THE SECOND BATTLE OF TRENTON
On July 22, 2005, Rand Groves was back in Trenton, in the Superior Court of the State of New Jersey, Mercer County, Civil Division, courtroom 3E. The kids were off from school, so he brought the whole family—his wife, his wife’s mother, his two teenage sons, and his daughter. This was judgment day, the final reckoning on his case, as set forth in his motion for summary judgment and Merrill Lynch’s cross-motion seeking the same thing. The hearing was scheduled for ten o’clock in the morning. The courtroom door was locked at the appointed hour, so Groves and his family waited quietly in the sunny corridor, calm and orderly amid a few dozen squawking, disorderly litigants from a domestic-relations tribunal down the hall. Groves was in his best suit, the children dressed as if for church. Things were looking up. He was reasonably optimistic.
After a protracted search, he had found a lawyer willing to take on his fight against Merrill Lynch on a contingency, pay-only-if-you win, fee arrangement—a feisty small-town lawyer named G. Martin Meyers. It was an egregious case, Meyers believed. Fabricated evidence, crucial blank tapes. It was, when it came to the facts, the kind of case lawyers dream about. On the law—well, that was something else entirely. Anyone looking at this case objectively would suspect—no, would know—that this case simply flew in the face of decades of carefully constructed jurisprudence that made it all but impossible for an investor to overturn an arbitration on appeal. That was a point that Merrill Lynch emphasized, quite persuasively, in its twenty-three-page brief arguing for dismissal of the case. The law had changed, for the better most legal scholars would argue, since those distant days of ancient history when George Washington met with his generals across the street.
After the First Battle of Trenton had ended in victory for the colonists, the British regrouped and attacked from the north. Washington was outnumbered, his troops were melting away, and he simply could not afford to lose Trenton to Lord Cornwallis, who had marched in from Princeton. The British attacked at a creek called Assunpink. They were repulsed. They attacked again and were repulsed again. Each time the line was held with heavy losses to the British. Had Cornwallis stormed the bridge, Trenton would have been lost—and with it, possibly, the revolution. The entire course of world history may well have been decided right there, at a little creek in New Jersey. With his troops holding the British at the creek, Washington decided on the evening of January 2, 1777, across the street from the courthouse, to move his troops along country roads and outflank the British. He attacked from the rear, near Princeton, and won a glorious victory.
With the triumphs in Trenton and then Princeton, a string of American defeats and retreats had come to an end. Several generations of American students (including the Trenton High School class of 1903, which erected that plaque across from the courthouse on Washington’s Birthday, 1902) would learn that their independence, their freedom, was guaranteed by the Second Battle of Trenton, a crucial turning point of the Revolutionary War.
Groves needed at least as unlikely a victory in order to succeed for a second time in Trenton. He was cautiously optimistic. He had no other choice. His losses in 2000 and 2001, for which he blamed Merrill, had sent him into a financial tailspin. He had found a job in Florida, but he owed money to the New Jersey tax people as a result of his long-vanished options nest egg. Much depended upon reversal of the arbitration case and, hopefully, restoration of the money that he felt was lost because of Merrill’s negligence. He had to win, and now that he was in an American courtroom, instead of a Wall Street arbitration forum, he firmly believed that fair play would prevail.
Judge Mary C. Jacobson was a last-minute replacement for another judge who had recused himself. Groves and his lawyer had not asked for the recusal, and they did not know why it had happened. It was, in a strange way, reassuring. Fundamental principles of American justice require that judges not preside over cases in which they have a conflict of interest, or even an appearance of a conflict of interest. Potential jurors are questioned closely to exclude those with any connection to the parties. This rigorous pursuit of fairness is one of the things that make lawyers, and even some laypeople, misty-eyed about the American court system. “Fundamental fairness” and “due process” are not mere clichés. They mean something. They are a reality.
