Investor Wins $10 Million in Penny-Stock Broker Case

NEW YORK —  In one of the largest securities arbitration judgments ever, a Pasadena physician won a $10-million punitive damage award against four principals of the defunct penny-stock brokerage Stratton-Oakmont Inc.

Philip M. Aidikoff, attorney for Dr. F. Clark Gardner, said he believes it is the largest punitive award that an individual investor has ever won in an arbitration case before the National Assn. of Securities Dealers.

Aidikoff, in an interview Wednesday, said the award is also significant because it fixed responsibility on the firm’s principals even though there was no evidence that they had direct dealings with Gardner or knowledge of his investment history with the firm.

Gardner had accused the firm of failing to supervise a broker who allegedly “churned” the doctor’s account, made unauthorized trades and led him into risky investments that lost more than $184,000. The arbitration case, filed in October, was heard in Los Angeles.

Arbitration cases rarely produce judgments as large as those awarded in courts. Aggrieved investors and their attorneys complain that securities industry rules force them into arbitration, and that arbitration panels are often biased in favor of the industry.

However, the industry denies such bias, and says that a significant portion of arbitrations are won by investors. NASD also defends the process as faster and less costly than the courts.

Stratton-Oakmont, based in the town of Lake Success on New York’s Long Island, filed for Chapter 11 bankruptcy protection last January, leaving an estimated $5 million in mediation and arbitration judgments unpaid. A federal judge rejected the company’s application for Chapter 11 and ordered it to liquidate. NASD had expelled the firm in December, citing a history of disciplinary problems, including charging excessive commissions and using boiler-room tactics in the sale of risky securities in which the company itself was sometimes a market-maker.

Punitive damages of $4 million were assessed against former Stratton-Oakmont President Daniel M. Porush and $2 million apiece against Jordan Shamah, vice president; Andrew T. Greene, corporate secretary; and Steven P. Sanders, identified as chief trader and direct supervisor of Gardner’s broker. The four were found collectively liable for compensatory damages of $184,583 for Gardner’s losses, plus $24,375 in interest.

Sanders’ attorney, Amal Aly, called the award against her client highly improper. Sanders, Aly said, was a salaried employee, not an officer or owner of Stratton-Oakmont, and was not even Weber’s supervisor.

“There is absolutely no basis for asserting liability against him,” she said. Aly said Sanders’ only avenue of appeal is to petition a court to vacate the award, an option he is considering but has not yet decided upon.

None of the other defendants or their lawyers could be reached for comment Wednesday night.

Gardner, 51, contended that he was gulled into risky and inappropriate investments by broker Samuel R. Weber, who solicited the physician’s business in a “cold call”--an unsolicited telephone sales pitch--in November 1994.

Weber could not be reached for comment Wednesday.

Weber, according to Gardner’s complaint, promised Gardner that he would protect him from loss by immediately selling any stock that declined in value by $2 a share.

But later, after Gardner had invested thousands of dollars in thinly traded stocks, Weber repeatedly refused to sell when Gardner told him to, the complaint states.

Gardner’s case was bolstered by tapes of his phone conversations with Weber. In one conversation, in October 1995, Gardner asked Weber 23 times to sell a particular stock, the complaint states.