The often-cloistered stock market business could be in for some tumult.
One of the oddities of the securities industry is that nearly all employees, from stock brokers to traders, right up to top-flight investment bankers, sign binding arbitration clauses with brokerages.
The U-4 forms required by the National Association of Securities Dealders specifiy that in employer disputes and certain disciplinary matters, the NASD shall serve as arbitrator. The industry-financed NASD provides three-person panels to resolve disputes or customer complaints against brokers.
But last week, the Securities and Exchange Commission ruled that U-4 forms do not compel employment discrimination cases based on race, sex or age into arbitration. With the ruling effective in 1999, such employees have a green light for discrimination lawsuits.
In some regards, the arrangement of binding arbitration, while perhaps too cozy, makes sense. Many disputes between employees and brokerages, or customers, are technical and financial. The slow-moving civil courts may be a difficult forum in which to resolve such financial issues.
But few ever contended that the NASD was an ideal body for resolving complaints about racial discrimination, or sexual harassment, which is legally considered a form of employment discrimination. Women's groups, in particular, have criticized a male-dominated arbitration system for squelching harassment complaints.
Recognizing this, and the fact that U-4 forms merely say that employment disputes will be settled in arbitration rather than explicitly stating that employees have given up their rights to jury trial in discrimination matters the SEC made last week's ruling.
However, there may yet be a way to avoid a flood of lawsuits, said David Bartholomew, partner at Long Beach-based Keesal, Young & Logan, a preeminent securities-industry defense firm. He agrees that existing U-4 forms are not valid to compel employees into arbitration on discrimination matters. But the forms can be reworded, said Bartholomew.
"As it stands, if an employment contract, or U-4, makes it explicit that an employee is consenting to binding arbitration, even in discrimination matters, then those contracts will stand up," said Bartholomew, citing certain U.S. Supreme Court cases.
Last week, NASD spokeswoman Nancy Conlon concurred with Bartholomew that newly worded U-4 forms could effectively reestablish the status quo despite the decision by the SEC to change matters.
The SEC ruling is too recent to result in action by most brokerages, and industry officials reached last week had no substantive comment. The NASD is taking a wait-and-see attitude. "I don't think all of them will do that (merely reword U-4 forms), but some of them will," Conlon said. "It will be up to the employees to sign those (reworded) forms, or not."
The spirit of St. Louis
The 110-year-old St. Louis-based A.G. Edwards Inc. brokerage has been known for generations as a "retail" shop, which is to say that it plied stock underwritten by others to ordinary investors.
But over the years, things have changed, and A.G. Edwards now has investment bankers, institutional clients and a 12-person Los Angeles corporate finance office, led by Managing Director Roderic "Rod" Essen. A 20-year industry veteran, Essen brings a national distribution system with more than 6,300 brokers and institutional salesmen to Los Angeles-area middle-market companies.
"That's what's different about us from other major firms. We will look at a company that has a market cap of $60 million. The other major firms won't pay attention to almost anything under $100 million," Essen said.
Essen, who opened the A.G. Edwards office here early last year in the Library Tower building in downtown Los Angeles, works in M & A; deals, private placements and public offerings.
A little more than 40 percent of A.G. Edwards' underwritings are sold to retail investors, much higher than the industry average, said Essen. New York-based Donaldson Lufkin & Jenrette Securities Corp., for example, sells virtually only to institutional investors, such as mutual funds, pension funds and insurance companies.
By Essen's reckoning, that's an advantage for A.G. Edwards. Retail investors tend to be "stickier," and don't sell troubled stock quickly, the way mutual funds are wont.
"In fact, we have research that shows retail investors often use a bad quarter to buy (a depressed stock)," said Essen. For companies considering going public, that means a more-solid investor base.
They do things differently up in Malibu, and if you don't think so, just talk to Ken Luskin, former stockbroker for 15 years with Bear Stearns, Morgan Stanley and Smith Barney and now head of his own money-management shop, Intrinsic Value Assets Management LLC.
"If you are a money manager, I don't think you should get paid unless you beat the S & P; 500," he said. "With my clients, I get paid 20 percent of all returns in excess of the S & P; 500." Performance-based compensation in money managing is extremely rare outside Malibu.
Be that as it may, Luskin likes to buy depressed stocks in companies that nonetheless have good technology. One he likes now is Immulogic Inc., which will soon test humans for a "cocaine vaccine."
This is a company that has lost money since Merrill Lynch took it public at $14 a share in 1991. Morgan Stanley underwrote a secondary offering at $22.75 a share in 1992, and in 1995 Hambrecht & Quist underwrote yet another common stock offering at $10.75 a share. Now the stock trades at about $1.80.
Having burned Wall Street, and badly, the $2 million-in-sales Immulogic has completely lost its sponsorship, as they say.
But Luskin sees a future. "The vaccine works by stimulating the body's fight against the molecules of the drug, in this case, cocaine. The aroused immune response prevents the drug from reaching the brain."
On the horizon: A vaccine against nicotine, the narcotic found in cigarettes, said Luskin. "That's the huge market. They just started with cocaine, because they got a grant from the National Institute on Drug Abuse a few years back."
Contributing reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His e-mail address is firstname.lastname@example.org.
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