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Burden of Proof

Bear Attack On Wall Street: Buyer, Beware

Aired March 13, 2001 - 12:30 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

ROGER COSSACK, CO-HOST: Today on BURDEN OF PROOF: bear attack on Wall Street. A group of banks are the target of a class-action law suit, amid a nervous and brittle market. When do you buy? When do you sell? And when should you sue?

(BEGIN VIDEO CLIP)

CHRISTINE ROMANS, CNN CORRESPONDENT: We have the S&P futures down 15 points. So we're looking at some moderate, heavy losses in the early going here today.

UNIDENTIFIED MALE: The tech stocks are terrible. Get out.

DARYN KAGAN, CNN ANCHOR: We're open all that six minutes, and look at the Dow. It's already down 138 points. The Nasdaq is down 62 points.

LEON HARRIS, CNN ANCHOR: Check this out, folks. And it is coming down. Wow!

KAGAN: Talk about something dropping on a cricket this morning.

HARRIS: It's now down 182. It was just, what, two minutes ago, 140.

KAGAN: 140.

HARRIS: And then, before that, it was down nine.

JOHN METEXAS, CNN CORRESPONDENT: This is the lowest level in the Nasdaq since mid-December 1998.

UNIDENTIFIED FEMALE: The quanters have more than a two-to-one edge over advancers.

UNIDENTIFIED MALE: I think we're really in the late stages of a bear market that's been going on for several months.

RHONDA SCHAFFLER, CNN CORRESPONDENT: On the floor of the New York Stock Exchange, where a dramatic selloff is under way.

UNIDENTIFIED FEMALE: The S&P 500 is now officially in bear market territory. It's down 20 percent. The Nasdaq is down more than 50 percent from where it was a year ago. The Dow Jones Industrial Average also joined the selloff today, losing 400 points.

(END VIDEO CLIP)

ANNOUNCER: This is BURDEN OF PROOF, with Greta Van Susteren and Roger Cossack.

COSSACK: Hello, and welcome to BURDEN OF PROOF.

Well, one year ago, the markets were booming. The dot-coms were the life of the party, and tech stocks were soaring. What a difference a year makes.

President Bush commented on the market woes this morning, saying his tax-cut plan would help a turnaround. But other Wall Street watchers point to the Federal Reserve, hoping for a rate drop.

The message within the stock community: Buyer, beware. In the rush to make up for devastating losses, investors could be lured into unstable products by unscrupulous stock brokers. So for the consumer: crossroads. Does John Q. Public sit idly by while the bottom falls out again? Or is it time to sell? And what would he sell?

For the inside scoop on the private investor, we have Chicago bureau chief Jeff Flock from a brokerage house. And for some Wall Street historical perspective, CNNfn's Myron Kandel.

Well, Mike, you have seen the market go over a number of years. You've seen it up, you've seen it down. Put what happened yesterday and what's been happening in the last several months in some kind of historical perspective for us.

MYRON KANDEL, CNNFN ANALYST: Well, Roger, you put your finger on it, what a difference a year makes. A year ago, Saturday, the Nasdaq Composite Index set its record high, over 5000. The Dow Jones Industrial Average was just a month or so away from its record high. And the Standard and Poor's 500 was yet to set its record high, which would be a year from next week.

What's happened since then, obviously the economy is fallen out of debt. The dot-com bubble burst in a big way. Tech stocks are hurting. As of yesterday's close, the Nasdaq was down 62 percent from its record high. But as bad as things were yesterday for the Dow, the Dow is still down only 13 percent, so far. So it's been a very mixed market.

Now, if you look at what's happening today, we have a mix market as well, although not nearly as drastic as yesterday. Right now, the Dow is off 55 points. It was down 100 points a little while ago. The Nasdaq is up 34 points; it was up more than 50.

So right now, investors are sort of taking a cautious position. They are not bailing out. There were some people who thought that today or maybe even tomorrow, that there would be a huge selloff. People would just dump stocks billy-nilly. And a great surge of volume would indicate that maybe the selling was over and that the bottom had been reached. Right now, well Wall Street, you might, say is treading water, Roger.

COSSACK: Mike, you know, you had an interesting phrase. You said that the tech-stock bubble burst. What made the tech stocks -- why were they a bubble? And what caused it to burst?

KANDEL: Well, the biggest bubble were the Internet stocks, the dot-coms. They were priced way out of sight. I mean, they just -- there's a joke on Wall Street that the stocks are based on P/E ratios -- that's price-earnings ratios -- the dot-coms were being priced at P/L ratios, profit-loss shows, which obviously is just a joke.

But those stocks were way, way over priced. And they began tumbling about this time last year. Then, the technology stocks followed in the latter part of the year and beginning of this year, mainly because the economy was slowing. The great demand for technology products, PCs, telecom equipment and all of that began drying up, as companies cut back in the recession.

You know, it's interesting that Federal Reserve Chairman Alan Greenspan has always talked about the technological revolution that helped this economy achieve record growth. But without big inflation -- and he gave credit to technology -- what technology also does is instant information. Companies realized that sales were drying up, that inventories were growing. They understood that a lot faster than they had in the past.

