Arbitration Makes Flood of Brokerage Claims Unlikely.

THE recent conclusion of a couple of high-profile arbitration cases raises the question: Will Wall Street be inundated with investor arbitration claims contending that brokerage analysts did them wrong? Will investors en masse charge that stockbrokers, following the recommendations of brokerage analysts, herded them into lousy stocks, benefiting not the investor but the brokerage's underwriting department?

Likely not, said Phil Aidikoff of the Beverly Hills law firm Aidikoff & Uhl. Aidikoff is a 20-year industry veteran of the arbitration wars and president-elect of the national Public Investors Arbitration Bar Association, a group of lawyers who represent investors in claims against stock brokerages.

True, the number of such claims is rising -- and a recent successful case against Internet sector analyst Henry Blodget of Merrill Lynch & Co. garnered a lot of attention. But much militates against any one investor filing a claim, said Aidikoff.

First off is the simple cost of litigating.

"The reality is, if the loss is less than $50,000, generally speaking, it will be difficult to find a lawyer to take the case," said Aidikoff.

Obviously, an investor maintaining diversity in a portfolio will be unlikely to have $50,000 in a single stock, unless the investor is well-heeled. So a number of claims that might have merit are simply too small to litigate in a cost-effective way, said Aidikoff.

Part of the problem is that investors are compelled by federal regulations and brokerage contracts into binding arbitration, usually conducted by a three-member panel under the auspices of the industry-financed National Association of Securities Dealers. "Those panels almost never award attorney's fees," said Aidikoff, noting rules requiring that one member of the panel be an industry representative. Punitive damages are extremely rare, too.

As a result, the vast majority of analyst bias claims are shunted to the circular file. "In general, we take about one in eight cases brought our way. But with claims of analyst bias, it is much less than that," he said. "I looked at a very interesting claim recently, but the loss was only $8,000. It was not worth pursuing."

Still, practical cases are popping up. In the Internet bubble of 1998-1999, stockbrokers "got caught in the tech euphoria," and thus advised clients into positions heavily concentrated in tech stocks recommended by brokerage analysts, said Aidikoff.

So when several criteria are met -- a loss larger than $50,000, a stockbroker who advised concentration to boost gains, and an analyst whose "buy" recommendation is conflicted by a specific investment banking relationship -- then a claim might thread the needle and bring a settlement, said Aidikoff.

The iffy nature of arbitrating means that the process will probably never be a big enough stick to beat Wall Street into reforming its system of research, said Aidikoff. "Most likely, arbitration awards will just be considered a cost of doing business," said Aidikoff. "But it remains the only redress available for investors."

It's Not Butter

The last one standing gets to claim the name. That is how Beverly Hills-based boutique investment bank Imperial Capital LLC will retain the word "Imperial" in its name, while its two larger corporate progenitors, Imperial Bank and Imperial Credit Industries Inc., drop their monikers.

The ultimate parent of Imperial Capital was Los Angeles-based Imperial Bank, which begat Imperial Credit, the diversified business lender based in Torrance, back in the mid-1990s, when it was forced to spin off the subsidiary by federal regulations.

Then, in 1997 Imperial Credit acquired a controlling stake in a then-struggling investment shop, Dabney Resnick, changing the name to Imperial Capital.

But last year Detroit-based bank Comerica Inc. bought Imperial Bank (actually, its holding company, Imperial Bancorp), and is now getting around to changing the name. And Imperial Credit, in the throes of a major restructuring, will soon change its name to Southern Pacific Bank.

"So we are going to keep the name Imperial Capital," chuckled Jason Reese, president of the 90-employee shop.

By any name, times are sweet at Imperial Capital, due to its longstanding strengths in the junk bond and restructuring business.

"There is a lot of dislocation in the market, meaning there are a lot of distressed bonds, and a lot of institutions that either want to buy or trade those bonds," said Reese. Imperial Capital has retained a cadre of junk-bond researchers and traders expert in finding, or finding a home for, junk bonds, said Reese.

In keeping with its past, Imperial Capital today is handling investment banking work for troubled companies, including a recent assignment to design a financial restructuring of Frederick's of Hollywood Inc., the lingerie house, said Reese.

On the investing and research side, Reese said, opportunities abound in convertible bonds which no longer offer any conversion value, because the stocks into which they were supposed to convert have sunk so much. Many investors want to dump such bonds, as they bought them hoping for a conversion upside. "But the bonds still offer attractive yields, and are trading at 50 to 60 cents on the dollar. They are interesting just as straight bond purchases, if you think the credit is good," he said. Yields to maturity on such convertible bonds, sometimes in as little as four years, can exceed 20 percent, said Reese.

The Nose Ring Factor

When you see employees with pierced eyebrows, buy the company's stock?

A few months back, Michael Pachter, head of research for Wedbush Morgan Securities in downtown Los Angeles, told us he liked Santa Monica-based video-game software maker Activision Inc., which subsequently tripled on Wall Street. Pachter reasoned that introduction of new hardware by game makers, such as Nintendo and Microsoft Corp., would lead to a flood of new software. So far, Wall Street likes the story.

Okay, so what does Pachter like now? Certain retailing stocks, including City of Industry based Hot Topic Inc., which he describes as "music-inspired merchandising." Retailing to the tattoo crowd, Hot Topic "gets it" with on-target products at its 316 mall-based stores, and even hiring "smart people who can't get jobs anywhere else because they have tattoos and pierced eyebrows," said Pachter. "But if you talk to those kids, they are really smart."

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," published by Bloomberg Press.