By the middle of 2005, George W. Bush’s plan for an Ownership Society had receded into memory, as his Social Security privatization plan met sustained opposition in Congress and was, for the time at least, moribund. Trade associations for the securities and mutual fund industry, for whom this would be a massive boon, planted stories in the media advancing the preposterous theory that they could not profit from the “low fees” promised by Social Security privatization. (Ignoring the principle that one penny multiplied by a trillion is at least as advantageous as ten billion multiplied by one dollar.) Still, the ethos that the president had encapsulated remained alive. The stock market was coming back to life, slowly. The Street was cranking up its advertising. Microcap stocks were booming. People were forgetting the kinds of complaints they had, the ones that Groves had unsuccessfully advanced just a few years before.
Neither Groves nor Meyers knew a thing about Judge Jacobson. They knew that she had been an assistant attorney general, which they viewed as a plus. When the courtroom doors opened, they and Groves’s family sat in the courtroom waiting for her to rule on motions in three other cases, and the two men had an opportunity to assess her demeanor. She was an obscure jurist of middling reputation—ranking 175th out of 366 judges in a New Jersey Law Journal survey of lawyers several months before. But she seemed anxious to bring up her score (8.01 versus a statewide average of 7.85). She was cheerful, pleasant, courteous. A good judge.
Judge Jacobson appeared to be a compromiser, a conciliator, a “split the baby” judge. You might even think, when their time came and she proceeded to rip Groves’s case to shreds, that she did so reluctantly. You could almost sense that she wanted to say, “Yes, Rand Groves. I will grant you some kind of relief. I will consider the evidence again, overturn what was unfair, and make things right for you.” Maybe she didn’t feel that way. But she seemed to feel that way, and appearances count, at least for a little, when you are facing financial ruin and your only immediate legal recourse is being flushed down the toilet.
The law was against him. Merrill Lynch had made that point. Reading the brief that Merrill filed, one could see that Merrill was…well, “right” doesn’t seem to fit. Merrill was correct. Groves and his lawyer had hoped that the sheer weight of the adverse facts would carry the day, that and a more expansive reading of New Jersey arbitration law than this judge (or, quite possibly, any judge) was willing to provide.
Groves was impassive as he walked out of the courtroom after the judge ruled from the bench, being careful to thank the attorneys for both parties for their cogent, well-written briefs. His family showed no emotion as their breadwinner lost his absolutely, positively (appeal being a distant long shot, though it would be tried) final chance at overturning an arbitration decision that they considered, with some justification, to be manifestly unfair. These were well-controlled, perfectly behaved, nice people who did not believe in public displays of emotion.
New Jersey law—black-letter law, the lawyers say—made winning this case all but impossible. The New Jersey Arbitration Act, N.J.S.A. 2A:24-1, et seq. is so strong as to crush almost any challenge to an arbitration decision, no matter how unfair. Its four major provisions allow courts to overturn arbitration decisions only in cases of corruption or misconduct or refusing to hear evidence. The fact that brokerage customers such as Groves have no choice in the matter—either agree to arbitration or be gone—is not recognized by the law.
Groves’s case had hung by its fingernails on ten words from subsection (c) of the act—an arbitration may be overturned as a result of “any other misbehaviors prejudicial to the rights of any party.” A little wiggle room there, in that “any other” language. Erasure of the tape—the one with the “gotcha” moment, which was, to Groves, proof that evidence was fabricated by the broker—simply didn’t make the grade. Merrill had argued, and the judge agreed, that the arbitrators had heard that “gotcha” moment and didn’t need the tape. Besides, even if the tape had been available, it didn’t matter. Merrill Lynch made that point in its brief: “Under the Arbitration Act,” Merrill argued, “a court cannot vacate an arbitration award because it disagrees with the arbitration panel’s findings of fact or conclusions of law.” Again, the judge agreed. Again, it was a hard point to contradict. The law was as clear as a bell. Many cases said the same thing. Some cases even said that an erased tape was not sufficient to get a case overturned. The law is the law.
Judge Jacobson could not substitute her assessment of the broker’s credibility for the arbitration panel’s—and Meyers could talk about “blatant admission of fabrication of evidence” until he was blue in the face. It didn’t matter. The law was against him. The arbitrators were not required to disbelieve witnesses just because, as the judge evenhandedly put it, “his credibility is called into question.” “Nobody has shown me any case law saying that,” said Judge Jacobson. Again, correct.