COSSACK: Mike, I think what you're saying, they were victims of their own success, in some ways, or their own abilities.

Let me go to Jeff Flock for a second, Mike.

Jeff, what's the mood at the brokerage house today?

JEFF FLOCK, CNN CHICAGO BUREAU CHIEF: Well, if you were expecting irrational panic, Roger -- irrational exuberance may have been badly placed, but there's no irrational panic out here either.

A lot of people have been coming in here. I don't know if you can see this machine, but this is the Schwab office in Chicago. They come in, the first thing they want to do is see what the Dow's done. It's down 50 points right now and the Nasdaq's up 35. And then what they'll do is go to their stocks, like Cisco, for example. Talked to a lot of people that hold Cisco. They want see where that is today. That's up about 1.8.

Very interested in what their stocks are doing, but I don't get a lot of people out here saying, gee, I've got to dump, we got to get out of this thing. People holding the course, staying the course and not making any drastic changes in their portfolio, Roger.

COSSACK: Jeff, do you have a sense of fear from people when they come in today? You know, this was a wonderful market for a long, long time. People apparently made a lot of money. And now, in a dramatic fashion, it's turned around. Are people bewildered, are they scared? FLOCK: I've talked to a couple people that actually were able to get out of the market early on, somebody who was doing a home remodeling project and said, oh, gee, I hated to sell Intel. I had Intel. It was about 70 and I had to sell it. I thought it was even going to go higher. Well, as it turns out, the bottom dropped out of it. It's now, I don't know what, 19 or 20 or something like that. So some people who got out of the market at the right time feel pretty good about it.

But a lot of people coming in just looking for some guidance, but no sense of underlying fear out there. I think a lot of these investors have been on a bit of a roller coaster already and they're willing to ride it out, at least the ones we've talked to.

COSSACK: It's the giant roller coaster out at the beach. You can't get any worse than it's been.

All right, Jeff Flock and Mike Kandel, thank you both for joining us today.

When we come back, why seven investment banks are being sued on behalf of investors. And we'll roll out a panel of guests to talk about the rules of the game and the rights of the investor. Don't go away.

(BEGIN LEGAL BRIEF)

Defense attorney Robert Shapiro has launched a Web site to help people looking to file wills, restraining orders and other legal papers without the aid of a lawyer. The Web site, LegalZoom.com, offers different services for varying fees.

(END LEGAL BRIEF)

(COMMERCIAL BREAK)

COSSACK: Acting on behalf of individual investors, a group of lawyers have filed a class-action lawsuit against seven investment banks in their allocation of initial public offerings. Now, IPOs are a much sought-after commodity on Wall Street, but are only offered to an exclusive cache of investors. The lawsuit claims the banks demanded large brokerage fees for these sales and that they required commitments to buy more stock from the companies, thereby keeping its stock price pushed higher.

Well, for a lesson in such economic issues as supply and demand, we're joined by Kathy Kristoff, author of "Investing 101." And from Indianapolis, we're joined by Mark Maddox, a securities and arbitration and litigation attorney who represents investors. And from Washington, we have William McLucas, former director of enforcement for the Securities and Exchange Commission.

Well, Bill, let's talk a little bit about the rights of investors. What kind of rights do investors have in the market, with their broker and to protect themselves? WILLIAM MCLUCAS, FORMER DIR. OF ENFORCEMENT, SEC: Well, Roger, the first thing you have to remember is the fact that the markets declined by a 400 or 500 points in a day doesn't mean that anyone has done something wrong and that investors as a group can go out and claim damages from their broker or from their investment bank with which they have their account.

Generally, most individuals sign account statements that have mandatory arbitration provisions through which they could pursue a claim against their broker or the firm. And in the instance of the current market and the kinds of things we're seeing develop, one would assume that the most likely claim that may come up will be suitability. That is, did the broker recommend and sell to an individual customer investment products, equities, in fact, that were suitable to that individual's investment objective, their financial situation and their overall ability to, in effect, tolerate risk. That's...

COSSACK: Bill, let me interrupt just one second. What kind of disclosure does a broker have to make to a buyer regarding their own position in a stock that they're selling, or whether or not they have any conflict or have any investment in that stock?

MCLUCAS: Well, with most multiservice firms or large investment banks, the customer will know that the bank may well have a proprietary position in an individual stock. Many of these banks, obviously, underwrite and offer and sell securities which are then sold to retail clients.

The issue of disclosure and obligations by an individual broker to the client require fundamentally that the broker have some idea of the equity or the stock that's being recommended, and provide adequate information to the investor so the investor can make a reasoned decision about whether the purchase or the investment is suitable to his or her overall objectives.

COSSACK: All right, let me go to Mark Maddox now.

Mark, you represent investors.

MARK MADDOX, INVESTOR ATTORNEY: Yes.

COSSACK: In terms of what rights investors have, what are they to be told by brokers? What must they know? And what rights do they have, if any?

