By MATT CHANDLER
Buffalo Law Journal

Dennis Kahn, managing partner at Siegel Kelleher & Kahn, sees his firm's latest venture as a chance to reach an untapped market in Western New York.

In conjunction with the Pearl Law Firm in Rochester, Siegel Kelleher has formed a new practice group focused on representing people who have lost substantial money in their investment portfolios due to the negligence or unethical behavior of their stock broker or financial adviser.

Kahn believes there are many Western New Yorkers who have been victimized and, unlike the high-profile cases of Bernard Madoff and, locally, Richard Piccoli, aren't getting the help they need in recovering their lost assets.

"Given the economy, our suspicion is, there are many many people out there who for one reason or another are ashamed to come forward and say ‘Hey, I lost money,' " he said. "That's crazy, because if they did, and it is through recommendations that were made (by the brokers), and they were inappropriate investments, there is a potential cause of action and they may have a claim."

Kahn has tapped former state Supreme Court Justice Joseph Makowski to chair the new investor practice group.

After 10 years on the bench, Makowski resigned from his court post in February amid allegations he lied in an affidavit he submitted on behalf of an attorney facing criminal charges. He was not charged with any crimes, but he did sign a binding agreement with the state Judicial Conduct Commission stating that he would not seek judicial office again.

A developing practice area

Makowski said there are only about 400 attorneys nationwide who focus on representing investors who have potentially been duped by their financial advisers. He sees the three-way partnership between the Siegel and Pearl firms and Makowski, who formed his own limited-liability corporation and is working independently with both firms on the collaboration, as one that is long overdue.

"He had been interested in having a discussion with a Buffalo firm, and after months of discussions, we felt like it made sense to get into doing this work," Makowski said of Robert Pearl, managing partner of the Pearl Law Firm.

While he expects their future clients to run the gamut in terms of demographics, Makowski said there is one particular group that is regularly victimized by unscrupulous investors.

"A lot of these people are at or near retirement age. They might take early retirement or be induced to take a lump-sum payment to leave early," he said. "Investment advisers become aware of this and target these people for seminars and offer them financial products where returns are assured which they can't realize."

Kahn said one of the challenges his firm faces in breaking into this market is making people aware of their rights when it comes to investments gone bad.

"People shouldn't assume that because they signed an agreement, they waived their rights to proceed with a claim," he said. "A lot of these people are just not suitable for the investment that is recommended to them. It isn't just as easy as (the investor) signed a disclaimer. That doesn't mean you can just go out and invest somebody in these complicated investment schemes."

Poor investment choices or fraud?

Peter Hafner, owner of the Hafner Financial Group in Williamsville, has been in the brokerage business for 17 years. While he concedes that "Sometimes people are put into investments that are not suitable," he said most firms have a series of checks and balances in place to avoid broker error.

"Every investment I make is checked by a regional manager to make sure it matches up with the client's goals," he said. "We also have a compliance department that has so many rules that keep people from tripping up and making mistakes."

Hafner said cases like that of Bernard Madoff, who defrauded investors out of an estimated $18 billion, can make it more difficult to bring in new clients. Investors are now more wary of handing over management of their savings to a stranger, Hafner said.

But he sees a divide between money managers who make a poor investment choice and those who commit fraud.

Given that all investments come with risk, attorneys in investor-loss practice have to distinguish between normal losses and fraud or negligence. The Siegel-Pearl group is targeting investors who have lost at least $100,000.

"Many times, you have an unsuitable investment or over-concentration in one area, as opposed to diversification. You can have misrepresentation or a failure to disclose a material fact," Makowski said. "A lot of the problems in this area are systemic from the point of view that there is a great deal of financial pressure on brokers or financial advisers to procure new business. The way in which they are compensated, higher-commissioned products are more favored, (and) their revenue targets are part of why this occurs."

Pearl said he has been handling these types of cases in the Rochester market and sees Buffalo as a large population base where virtually no firms are taking these cases.

"The idea that someone loses money investing with a professional is not a new idea, but the fact that the professional might actually be responsible is something that a lot of people don't recognize," he said.

Few cases go to trial

Pearl said investor-loss cases are handled on a contingency basis, meaning clients only owe attorney's fees if their cases are successful and they recover at least a portion of their losses.

"People who have lost their life savings - and the lion's share of our clients fall into that category - are financially decimated," Pearl said, "and they obviously can't go out and hire a lawyer to pursue these claims."

According to Makowski, few of the cases ever make it to court.

"In most cases, when you sign an agreement with a brokerage firm or investment adviser, you agree to arbitrate your claims as opposed to going to court," Makowski said. "If the claim is solid, people are being pushed to mediation, where a third party will try to facilitate a resolution short of a need for an adjudication."

Kahn said the heavy concentration of resolution through arbitration in these type of cases was part of what made this practice area attractive to his firm.

"Frankly, our experience has been that if people can avoid going to court," he said, "that's what they like to do."