Fordham Law

Amid Downturn, Law Students Give Aggrieved Investors a Day in Court

Paul Radvany in Chronicle of Higher Education, April 03, 2009

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Cru Ulrich doesn't pretend to be a financial-planning expert. But when an elderly couple turned to his law school's Investor Justice Clinic for help, he knew enough to be outraged.

The second-year law student at the University of San Francisco is trying to help the couple recover a significant chunk of their nest egg, which disintegrated when a broker talked them into investing $100,000 of it in risky bonds that wouldn't mature for 30 years.

Within four months, their portfolio's value had plummeted to $71,000. Panicked about the possibility of losing any more of their life savings, the couple sold the bonds.

Working under a law professor's supervision, Mr. Ulrich helped file an arbitration claim with the Financial Industry Regulatory Authority in February, seeking to recover the money the couple had ended up losing.

"The more the community at large learns that elderly and disadvantaged people are being taken advantage of, the more likely it is that we'll get some serious oversight and regulation," he says of the pending claim.

The University of San Francisco School of Law is one of at least a dozen law schools in the United States where students represent small investors facing big headaches, often because their brokers were more interested in maximizing their own commissions than in giving sound advice. Supervised by law professors, teams of students file motions, interview clients, and make their cases in hearings before arbitration panels.

Clinics that used to receive a couple of calls a week have fielded dozens in recent weeks, as investors realize the extent of their losses in the economic downturn. Many cannot afford to hire a lawyer, or their claim is too small to interest one.

Most of the clinics started in New York State, with support from settlements that a former state attorney general, Eliot Spitzer, won prosecuting Wall Street firms. More than a half-dozen law schools in the state, including those at Fordham University and Pace University, and New York Law School, now offer free clinics for small-time investors. Similar clinics are operating at Duquesne and Northwestern Universities.

The case that Mr. Ulrich is working on is typical. Edward and Jean Marnell, both in their mid-80s, sold their house in Stockton, Calif., several years ago and moved into a mobile home. In 2005 they turned to an adviser with Morgan Stanley for tips on how to generate income from their $100,000 profit on the sale.

Despite the fact that Mrs. Marnell had Alzheimer's disease and the couple needed immediate access to their money, the broker talked them into investing their savings in four 30-year corporate bonds, at least three of which were in the automobile industry.

"These corporate bonds were set to mature when the Marnells would be nearly 120 years old, and in the meantime, they needed the money to live off of and pay their medical bills," says Mr. Ulrich. "We're not alleging that the broker intentionally lost our client's money. But it does make me question whether he was incompetent."

A Morgan Stanley spokeswoman, contacted by The Chronicle, said the company "denies the allegations in the statement of claim and intends to contest them."

'A Very Difficult Time'

In a tanking market, part of the challenge for the student lawyers and clinic staff members is demonstrating that the outcome would have been different if the broker had suggested a wiser investment strategy.

The team working on the Marnells' case determined that if the money had been invested in a safer, more diversified manner, the portfolio would probably have grown $2,000 during that time.

William A. Jacobson, director of Cornell University's Securities Law Clinic, says his students take a similar approach to calculating how their clients' portfolios might have performed. "Even in this horrible market, you might have been down," he says, "but not by 50 to 60 percent."

Generally, when people open brokerage accounts, they sign an agreement that they will handle any conflicts through a dispute-resolution panel. But investors who try to handle cases themselves are often overwhelmed by legal and financial jargon.

"Obviously, in this period of collapse, that clinic is a beacon," says Jeffrey S. Brand, dean of the San Francisco law school. Business has also picked up at the school's other clinics, such as those dealing with claims of predatory lending and employment discrimination.

"This is a very difficult time for students as they watch the economy collapse," says Mr. Brand. "They're rightly concerned about their well-being. It's important to provide them a means to feed their mouths, but also to nourish their souls and spirits."

Robert E. Talbot, a law professor who heads the Investor Justice Clinic, says many of its elderly clients fall prey to telephone pitches. "A lot of these people are lonely, and the callers are charming," he says. "They get into a trusting state and buy the product, and then all of a sudden there's a financial downturn and they've lost the money."

Small Potatoes, Big Thrill

Law-school clinics take on cases that private-practice lawyers won't bother with because the potential for recovery is too small. "Maybe someone lost $40,000 of their life savings of $80,000, and they talk to a few lawyers who won't take it," Mr. Talbot says. He says that with idealistic, energetic students, he is "thrilled" to take on such cases.

Resolving such a case usually takes longer because students are learning on the job, but clients who have nowhere else to turn rarely complain.

At Cornell, "there's no question we're at capacity," says Mr. Jacobson, director of the Securities Law Clinic, which opened last year and has received about three dozen calls from investors this academic year. The clinic can take only a handful of cases — many have to be rejected because they are from out of state — and the ones they select tend to be time-consuming.

Last year Duquesne's law clinic handled four cases, but as of this March it had taken on nine.

The Securities Arbitration Clinic, at Fordham's law school, recently won $23,000 in compensatory damages and $44,000 in punitive damages for an elderly couple who had been defrauded out of $25,000. Their broker had "basically stolen" their money by making phony investments with it, says Paul B. Radvany, a clinical associate professor who directs the clinic. Ten students juggle about a dozen cases there now.

Kate Moore, a second-year student, is one of four students preparing a case for arbitration in April. Their client gave a family friend $50,000 to invest in a venture-capital deal that turned out to be fraudulent. The client had told the friend that she hoped to make enough money to help her sister pay for college. He had assured her, she said, that even in a worst-case scenario, she would get all of her investment back. Instead she has received only $6,000 back from the defendant and his partner, both of whom have been jailed on fraud convictions related to the clinic's case.

"You hear about so many cases that are fueled by greed, with family friends even stealing from close acquaintances," says Ms. Moore. "When I'm reading about people like Bernie Madoff, I can feel that I'm doing something good to help someone who has been a victim."