MADDOX: Well, Roger, here's the most important thing about the market downturns of the last year as it relates to your question. When investors start doing business with brokers and brokerage firms, investors need to have a conversation with their broker about what their investment objectives are, what their financial needs are, where they are in life, when they plan to retire, whether they have any kids they need to put through college. You need to go through sort of like a physical, a complete detailed physical of your financial needs and financial affairs with your broker. Then what your broker is supposed to do is listen to and understand what you're telling him or her. And then the broker needs to talk to you about what your tolerance for risk is. Because where we see most of the problems in the investment business is that investors and brokers aren't communicating very well up front about the level of risk that the investor is willing to take, and then the broker subsequently puts the investment into things.

COSSACK: All right, let me ask both of you gentlemen the same question. For the last year, or up until the last year, the stock market, you could almost shut your eyes and point and make money. Perhaps ordinary people fell under the spell that there was no risk there. Was there a higher duty for brokers to inform people particularly in good times that, look, this isn't going to last forever?

MADDUX: Well, there's no question that that should be the general rule all along. You know, it's just been the historical fact that, from time to time, certain sectors of the market are hot for periods of time. Prior to this last year, technology stocks were very hot. But we all have kind of generally heard the old adage: You don't put all your eggs in one basket.

You need to have five or six different baskets in which the investment eggs are put into. And most brokers -- some brokers lost sight of that the last three or four years, as did some investors.

COSSACK: All right, let's take a break. When we come back: more information on whether we have any rights in the stock market, particularly when we see it going down, down, down.

Stay with us.

(BEGIN Q&A)

Q: After hearing evidence against an 85-year-old woman, an Oregon grand jury refused to indict her for what crime?

A: Allegedly stealing her neighbor's cat 10 years ago. If indicted, she would have faced jail time under a state law governing theft of a companion animal.

(END Q&A)

(COMMERCIAL BREAK)

COSSACK: With a falling stock market, investors are looking for answers about how to proceed with their investments. Where does the investor go from here?

Bill, before I change gears on this, I just want to ask you this: Does the media -- has the media played any role in making the investment of money almost -- the way it's become, almost a game, if you will? We only saw it go up. Was it irresponsible?

MCLUCAS: Well, I would hesitate, Roger, to suggest that the media has contributed to that psychology. I think the point is a fair one that, over the last decade, we've seen the longest bull market in the history of the country.

And I do believe that, with the entry of hundreds of thousands of individual investors who are new to the stock market, they have only seen the market go one way. And we've lost a discipline in looking at the fundamentals. To some degree, the phenomenon of the Internet and the tech stocks have contributed to the absence of those fundamentals. But people have tended to believe that it only goes one way and it's sort of a game.

COSSACK: And now it's -- and now it's painfully going the other way.

Let me go to Kathy Kristof.

Kathy, investment 101: What do we do now?

KATHY KRISTOF, AUTHOR, "INVESTING 101": You keep on investing. It's a little late to sell. The big money that was lost in this market wasn't lost, really, to fraud, bad brokers, or any of these things; it was lost to the cocktail-party guy. It's the guy you met at the cocktail party, and he told you: Hey, I doubled my money on Amazon.com. You've got to get in now before you miss out.

COSSACK: Were you at that same party I was at?

(LAUGHTER)

COSSACK: Because that's exactly what I was told. And guess what?

Anyway, continue on.

(LAUGHTER)

KRISTOF: They were at all the cocktail parties. And the bad thing is, is that people listened to them. And then they go and they abandoned their thoughtful strategy, and they bought into a company, and they didn't realize that: Hey, Amazon is selling at a thousand times projected 2005 earnings, which are never going to pan out.

So the people who bought those stocks: They are not coming back. Just get used to it. It's down. It may even go further. It may go under. What you need to do now is you need to look at fundamentals: What is the company's price? What is its earnings?

Understand that a good company can be a bad stock. You need both a company that's going to grow and prosper and a stock that is selling for a reasonable price.

COSSACK: Kathy, the last couple of -- the last 12 years, up until last year, was the biggest whirlwind that was pointed out in the stock market. Everybody could point their finger and have a success. Are those days over? KRISTOF: Well, they may not be over, but the fact is, the stock market doesn't perform at double-digit -- or they don't get 20 percent returns every year, year after year.

And, in fact, because the market performed so well in the past, you have to expect lower-than-average performance over the next several years. Now, either the market will drop a lot and then it will go back to normal performance -- which is about an 11 percent average annual return -- or it will just kind of skip along at a much lower rate than that, maybe 5 or 7 percent returns over a long period of time.

COSSACK: Kathy, you know, that's all the time we have for today. I wish I would have been standing next to you at that cocktail party instead of that guy who told me about Amazon.

(LAUGHTER)

COSSACK: But thanks to our guests. And thank you for watching.

CNN will continue to follow developments in the stock market throughout the day. Tune into "TALKBACK LIVE" at 3:00 p.m. and weigh in on the market turbulence.

And we'll be back tomorrow with another edition of BURDEN OF PROOF. We'll see you then.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com

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