Rand Groves had lost his second battle of Trenton long before he stepped into the courtroom—not by days or months but by decades. His loss went unnoticed in the financial press, which as usual was focusing on the nuts and bolts of American capitalism—the swaying, terrorism-wary markets; the ongoing saga of Morgan Stanley’s executive reshuffling; and, buried inside, the latest spasms from the perennial Dick Grasso saga. Maybe Grasso would settle. Maybe Grasso would not settle. The media was pulling petals off daisies on this one. Dick Grasso, two years after his departure, was still large bore. Arbitration was small bore, old news, no story. Groves did not exist, not for the regulators and certainly not for Wall Street, now that he had been sucked dry and tossed aside. Not even NJBIZ published a follow-up.
Three weeks after Groves’s defeat, my repeated requests for comment from the firm and Ross came to naught. Then I received the following email from Merrill Lynch spokesman Mark Herr:
Mr. Weiss,
I understand you wish to talk about the litigation brought by Mr. Groves against Merrill Lynch and our employee, Lew Ross. Is it fair for me to assume that you know that an arbitration panel found for Merrill Lynch and Mr. Ross and denied Mr. Groves’ claims? In a similar vein, is it fair for me to assume that you are aware, further, that when Mr. Groves sought to have the panel’s ruling in favor of Merrill Lynch and Mr. Ross set aside by a Superior Court judge in New Jersey state court, the judge in that proceeding also found for Merrill Lynch and Mr. Ross?
Yes, it would be fair. Or, to use a better word, correct.
Some weeks later, Herr sent me another email setting forth Merrill’s position on the Rand Groves case. Clearly, Merrill was fed up with Groves and sick and tired of his bellyaching. “There is no reason to believe Mr. Groves was treated unfairly or that his case had any merit,” said the statement. As far as Merrill was concerned, the hearing before Judge Jacobson in Trenton, the one that was conducted on razor-thin legal grounds and was doomed before it started, was akin to a full-blown trial on the merits. Groves had had “two bites at the litigation apple and both times impartial tribunals rejected his theories.” In Merrill’s view, the one-sentence decision, the one Judge Jacobson had called “frustrating” in its brevity, was a complete vindication, a finding that its broker Lew Ross “did nothing wrong.” Groves’s appeal was framed in grotesque terms, setting forth, Merrill alleged, “a conspiracy theory worthy of Oliver Stone and just as inaccurate, untrue and false.” Note the rhetorical use of repetition, with the word “inaccurate” used with two synonyms of identical meaning, underlining the righteousness of Merrill’s position and its justifiable anger at the courtroom depredations of its ungrateful ex-client.
Groves read the statement, which I sent to him for his comment, with his usual combination of stoicism and anger. (Or, as Merrill might have put it, with “anger, upset and dismay.”) It was a gross distortion of the record, he told me. It was unfair. Still, the damage had been done, and he wasn’t about to get upset about yet another insult, another injustice. Groves was pressing on with an appeal of Judge Jacobson’s ruling, still hoping for a miracle, and prepared to file for bankruptcy.
The media had not forgotten Wall Street—that it could chew up and spit out the small fry. A little more than a week after Groves lost his second battle of Trenton, on July 31, 2005, the newsmagazine show Dateline NBC led off a two-hour broadcast with a fourteen-minute segment on what it described as a particularly invidious peril to all investors.
“He was just a man with a dream—a dream that came true—his hot new invention—backed by Wall Street,” said the announcer, his voice over images of an ordinary-looking man, middle-aged, wearing steel-rimmed glasses—the spitting image of Rand Groves. “I was worth forty-two million dollars on paper,” said the man.
“And then,” the announcer continued, “suddenly, mysteriously, it all fell apart. Some say the big guys got big bucks and the little guys got taken.” A man with a Texas accent appeared, saying, “There was lying, cheating, and stealing.”
If you were watching this story unfold that summer night, you had to believe that what was happening on the Street was a crookedness that was massive in its cruelty and danger to the public interest. After all, this was prime network real estate, the coveted first segment of a major newsmagazine show, and, at almost a quarter of an hour, it held the air for an eternity by network standards. Like all competent broadcasting, it focused on the plight of a single person, heroic but “mysteriously” victimized. He was not Rand Groves but rather a gent named Rodney Young, and the company he founded to develop his “hot new invention” was Eagletech Communications. CNBC correspondent Ron Insana, one of the Street’s leading broadcasters, came on camera to explain:
There’s an old saying in business, “If you build a better mousetrap, people will beat a path to your door.” Rodney Young used to believe that, but that was before his four-year odyssey through the world of starting a company—a wild ride that took him through some very murky corners of the stock market. His is a cautionary tale every investor should hear before buying another share in a small-company stock.
