER. BUT FOR THE AVERAGE JOE WHO LOST LESS, THE
OPTIONS ARE SLIM. JUST ABOUT THEIR ONLY CHANCE IS TO JOIN A CLASS
ACTION SUIT. AND LAWYERS EXPECT TENS OF THOUSANDS OF INVESTORS
TO DO JUST THAT. IN THE LAST TWO YEARS ALMOST 400 SECURITIES
FRAUD CLASS ACTIONS HAVE BEEN FILED AGAINST WALL STREET GIANTS
SUCH AS SCHWAB, OPPENHEIMER AND TD AMERITRADE. BUT THE ODDS
ARE THE SMALL INVESTORS ARE UNLIKELY TO RECOVER ANYTHING.
LANZALOTTO THOUGHT ABOUT JOINING A CLASS ACTION SUIT AGAINST
SCHWAB AND ITS’ YIELD PLUS FUND, BUT HE CHOSE ANOTHER COURSE…

CONSTANTINE KATSORIS, PROFESSOR AT FORDHAM UNIVERSITY
People have lost confidence in the markets. And-- and one of the things that people have
to know is that when they deal in the market, that the market is fair. And if there's-- a
wrong occurs, they should have redress.

RATHER (VOICE OVER)
CONSTANTINE KATSORIS HAS BEEN TEACHING THE INS AND OUTS OF
SECURITIES LAW AT FORDHAM UNIVERSITY IN THE HEART OF
MANHATTAN FOR 45 YEARS. IN 1999 HE HELPED FOUND THE SECURITIES
ARBITRATION CLINIC, A SPECIAL CLINIC DEVOTED TO HELPING SMALL
INVESTORS WHO’VE LOST MONEY DUE TO THEIR BROKER.

KATSORIS
So, if somebody-- can afford a lawyer, they should go to the organized bar. We're there
to screen cases of people who can't afford a lawyer-- and have had-- been wronged. And
we take them, and we take them all the way.

RATHER (VOICE OVER)
FORDHAM CLINIC IS ONE OF ONLY 14 SECURITIES ARBITRATION CLINICS
IN THE COUNTRY. WHAT MAKES IT UNUSUAL FOR INVESTORS LIKE
LANZALOTTO IS THAT THE BULK OF THE WORK IS HANDLED BY
STUDENTS. THAT’S RIGHT – LANZALOTTO WILL BE GOING UP AGAINST
CHARLES SCHWAB’S ARMY OF LAWYERS WITH THREE THIRD-YEAR LAW
STUDENTS.

ALEX POWIETRZYNSKI, STUDENT
I think the securities area is a hot topic right now. It's nice to be in the-- whatever the hot
area is. Because it's new, it's evolving, there's plenty of work to do, and there's plenty of
ways that you can effect change.

RATHER (VOICE OVER)
ALEX POWIETRZYNSKI ALONG WITH KRISTEN O’CONNOR AND JEREMY
SADKIN ARE THE THREE STUDENTS ASSIGNED TO LANZALOTTO’S CASE.
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KRISTEN O'CONNOR, STUDENT
We definitely think that he has a good case. Through what we've been doing here at the
clinic, we've gathered that the fund was invested in much riskier securities and a higher
percentage than Schwab had initially advertised.

RATHER (VOICE OVER)
EVEN THOUGH THEY’RE NOT YET PRACTICING ATTORNEYS, STATE LAW
ALLOWS THE STUDENTS TO REPRESENT CLIENTS AS LONG AS THEY’RE
SUPERVISED BY A LICENSED ATTORNEY. PAUL RADVANY, A FORMER
FEDERAL PROSECUTOR, IS NOW A LAW PROFESSOR AT FORDHAM
UNIVERSITY AND THE DIRECTOR OF THE CLINIC. HE OVERSEES THE
STUDENTS AND WORKS CLOSELY WITH THEM ON THE CLINIC’S CASES.

PAUL RADVANY, PROFESSOR AT FORDHAM UNIVERSITY
They have very close supervision throughout the process. So we can actually spend a lot
of time with our students and our clients to work on the cases. And not only train
budding lawyers in a way that's helpful to them, but also give representation to people
who really wouldn't have anywhere else to turn.

RATHER (VOICE OVER)
LANZALOTTO’S CASE IS ONE OF 10 CASES THE LAW CLINIC IS HANDLING.
THE STUDENTS COMMUNICATE WITH HIM ON A REGULAR BASIS AND SAT
DOWN WITH HIM ONE RECENT MORNING TO DISCUSS THE LATEST
DEVELOPMENTS IN THE CASE.

JEREMY SADKIN, STUDENT (IN MEETING)
At an arbitration you would never communicate directly with the other respondent.

RATHER (VOICE OVER)
THE STUDENTS DO JUST ABOUT EVERYTHING A LICENSED SECURITIES
ATTORNEY DOES – SUCH AS INVESTIGATE CASES, ANALYZE FINANCIAL
DOCUMENTS, ADVISE CLIENTS, AND ADVOCATE IN ARBITRATION.

RADVANY
Anyone who's worked with our students, or seen them in operation, you would think they
are real lawyers. Because they're so professional, they're so well trained, they're so--
present themselves so well-- that they do an amazing job

RATHER (VOICE OVER)
THE CLINIC’S PREPARATION IS RIGOROUS. IN THIS MOCK MEDIATION THE
STUDENTS TAKE ON THE ROLES OF THE PLAINTIFF, DEFENDANT AND
THEIR LAWYERS TO ARGUE BOTH SIDES OF A COMPLEX SECURITIES CASE.

