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Let's say you're a


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brokerage customer, and two years ago, at the urging of your broker, you bought a bunch of


shares. Your broker iced the deal by bragging about how the firm's hotshot telecom analyst, Jack Grubman, kept predicting the stock was going to the moon.

Two years later, your investment in WorldCom is practically worthless, as the telecom giant struggles to emerge from bankruptcy. Grubman, meanwhile, has been drummed out of the securities business -- exposed as being nothing more than a Wall Street version of a snake-oil salesman.

It's a situation that describes the predicament facing many investors who got burned buying stocks based on Wall Street hype, whether they got hit by Grubman's questionable turnabout on


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or one of the more outlandish buy recommendations on


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So what's the best way for investors to exact a measure of revenge against Wall Street? Should you file

an arbitration claim against an analyst and his brokerage firm, or join one of the dozens of class-action lawsuits that have been filed in the aftermath of last year's investigation into tainted stock research?

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The Art of Arbitration

Is Class Action Right for You?

There's no right or wrong answer to choosing a legal strategy. A lot will depend on the extent of your losses, the strength of your claim and the amount of time you're willing to devote to pursuing the matter. Joining a class-action suit probably makes the most sense if your losses are small, you rarely read an analyst's report from cover to cover and you don't have the time or patience to work closely with an attorney.

Unlike an arbitration, a class-action requires little work on the part of an investor. Trial lawyers do all the heavy lifting in a class-action and foot all the expenses that are associated with bringing the case. Basically all an investor needs to do is agree to be a part of the "class" of litigants and await the outcome.

Of course, you often get what you pay for with class-action litigation.

"The advantage to class-actions is that you can sit back as an investor and do nothing. You risk nothing because you haven't put any money or time into the litigation," said Rick Ryder, editor of the

Securities Arbitration Commentator

. "It's a good lazy man's process."

Mountain of Documents

Arbitration, by contrast, often is a drawn-out process that can involve days of testimony and require an investor to produce a mountain of documents to support a claim. Worst of all, if the damages incurred by an investor aren't sizeable, most lawyers won't take your case -- no matter how meritorious it might be.

But statistics gathered by Ryder and others show that if an investor has a good claim against an analyst or broker, he or she will likely fare better in arbitration than a class-action. In arbitration, investors tend to get back anywhere from 50% to 60% of their out-of-pocket losses in cases that result in either a settlement or an award. By contrast, the most investors in a class-action can hope to receive is about 5% of their actual losses.

One reason investors don't fair as well in class-action litigation has a lot to do with the impersonal nature of most shareholder litigation. Legal experts say that since plaintiffs' lawyers have little or no contact with the investors they represent, attorneys have little incentive to negotiate more lucrative settlements.

The arms-length nature of most class-action cases is one reason many mass consumer suits often don't return much in the way of cash. The settlements in those lawsuits often require manufacturers to provide consumers with coupons to buy more of the very same product they are often suing over.

"Wall Street firms tend to do better in class-actions because they can get rid of lots of claims at a low cost," said Jonathan Kord Lagemann, a New York securities lawyer and a former general counsel for a small brokerage firm. "And they settle for a pretty low recovery rate."

The odds are also pretty good that an investor with anything resembling a legitimate claim will at least get something back in arbitration. Last year, arbitration panels awarded damages to investors in roughly 56% of the cases they heard, according to the NASD, the securities industry's main self-regulatory agency. And that figure doesn't include the hundreds of arbitrations that end each year in a settlement, well before a hearing got under way.

Sweating the Details

But arbitration requires an investor to roll up his or her sleeves and invest a little sweat equity into the case, and that could be time an investor might want to spend elsewhere.

"Our view is that the people we represent want a voice at the table," said J. Boyd Page, an Atlanta securities lawyer who favors arbitration over class-action litigation. "If a client doesn't want to be personally involved and be a really active participant, then I'm going to tell him you really need to look at the class-action."

Page currently represents dozens of investors who intend to file arbitration claims against Grubman and Citigroup in the coming weeks. Many of those investors claim they lost anywhere from $50,000 to $150,000 on telecom stocks that Grubman was touting and Citigroup brokers were pushing as solid investments.

Now, normally an investor who has a beef with a brokerage firm or an analyst wouldn't even get the chance to choose between arbitration and class-action. That's because the overwhelming number of disputes in the securities business get resolved in arbitration -- a private, quasi-judicial process. As a general rule, class-action lawyers avoid getting entangled in disputes between investors and brokers because the claims often turn on each investor's own particular circumstances -- something that renders them unsuitable for mass litigation.

But the Wall Street-tainted research scandal has opened a new avenue of opportunity for class-action lawyers because so many investor claims involve a common allegation of an analyst wantonly hyping a stock. That's why class-action lawyers have been filing class-action lawsuits over tainted brokerage research even before the terms of last year's $1.4 billion industrywide settlement have been finalized.

At last count, dozens of class-actions have been filed against Grubman and Citigroup's Salomon Smith Barney brokerage division.

Merrill Lynch


, the former home of Internet guru Henry Blodget, is a defendant in more than 150 class-actions.

More lawsuits and arbitrations are expected to follow, once securities regulators release the internal emails they gathered during their massive investigation into the stock research practices at a dozen Wall Street firms. Merrill Lynch, for instance, is expecting such an onslaught of arbitrations that it has been advertising on

, an online employment service, looking to hire part-time lawyers to defend its interests.

But even with regulators expected to dump all of Wall Street's dirty laundry out in the open, prevailing in an arbitration or class-action won't be easy. It's worth remembering that one of the first "tainted research" lawsuits -- a class-action filed against

Morgan Stanley


and its online analyst Mary Meeker -- was quickly dismissed by a federal judge.

To win, investors will need to show that they relied on an analyst's stock touts in deciding to buy a stock. And since most investors deal primarily with a broker, not an analyst, that will be difficult to establish. It's not enough for an investor to simply say they heard that a high-profile analyst like Grubman, Blodget or Meeker were bullish on a particular stock.

"I believe you really need to show reliance on a research report," said Jill Gross, director of the securities arbitration clinic at Pace University School of Law. "In other words, an investor would not have purchased a stock if not for the recommendation."