The story that Insana proceeded to tell was gripping. After going public in a 1996 IPO, Eagletech’s share price had climbed from thirty-two cents to fifteen dollars within the space of four months, which Insana explained was “a remarkable performance for a start-up company.” The company received $1.2 million in financing from what Insana described as “early investors.” Things were looking good, Insana said. “The stock’s rapid rise got the attention of small investors throughout the country on the lookout for the next hot tech stock.”
And then, suddenly, it was all over. The stock came crashing down. “Something, or someone, had destroyed Eagletech,” said Insana. “The question was how—and why.”
The answer to this question, we learn, is a financial plague that an Eagletech lawyer named John O’Quinn, the fellow from Texas, says has “put as many as a thousand companies into bankruptcy,” resulting in “market losses of more than four hundred billion dollars.” Yep, massive stuff—this was, after all, a lawyer who had taken on the tobacco industry, Dateline NBC pointed out. Large bore by any definition. Surely, with numbers like this, you know what was completely and solely to blame for Eagletech’s misfortunes.
Why, naked short-selling, of course!
The Baloney Brigade was on the march, and with this Dateline NBC broadcast had achieved an objective that it had been carefully plotting for more than a year—the conquest of a network television newsmagazine.
There was only one problem with the broadcast, which anyone could have determined by spending approximately fifteen minutes on the Internet. Let’s just say it left out some stuff:
Eagletech’s collapse was not even the slightest bit “mysterious.” Its shares were rigged in a classic pump-and-dump stock scam. Such stocks always tumble when the rig is over.
As you can see, Dateline NBC might have had a pretty good story here of real alleged criminality, one with real victims. Or it could have turned over all that primetime network real estate to a real investor concern, such as the systematic deprival of investors’ constitutional rights when they have a complaint against brokers. Instead, Dateline NBC hopped on the lead APC of the Baloney Brigade.
It was a stupendous victory. But the Baloney Brigade, as usual, drew no solace from its triumph.
The broadcast, you see, had not used the phony buzzword being pushed by the Baloney Brigade—“stock counterfeiting.” “The now infamous and previously ‘postponed’…‘Dateline NBC’ expose aired Sunday night to a cacophony of yawns and disbelief, according to CEOs of companies decimated by naked short selling who contacted FinancialWire after its airing,” Gayle Essary’s FinancialWire reported the following day. “‘NBC just needed to get the program off the shelf, even though it was a journalistic “sell-out,” ’ said one CEO in an email to FinancialWire.”
The Baloney Brigade was marching on.
All this didn’t happen overnight.
Rand Groves’s right to have his complaint against Merrill heard in an American courtroom, a right guaranteed by the six thousand farmers and tradesmen who fought with Washington at Trenton, was chipped away for decades. It took more than one or two or a dozen unjust arbitrations or Wall Street scandals or mutual fund or hedge fund scams to erode investor protections, more than just one or two dumb SEC regulations, and more than just a couple of instances of flaccid, wrongheaded, or execrable financial journalism.
It all happened slowly, in court cases and regulatory proceedings and, above all, a series of little things that didn’t happen—SEC rules and acts of Congress that weren’t passed, speeches that Artie Levitt didn’t give, cases that Eliot Spitzer didn’t file, articles the financial press didn’t write. Last and by no means least, there was the ruckus that investors didn’t make—unless they themselves wound up ensnared in the system, by which time it was too late.
Your rights weren’t given away, or even taken away. They just withered away, and you didn’t know it was happening, even as you let it happen. It’s not entirely your fault, by the way. Yes, if you worked at it, you could have found out that the loudmouths of the Baloney Brigade were claiming to speak for you. But you didn’t even know where to look—or that whenever you hear the words naked short-selling, the word that should form in your head is baloney.
