Disgrunted Merrill Clients Find Friends at Local Firm

Wall Street West

by Benjamin Mark Cole

It was just a two-inch by three-inch ad buried deep inside the Los Angeles Times, but it represents a financial torpedo aimed at the securities industry.

The tombstone reads in part, “If you have lost money purchasing technology or Internet securities between 1999 and 2000 at Merrill Lynch ” and ended by soliciting a phone call to the law offices of Aidikoff & Uhl in Beverly Hills.

Phil Aidikoff, founder and nameplate partner at the firm, said response to the ad has been “tremendous.”

Merrill Lynch, of course, faces prosecution by New York State Attorney General Eliot Spitzer, who recently released e-mails in which Merrill analysts privately dismissed certain stocks as “crap,” while simultaneously touting them to the public.

“We knew for a long time these conflicts (between analyst’s true and stated opinions) existed… but until Mr. Spitzer released the e-mails, we never had the proof,” Aidikoff said.

Now, investors who used Merrill want retribution from their former broker, creating a surge in business at the four-member Aidikoff & Uhl. “We are adding staff, looking to hire more lawyers,” he said.

Under federal law, disputes between customers and brokerages are brought into binding arbitration, usually under the aegis of the National Association of Securities Dealers. And the $100 million or so that Merrill is expected to fork over as part of the Spitzer settlement could be peanuts next to arbitration decisions and settlements with burned investors.

Spitzer has also vowed to scour other brokerages’ e-mails. “It is just a matter of time before some more shoes and that is shoes, plural drop,” said Aidikoff, who also is president of the Public Investors Arbitration Bar Association.

Few investors complained when stocks were rising through much of the 1990s, Aidikoff said. But they got antsy when they started to lose money, and when they read in the newspapers that they were duped, they head for the nearest lawyer. “Now, we are really, really busy,” Aidikoff said.

Converting Converts

Long a meek hybrid among investment thoroughbreds, convertible bonds have become a lot more popular on Wall Street, as both investors and issuers look for ways to hedge themselves against the unknown. Convertible bonds are corporate IOUs that can be exchanged for stock under certain conditions.

In 1995, only $17 billion of convertible bonds were issued by U.S. companies a number that grew steadily through the rest of the decade, but exploded to more than $100 billion last year. This year looks like it will break last year’s all-time record, said Dave Johnson, chief operating officer for Los Angeles-based Froley Revy Investment Co., a money manager that has specialized in convertible bonds for more than 25 years.

For a generation, it was usually non-investment grade outfits issuing convertible bonds, offering high yields and the chance for an big upside “equity kicker” to offset risk. But the big boys are now issuing them. By 2000, nearly 60 percent of convertible bonds were issued by investment-grade companies, according to Convertbond.com.

Among the largest issuers of convertible bonds in 2001 were Verizon Communications, Merrill Lynch, Tyco International and General Motors. Notably, Enron Corp. made the top 10 list with a $1.3 billion zero coupon bond in January of 2001, before the company gave new meaning to the term “zero coupon.”

Everyone is hedging their bets, explained Johnson. Issuers think they will be able to increase stock prices sometime in the next few years, when the bear market ends. If prices rise enough, lenders will convert their bonds into equity and poof! away goes the debt. On the other side, convertible bond buyers want some yield while they wait for that day, and if that day never comes, at least they got that yield while waiting.

Additionally, said Johnson, there has been a huge increase in the number and size of hedge funds that buy convertible bonds and then short the underlying stock. If a stock goes down, they make money on the short position, while collecting interest on the bonds. If the stock rises, they make money on the convertible bonds (and interest), if taking a hit on the short position. If effectively executed, such a strategy should “stabilize” returns, Johnson said.

In a big bull market, everyone wants stocks. In a sustained bear market, nobody does. But in a choppy market like today’s, “we should continue to see a good amount of investor interest in convertibles,” predicted Johnson. “They offer a defensive posture and yield.”

Analyst Recommendations

Though little known to investors, there’s an industry group for securities analysts the Charlottesville, Va.-based Association for Investment Management, which has been advocating regulations that would limit the conflicts faced by brokerage analysts, also known as “sell side” analysts.

The brokerage industry has been accused of having analysts who always put out “buy” recommendations to draw in the profitable investment banking business and that business would be lost if a brokerage put out a “sell” signal on a company.

James Lyon, managing principle for equity investments for Oakwood Capital Management in Century City, is president of the Los Angeles Society of Financial Analysts (AIMR’s local chapter) and a strong advocate for industry reforms being contemplated by Congress. Lyon forcefully endorses recommendations made last week by AIMR to alter the sell-side environment.

In a nutshell, the 57,000-member AIMR called for analysts to be paid based upon their performance as stock pickers not on how much investment banking business they help drum up.

For Lyon, it’s a big issue. If the investing public loses faith in stocks, the country will be the loser, he said. “The public’s faith in Wall Street may be harmed by brokerage analysts recommendations, as well as the financial reporting issues raised by the Enron case,” said Lyon. “When the integrity of the capital markets is called into question, this can only hurt capital formation… which is critical to job formation.”

Fewer investors means more-expensive capital and less growth, Lyon said. “You don’t want to fool with that.”

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at

[email protected].