PAYBACK TIME; SMALL INVESTOR MAKES BROKERAGE FIRM PAY FOR ITS ERRORS.

Byline: Deborah Adamson Daily News Staff Writer

In the spring of 1995, David A. Smith received a cold call from a broker telling him about a great stock. Little did Smith know how costly that phone call would be.

The 26-year-old recent college graduate from West Los Angeles ended up losing $4,550 on the stock and countless hours trying to get it back. That's because rather than accept his losses, Smith fought back and in the end, won a small-claims court decision that forced a major Wall Street brokerage to pay him back.

Smith's saga reads like a storybook full of lessons: Beware of unsolicited telephone sales pitches. Be persistent, especially when you know you're right. And modern-day Davids can still slay Goliaths.

``I was going up against a giant,'' said the soft-spoken and bespectacled Smith, whose mild manner belies his determined streak. ``When they started to manipulate and lie, I got so upset, I wanted to fight this as much as I could.''

Bear, Stearns officials wouldn't comment on the case, instead issuing this statement: ``Mr. Smith obtained a small claims default judgment against Bear, Stearns in a case in which we believe we had been improperly served and had meritorious defenses. In addition, an identical case filed by Mr. Smith in the same court had been previously dismissed.''

Smith's odyssey began on a seemingly innocuous note - he opened an account with A.S. Goldmen in New York at the urging of a cold-calling broker in early 1995. A few months later, his broker moved to A.R. Baron and wanted permission to continue handling his account. Smith moved his business to A.R. Baron.

At the time, he held about $5,000 worth of Skylands Park Management shares, a recommendation from A.S. Goldmen, and cash. When his account started dropping, Smith ordered his broker to sell the stock. No problem, the broker said.

But when he tried to contact the broker soon after to confirm the trade, he found out the broker had quit. In the meantime, A.R. Baron employees claimed they couldn't find his account.

``What do you mean you can't find it?'' Smith said to them, incredulously. ``I have a Social Security number, I have an account number.''

Did A.R. Baron lose track of Smith's account? Not likely, according to the president of an agency created by federal legislation that pays back investors up to $500,000 in the event their brokerage firm goes bankrupt. The agency is funded by the securities industry.

``They didn't want to sell his stock,'' said Michael Don, president of the Securities Investor Protection Corp. In general, corrupt brokers ``keep the stock price up because someone in the firm has a big position in it.''

When the stock reaches a certain level, the brokerage executive will dump it and ordinary investors will be left holding the bag - a declining stock. That's a standard con among disreputable firms, Don said.

In Smith's case, his stock kept dropping, but no one could sell it because they claimed that they couldn't find his account. A.R. Baron pledged to keep looking.

His broker finally called him back in September 1995. He said he had moved to another place of employment and wanted to handle Smith's account again. Smith agreed to the plan, hoping the broker would now find his account.

But his broker vanished again, having left his new employer. Smith contacted the National Association of Securities Dealers, which couldn't find the broker since he had left his last job. Smith wrote the New York Attorney General's Office to find the broker's address and phone number. What he got back was confirmation of his broker's transient nature: He had held 11 jobs in eight years.

They weren't just small unknown firms either. Among his employers were Dean Witter, D.H. Blair, Shearson Lehman Bros. and Prudential-Bache. One Century City firm he worked for was The Boston Group, underwriter of the initial public offering of Studio City-based Jerry's Famous Deli, among others.

In the summer of 1996, a representative of A.R. Baron told Smith he had found Smith's account, not in an overlooked computer database but in a stack of files. The bad news: The $5,000 account was now worth $453.

Smith said the A.R. Baron employee promised to make up the lost money in a couple of trades. He asked Smith for more investment money. A.R. Baron even promised to let him in on a few IPOs.

A manager, trying to assuage Smith's concerns that their brokers don't stay with them long, assured him that the ones they were currently employing would be around for a long time. But Smith just wanted his money back. He was tired of being strung around.