The Street and its dupes have set the agenda. But you can take the agenda right back from them. You need to fight back. You can’t do it all, but you are the essential ingredient. Without sustained public pressure, nothing is going to happen.
In this book I’ve outlined a lot of what needs to be done. A lot of it is really pretty obvious once you know the facts, and is a question of individual choice.
You can sit idly by, or you can do something about the arbitration system. The NASD likes to tamper with the system and make “improvements” that don’t change the essential unfairness of the system. In 2004, the definition of public arbitrator was altered to make that less of a charade, and remove people with more than twenty years of faithful service to the Street from serving as “members of the public.” But the fundamental character of the system remained untouched. Tell the NASD, your congressman, and the SEC that the time for window dressing is past. You want the arbitration system to be voluntary—and you want that done now.
Now that you are aware of how mutual funds soak you, the choice is yours: to continue to play a loser’s game and try to beat the market, or to invest your money in a low-cost index fund or an exchange-traded fund.
You can invest in a hedge fund, now that the inflated value of your co-op shares has pushed your net worth into the ranks of the accredited investors. Or you can say “No, thanks,” and try to find another way of expressing your social status.
You can allow the people who run your state and local governments to enrich their pals through negotiated bond deals, or you can tell them to switch to competitive bidding.
You can wield the power that you have, and maybe have some fun in the process. You can make a difference by going online and playing a role in exposing stock fraud, or one of the many other forms of investor ripoffs and injustice that are taking place all around you.
You can give the Baloney Brigade a run for the money. You don’t have to be a rich guy like Mark Cuban, owner of the Dallas Mavericks, to start up your own blog or to gain access to the Internet—either to research or to sound off. Blogs are there for the asking, totally free of charge. Don’t just write about your summer vacation. Write about your experiences with Wall Street. Tell people about your blog. Word will get out.
You can tell the media to stop focusing on trivia, and to cover things that matter to you. If your favorite newspaper or financial publication has abandoned hard-hitting reporting that protects you, and instead is publishing puff pieces on moguls or boring inside-baseball articles on subjects that don’t affect you, write to the editor. Tell him to publish articles for you, not for his advertisers or his reporters’ sources. The people who run newspapers and magazines read letters from readers and take them very seriously, if the letters are coherent and aren’t rants or part of an organized letter-writing campaign.
Above all, you can use the system to make yourself heard. You can offer a comment on an SEC rulemaking. You can nag your representatives in Congress. Don’t leave all that letter-writing and rule-commenting to the Street and the Baloney Brigade. Start your own brigade. You can name it yourself. Maybe the Sanity Brigade. If you meet the bad guys and their dupes in the field of battle, you will definitely win. In the end, the truth always wins.
It will take a while. Their livelihood is at stake. They’re not giving up.
Gayle Essary was upset by the Dateline NBC broadcast, and also troubled by the failure of NBC to broadcast a few days later, as had been expected, an interview with a former Commerce Department official who had come up with “proof” of naked short-selling of Eagletech. It was an interesting chain of events, he told me. First the Dateline NBC broadcast was mysteriously chopped in size and delayed, months of reporting disregarded, and then the non-broadcast of the interview with the ex-Commerce official. Strange.
Still, Gayle was upbeat. He was always upbeat, always looking for new angles, new ventures, or new variations on old ones. Gayle had been working hard and had come up with a brilliant idea, one in keeping with the times—the resurgent market, the explosion in the OTC, the nation’s unquenchable hunger for above-market returns.
Three days after the Dateline NBC broadcast, Gayle put the following item on his FinancialWire:
“Ever Wonder What Happened To That Ornery Critter, ‘The Waaco Kid’? He’s Baaaack.
“Every once in awhile, someone muses, ‘Whatever happened to the Waaco Kid?,’ that ornery critter who was once the toast of ‘Low Society’ and a stock-picker extraordinare for individual traders—never investors—who were looking for a place to quite literally gamble on from 5% to 25% of their portfolios.
“It has taken four years to track down and locate the persnickety codger,” Gayle reported, but all’s well. “Okay, ‘pick us a couple of stocks,’ he was told, in exchange for an article contribution from time to time, and the rest, at least until the market opens again today, is history.”