Case Gives Insight Into Investor, Broker Disputes : Finance: Retiree has filed a federal lawsuit after most of her $1-million inheritance was lost in high-risk ventures.

When her stockbroker talked, Jean W. Jacobs listened. And now she says she is sorry she did.

Jacobs, 76, has always lived simply. In October, 1985, she inherited $1 million from her sister. She continued living in her modest mobile home in a trailer park in Santa Ana and entrusted the money to a local stockbroker, Joseph J. Squillaciotti, to invest.

Seven years later, Jacobs still lives in the same Kona Kai trailer park. But a substantial amount of her inheritance is gone, she says.

In a federal lawsuit in Los Angeles, the retired secretary and her two sons accuse Squillaciotti’s brokerage, Bateman Eichler, Hill Richards Inc., and its parent company, Kemper Securities Group Inc., of fraud, deceit, misrepresentation and racketeering.

Jacobs alleges that Squillaciotti squandered her inheritance in high-risk investments--including a stake in an ill-fated Santa Ana jazz bar and restaurant--for his own personal gain.

“I’m devastated,” Jacobs said. “I really am. I trusted him.”

A soft-spoken divorcee, she offers little elaboration during an interview. She is embarrassed and feels that she has been hoodwinked. She lives on Social Security and her remaining retirement savings.

The brokerage and its Chicago-based parent company are contesting the lawsuit. Kemper Securities has filed a motion to move the case from the federal court to securities arbitration proceedings, said Ellen Resnick, a spokeswoman for Kemper.

“There are always two sides to a story,” Resnick added. “We will tell ours in the appropriate hearing.”

Squillaciotti, who now works in Bateman Eichler’s Anaheim office, said that even though he wasn’t sued, his attorney has advised him not to comment.

Industry regulators at the National Assn. of Securities Dealers and the Securities and Exchange Commission say Squillaciotti, a senior vice president who has worked at the firm since 1981, does not have a disciplinary record.

The Jacobs case provides one of the few insights into the numerous disputes that investors have with brokers. Most differences are settled privately through binding arbitration, which many brokers require as part of their initial contracts. Arbitration has been particularly popular since 1987, when the U.S. Supreme Court upheld its use to settle these battles.

The number of disputes submitted for binding arbitration to the National Assn. of Securities Dealers, one of the industry’s regulators and its biggest arbitrator, totaled 4,150 last year, a 44% increase over the 2,886 disputes submitted in 1987. Nine other organizations also act as arbiters.

But Bateman Eichler has not yet produced a binding agreement signed by Jacobs, and her lawyers wanted to take the case to federal court because they believe she would get a full hearing and because the company would face punitive damages.

Her case is “sort of like an investor’s nightmare,” said Greg Tosi, one of her attorneys. “She was taken advantage of.”

Tosi said that Jacobs is a woman with little financial savvy who trusted her broker completely. Her dying sister, Marion Breuninger, had advised her in a letter in 1985 to avoid all risky investments with the inheritance money.

In early 1987, Jacobs said she decided to entrust her money to Squillaciotti, whom her son Paul, a 32-year-old nurse at a psychiatric hospital, met at an investment seminar.

Jean Jacobs said that she spoke with Squillaciotti infrequently, about once a year through 1991. Instead, Paul Jacobs stayed in monthly contact with Squillaciotti. But Paul Jacobs said he didn’t know that the investments that Squillaciotti chose were inappropriate, and he said that Squillaciotti constantly reassured him that the souring investments would recover.

“I felt like he had become a friend and he knew what he was doing,” said Paul Jacobs. “He also worked at a major brokerage house, and we thought they knew what he was doing.”

Squillaciotti lost the money in speculative deals including so-called junk bonds, real estate limited partnerships and a stake in a Santa Ana jazz bar and restaurant in which Squillaciotti was the managing general partner, the lawsuit alleges.

Since December, Tosi and attorney Joel Siegal have tried to track down Jacobs’ money.

“We believe all the money is gone,” said Siegal, who specializes in securities fraud. “It’s an outrage. She is a simple person, and she doesn’t need to be a partner in a jazz bar.”

They believe at least $50,000 was invested in the nightclub, called the Courthouse Restaurant and Bar. Squillaciotti urged Jacobs to invest in the jazz bar, “omitting that it was not a sanctioned investment,” Tosi said. The broker then began asking for more money, saying her investment would be lost otherwise, the lawyer said.

The restaurant went under in 1990, forcing a change in ownership, Jacobs’ attorneys say. Even without a recession, investments in restaurants are often considered risky, according to Tosi.

“Paul and I assumed it was authorized,” Jacobs said. “We didn’t know it was a personal thing. He even took us to dinner there.”

Tosi said that Squillaciotti also invested Jacobs’ money in insurance policies from Executive Life Insurance Co., which collapsed because of its money-losing junk-bond holdings.