Within a month, A.R. Baron filed bankruptcy. To his surprise, his account with his remaining $453 was automatically transferred to Bear, Stearns. Bear, Stearns did not ask for Smith's permission.

He filed a claim with the bankruptcy trustee in charge of the A.R. Baron case but it was rejected. The trustee wrote that since Smith's loss came from his allegation that A.R. Baron did not execute a trade, it was not covered under the Securities Investor Protection Act of 1970. The SIPA gives the Securities Investor Protection Corp. the power to pay claims.

It was highly ironic that SIPC wouldn't insure his losses. After all, on his account statements - between the A.R. Baron and Bear, Stearns names - was the name Securities Investor Protection Corporation. He felt protected seeing that moniker, even if he didn't know how far the protection extended. Smith found out the hard way that fraud is not covered.

So Smith turned his sights on Bear, Stearns. He wanted the firm to take responsibility for his losses since they were the clearing agent. After all, their name was on his account statements and his broker's solicitation letter emphasized A.R. Baron's relationship with the Wall Street powerhouse. Smith said that lent confidence to his dealings with A.R. Baron - to his loss.

One of the key points that swung the case in Smith's favor were similarities between his account statements from A.R. Baron and Bear, Stearns. Both even used the same account number, giving strength to Smith's contention that A.R. Baron and Bear, Stearns enjoyed a closer relationship than met the eye.

``(Bear, Stearns) takes lots of profit and lends credibility to small firms that don't deserve that credibility,'' Smith said.

Clearing agents are firms that actually execute trades which investors place with their brokers. The agent may be a subsidiary of the firm or an outside company. Major brokerage firms, such as Bear, Stearns, clear their own trades and also provide the service at a fee to smaller shops.

``It's very common,'' said Laurie Doherty, branch chief of enforcement at the Securities and Exchange Commission in Washington.

Smith had a rough start in court since he was serving as his own attorney. He had to file the case twice because he didn't list all the defendants in the first filing.

Then, he didn't realize that the court date was on Rosh Hashana, a Jewish holiday, until the day of the hearing. As an observant Jew, he couldn't use the telephone that day to tell the court he couldn't attend or to postpone the case. The judge dismissed the case.

Smith refiled the case. A new court date was set for early 1998 and this time, Bear, Stearns attorneys didn't show up. Smith won the case by default.

Bear, Stearns appealed the ruling, saying it did not know of the new court date. In fact, in a sworn testimony, under penalty of perjury, a top executive from Bear, Stearns' legal department said he called Smith but they did not discuss the details of claim against the firm or any upcoming hearing dates.

But Smith produced telephone records showing that he called Bear, Stearns, not the other way around, and talked with the executive for 36 minutes in an attempt to settle the case.

Smith's mother testified at the appeal that she was listening to her son's telephone conversation without the Bear, Stearns' executive's knowledge. His mother, an attorney who hadn't practiced law for years, also submitted a declaration that the executive discussed the case with her son but didn't want to settle it. She said the executive ended the call by saying that he would see Smith at the hearing Friday.

``I finally had the upper hand,'' Smith said. ``They were playing so dirty.''

In March, the judge ruled against Bear, Stearns. Smith got his $4,550.

While it's less cumbersome to win a judgment in small claims, and have it affirmed in Superior Court, Bear, Stearns' loss should be a warning bell to other clearing agents, said J. Kelly Strader, a law professor at Southwestern University who specializes in white-collar crime.

``They better be careful who they clear for,'' he said.

Today, A.R. Baron is no more. It was shut down by federal regulators and the company is being liquidated, according to SEC officials. Last December, former executives and employees pleaded guilty to bilking investors out of $75 million from 1991 to 1996. They lied to investors, manipulated small stocks and initial public offerings, the SEC said.

Federal authorities are investigating Bear, Stearns' relationship with A.R. Baron, according to the Manhattan District Attorney's Office. The New York U.S. Attorney's Office declined to comment on the case.

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Photo: (Color) David Smith of West Los Angeles won a judgment against Wall Street giant Bear, Stearns over the handling and loss of his money.

Gus Ruelas/Daily News