SADKIN
That’s not ambitious, that’s unrealistic.

O'CONNOR
This is a huge deal. This is something that ends people’s careers.

RATHER (VOICE OVER)
BUT THIS ISN’T JUST A CLASSROOM DEMONSTRATION, THE STUDENTS
GAIN THE SKILLS THEY NEED TO BATTLE THE GIANTS OF WALL STREET --
AND IT SHOWS – THE STUDENTS WIN THE VAST MAJORITY OF THEIR
CASES. THE CLINIC HAS HELPED HUNDREDS OF INVESTORS -- IN THE LAST
YEAR WITH THE FINANCIAL CRISIS HITTING HARD, THEY’VE SEEN A 200
PERCENT INCREASE IN CALLS.

RADVANY
I think more and more investors are realizing that they were in inappropriate investments.
That often comes into light in times like this. Because they don't realize it until they get
their account statements and realize how risky the investments were.

RATHER
Now there are bound to be people who, I suspect a lot of people listening say, "Wait a
minute. When you go to a broker, you know there's gonna be a risk." So when you lose,
why do you have a legal case?

RADVANY
I think that's a fair point. I think for a lot of investors, they knew what they were getting
into. They understood the investments. They were told about the risks. But the investors
we represent, who weren't really told about the risk. They've lost a lot of money through
no fault of their own. And those people do have some redress for it.

RATHER (VOICE OVER)
IN ADDITION TO INVESTORS WHO DIDN’T KNOW THE RISKS, THEY ALSO
COME ACROSS UNETHICAL BROKERS.

RADVANY
They can be-- as bad as where a broker actually steals money from a client. So we had--
brokers who made up investment, took the client's money and basically ran. Sometimes
we have brokers who make a trade that the client never authorized. Sometimes ‘cause
they think 'cause it might benefit the client. But they're not really allowed to do that…
We also have cases where brokers, what we call, churn the account. In other words, they
make numerous trades of stocks solely for the purpose of gaining a commission, a fee for
themselves. But other cases are as, such as this one, where-- the company misrepresents
an investment or the risks of investments.

RATHER (VOICE OVER)
INSTEAD OF BEING TRIED IN A COURT OF LAW, THE CLINIC’S CASES ARE
SETTLED IN ARBITRATION BEFORE A FEDERAL REGULATORY AUTHORITY.
THE ARBITRATION HEARING IS THE CULMINATION OF MANY MONTHS OF
WORK AND A CHANCE FOR THE STUDENTS TO GO UP AGAINST THE BIG
BOYS.

KATSORIS
Our students get a fabulous experience from this, a clinical education. They try cases
against some of the leading attorneys in the country. And this is-- experience that you
just could not duplicate for--

RATHER
They're going up against the law firms? They're defending people such as-

KATSORIS
Oh, sure. Go against the f--

RATHER
Merrill Lynch?

KATSORIS
Absolutely--

RATHER
Charles Schwab?

KATSORIS
Absolutely. And they hold their own.

RATHER (VOICE OVER)
MOST OF THE CLINICS GOT THEIR START IN THE MID-1990’S WHEN THE
S.E.C. TOOK AN INTEREST IN HELPING SMALL INVESTORS. THEY GOT
ADDITIONAL FUNDING IRONICALLY FROM SETTLEMENTS NEW YORK’S
ATTORNEY GENERAL WON PROSECUTING WALL STREET FIRMS IN THE
LAST DECADE. THAT’S WHY 11 OF THE 14 SECURITIES ARBITRATION
CLINICS ARE AT UNIVERSITIES IN NEW YORK STATE – THE OTHER THREE
ARE AT UNIVERSITIES IN ILLINOIS, CALIFORNIA AND PENNSYLVANIA.
THAT LEAVES SMALL INVESTORS IN MOST OF THE COUNTRY WITH LITTLE
HOPE OF RESTITUTION. SOME MIGHT ARGUE THAT CLIENTS LIKE
LANZALOTTO ARE GETTING A BETTER DEAL THAN IF THEY’D BEEN
TAKEN ON BY A LAW FIRM.

O'CONNOR
There are three students and two supervisors assigned to this one case. At a firm, an
attorney could have many different cases. And the client wouldn't get the personalized
attention that he gets here at the clinic from us.

SADKIN
Having a client is a big responsibility. But it's one that I wanted to take on. It's easier for
me to wake up and come into the clinic and put in several hours of work because I feel
like it's going to something productive and positive and I'm helping someone.

RATHER
Well, how do you feel about your case being held by students? Did you go through a
period where you're saying, "What am I doing. I'm in the hands of these students. And
I've got $47,000 on the line."

LANZALOTTO
That’s a legitimate- that’s a legitimate concern and I got to tell you, I think-- they were
doing a very good job. In-- in my layman's eyes. I'm not an attorney so I can’t make
that, but I felt very comfortable in their hands. I still do.

RATHER (ON CAMERA)
OFFICIALS AT SCHWAB DECLINED TO COMMENT BECAUSE OF “ONGOING
LITIGATION.” THE STUDENTS WILL TAKE GERRY LANZALOTTO’S CASE
INTO ARBITRATION IN APRIL. THEY HOPE TO GET ALL OF HIS MONEY
BACK, PLUS INTEREST AND ALL RELATED FEES. DUE TO INCREASED
DEMAND FOUR MORE CLINICS ARE BEING OPENED AT UNIVERSITIES IN
MASSACHUSETTS, CALIFORNIA, FLORIDA AND WASHINGTON, D.C. I’LL BE
BACK IN A MOMENT WITH A FINAL THOUGHT.