Jean Jacobs’ son James became suspicious of the restaurant investment and other transactions last year. He wrote numerous letters to Squillaciotti and Bateman Eichler officials, but he said he never received any response.

Regardless of any evidence that Jacobs concurred on some of the investment decisions, Tosi asserts that the Jacobs family was not sophisticated enough to approve the investments that Squillaciotti made.

Tosi pointed out that Squillaciotti did not sign a brokerage agreement with Jacobs until December, 1987, well after the Jacobs account was opened. Therefore, Tosi said, a court trial would be more appropriate than the arbitration the defendants are seeking.

Either way, the Jacobs case could prove tough going.

The odds that a court filing will lead to a trial and result in punitive damages are not good, said Richard Ryder, publisher of the Securities Arbitration Commentator newsletter in Maplewood, N.J.

A May report by the General Accounting Office found only 23 cases in an 18-month period that went to trial, and none of those resulted in punitive damages, he said.

In arbitration, the customer and the broker agree to accept rulings on disputes by independent arbitrators such as panels of the National Assn. of Securities Dealers or the American Arbitration Assn., rather than take the case to court. In 1991, 55% of the cases were decided in favor of customers, according to the National Assn. of Securities Dealers.

More than 70% of all disputes go to arbitration mainly because it moves faster than the court system and the U.S. Supreme Court allows brokerage houses to require arbitration as part of customer agreements, Ryder said. But even in arbitration, a potential award could be big. In March, an arbitration panel in San Diego awarded a retired Coronado couple $1.93 million in a dispute with Prudential Securities Inc. for alleged fraudulent trading.

Under securities law, Squillaciotti was legally obligated to invest the inheritance in conservative investments appropriate for a retiree, Jacobs’ attorneys say.

Securities law requires that brokers find “suitable” investments for investors, he said. Brokerage houses typically have specific guidelines for brokers about investments for retirees and forbid transactions that are clear conflicts of interest, such as investing in a restaurant the broker owns.

The Jacobs case also prompted warnings from financial planners and other investment experts.

For retirees, the experts suggest that investments be conservative or safe because retirees do not have as much time to recover from financial losses. Investments that generate steady income, such as certificates of deposit, government bonds or utilities, have been standard recommendations.

“People have to be aware,” said Nancy Howard, a financial planner in Tustin. “Retirees have to be conservative. But it’s hard to know what is risky since some people have taken losses in what used to be safe investments.”

Diversity and liquidity are also important guidelines for retired investors, says Mark Matheson, an analyst at Cruttenden & Co., an investment bank in Irvine.

“The securities regulations require that the seller beware, not the buyer,” Ryder said.

The experts also warn investors to watch out for “churning” on the part of some unethical brokers. Churning is the unnecessary trading in stock or investments for the primary purpose of generating sales commissions for the brokers.

Tips on Finding a Good Investment Broker

* Interview more than one broker and find someone who handles accounts that are similar to yours, such as retirement accounts.

* Listen to the broker’s suggestions and see how they perform in the market before you actually invest.

* Read everything that the brokerage firm sends to you.

* Don’t sign agreements that contain large blank spaces in them.

* Don’t invest in anything that you do not understand.

* Realize that you are often signing away your right to go to court in most customer agreements, which call for binding arbitration panels to resolve disputes.

* Try to find a broker who doesn’t require arbitration.

Source: Hartley T. Bernstein, securities law specialist, New York

Bullish on Discipline

Formal complaints against stockbrokers have fallen since the stock market crash in October, 1987. But the more severe disciplinary actions, such as debarment and suspensions, have risen, and the value of claims and counterclaims hit a five-year high last year.

Individuals Barred or Suspended

‘87 ’88 ’89 ’90 ’91 263 270 565 577 749

Firms Suspended or Expelled

‘87 ’88 ’89 ’90 ’91 26 16 68 42 60

Note: As of March 31, 159 individuals had been barred or suspended and 10 firms suspended or expelled.

Customer complaints*

Cases in Jan.-March 1992: 1,209

Arbitration cases*

Cases in Jan.-March 1992: 1,130

* Not everyone who files a case for arbitration makes a formal complaint, and vice versa. Sometimes, though, the two overlap.

Disciplinary actions

Cases in Jan.-March 1992: 243

No Small Change

Nearly two-thirds of the securities cases filed are for amounts of more than $10,000: $1 to $10,000: 25% $10,001 to $50,000: 27% $50,001 to $100,000: 12% $100,001 to $500,000: 21% $500,001 to $1 million: 3% More than $1 million: 3% No amount disclosed: 9%

Soaring Claims

The value of all claims and counterclaims brought before the American Arbitration Assn. has seesawed dramatically, hitting a five-year high last year. Year: Amount ‘87: $81.0 ‘88: $266.8 ‘89: $116.2 ‘90: $84.3 ‘91: $329.4

Source: National Assn. of Securities Dealers , American Arbitration Assn.

Researched by Dallas Jackson / Los Angeles Times