The specter of the dreaded margin call reared its ugly head for many investors as the markets tumbled last month, but that was just a preview of the legal snarls to come, say a growing number of securities lawyers and state and federal regulators.

The wave of margin calls that accompanied April's stock slides will spawn a significant increase in legal challenges against brokerages, firing up a debate over whether investors are adequately told about their rights -- or lack thereof -- when they borrow money from their brokers to buy stocks, the lawyers predict.

But while investors historically have won relatively few arbitration claims based on margin-call disputes alone, securities lawyers say that may be about to change. "In every contract there's a standard of reasonableness," says New York securities attorney Ted Eppenstein.

Indiana investors' attorney Mark Maddox agrees, mostly because securities arbitrators, who are more likely to hear a margin case than a traditional court, may side with investors who've been sold out of holdings to satisfy a margin call if the brokerage's decision to do so is deemed unreasonable.

The scores of investors who leaned on margin -- borrowed capital from brokerage firms to finance stock transactions -- were beaten badly in April. As a result, many needed to kick in more cash to satisfy brokers' lending requirements or have their stocks sold off.

Investors readying claims say they weren't given time to satisfy margin calls before brokerage firms liquidated their accounts and they weren't notified that they'd fallen below margin requirements until after brokers had sold their holdings, lawyers involved in the case say.

Even though standard margin agreements clearly give brokers authority to sell investors' holdings with no prior notice, lawyers say most investors mistakenly believe they have hours or days to make up any margin deficiencies before that happens.

"The events of the last 30 to 45 days are going to be the first real increase in case filings that you can attribute to a specific product in many, many years," Maddox says. "My phone's been ringing off the hook."

New York attorney Bill Singer and Eppenstein say they're seeing the same response from margin account customers.

And investors are contacting state and federal securities regulators nationally to complain about being sold out of holdings in margin calls, according to the

North American Securities Administrators Association

and the

Securities and Exchange Commission

.

Securities firms that extend margin debt, however, insist their disclosure of margin rules to investors is already sufficient. "This is made clear when you open a margin account. That account may be liquidated and there is no obligation to notify the client," says

Securities Industry Association

spokeswoman Margaret Draper.

Brokerages have a dual duty to serve not only their investing customers, but also investors in the brokerage itself, says Glen Mathison, spokesman for discount broker

Charles Schwab

.

Schwab discloses its right to liquidate the accounts of margin customers in boldface in margin agreements, Mathison says. "We have been as generous as we possibly can be in those

margin call situations."

Margin rules are perhaps of greater interest to American investors now than at any other time, as securities buying on margin exploded to record levels early this year.

Outstanding debt issued for margin buying reached almost $300 billion for stocks traded on the

NYSE

and

Nasdaq

. That's almost three times the margin debt of just two years earlier. After April's market plunge, margin debt levels for NYSE member firms dropped from $278 billion in March to $252 billion.

Bottom-Line Concerns

Interest income from margin lending has become a lucrative business for brokerage firms, representing an average of 10.5%, and individually as much as 26%, of revenues at some major retail brokerages last year, according to a survey completed by

Salomon Smith Barney

.

Maddox says he thinks brokerages should be more selective in extending margin, but said the margin interest revenue possibilities work against that. "Most of the online firms will basically extend margin to anyone with a few thousand bucks and a pulse," he says.

Maddox and Singer agree investors have a widespread misperception that brokers must give notice before liquidating a customer's securities to satisfy a margin call.

Singer, who's expressed concerns to the

National Association of Securities Dealers

regulatory arm over margin practices, says margin agreements that better disclose brokerages' liquidation rights would aid both investors and brokerages.

The SEC has a simple piece of advice for investors when it comes to margin: Don't ignore the fine print.

"We are paying a fair amount of attention to the margin issue," SEC spokesman Chris Ullman says. "We are encouraging people to read the disclosure given to them very closely."