Market Blues

A fired Legg Mason broker contends that his bosses cost his clients millions of dollars in lost investments

December 07, 2003|By JAY HANCOCK AND PAUL ADAMS | JAY HANCOCK AND PAUL ADAMS,SUN STAFF

Star Legg Mason stockbroker George E. McDowell seemed bulletproof at the top of the bull market bubble. His clients weren't faring badly, either.

As the Nasdaq index floated toward 5,000 four years ago, the bundles of technology stocks that McDowell sold were rising 10 percent to 20 percent a month.

McDowell says he was making close to $100,000 a month. And Baltimore-based Legg was reaping big fees for selling the investments.

But then the stock bubble exploded - and so did McDowell's relations with Legg and his customers.

In the aftermath is a dispute that puts both Legg and its former million-dollar broker in legal jeopardy and raises a question that underlies recent soul-searching on Wall Street: Who's to blame when hot investments go cold?

The disagreements have prompted a flurry of litigation, the hiring of an outside counsel by Legg and investigations, previously undisclosed, by attorneys general in Maryland and South Carolina, where McDowell is based.

On one side is a deeply religious salesman anguished over a shattered career, millions in losses for his customers and what he says is Legg Mason's responsibility for the damage.

"These people hate me - my clients," McDowell, 59, said in a series of interviews that began in July. "I can go to church and they avoid me. And I don't blame them."

On the other side is Legg Mason, which like other brokers enthusiastically peddled technology shares in the 1990s but then saw technology shrivel along with the portfolios of many clients when the market lost air. The firm vigorously denies McDowell's assertion that the firm is responsible and says the evidence makes it clear that his allegations are groundless.

McDowell claims he was eager to advise his Legg clients to sell millions in tech-stock bundles called unit investment trusts, or UITs, in mid-2000 after the bubble had reached its zenith.

But - and this is the allegation at the center of the government inquiries - he says he was barred from urging clients to sell by Legg Mason lawyers who worried he might appear to be "churning" accounts to earn excessive commissions.

Legg challenges McDowell's claims. "We would never prevent a financial adviser from liquidating client positions in clients' best interests," said Peter L. Bain, the firm's chief administrative officer.

Records show McDowell sold clients out of hundreds of unit-trust positions after the supposed ban, said an outside lawyer hired by Legg to examine McDowell's claims.

"I found no credible evidence in my inquiry that anyone in Legg Mason's compliance department directed George not to sell any of his customers out of UIT positions," said the outside counsel, Charles O. Monk II, of the Baltimore office of Saul Ewing.

But McDowell says the records Monk examined are inaccurate or reflect instances in which customers initiated transactions. McDowell was allowed to sell UITs if it was a client's idea but couldn't suggest it himself, he said.

McDowell's claims have prompted investigations by South Carolina Attorney General Henry McMaster and his Maryland counterpart, J. Joseph Curran Jr.

Legg Mason documents have been subpoenaed in both states, people familiar with the matter said, and at least one current and one former Legg Mason employee besides McDowell have been interviewed under oath.

McMaster spokesman Trey Walker confirmed that his office is looking into McDowell's allegations.

"I can also confirm that the state of Maryland is conducting an investigation into this incident and has interfaced with our office on a number of occasions," Walker said.

He declined to comment further. A spokesman for Curran would not confirm or deny that a Maryland investigation is under way.

Hanging in the balance are dozens of McDowell's clients, many of whom lost hundreds of thousands of dollars on risky investments.

Among them is Imogene Burns, a retired mechanical and architectural designer from near Spartanburg, S.C., where McDowell also lives. Widowed when stocks were near their height, she said she burned up three-fourths of her nest egg by investing with McDowell and Legg Mason.

"I lost between $300,000 and $400,000. It's a lot of money for someone who has worked all their life to save some," Burns said. "Fortunately, I have a good income in retirement, and I can live on that. But I had certainly hoped to have what I had saved for major things" such as travel.

If McDowell's present disgrace contrasts with his long, successful career as a stockbroker, his embrace of technology stocks and unit investment trusts in the late 1990s also was unusual. For most of his life, he says, he concentrated on safer stocks and occasionally bonds.

But like many in the 1990s, he and his customers were lured by the riches to be made by buying pieces of profitless Internet merchants, overextended fiber-optics outfits and any other dubious company with a "tech" label.

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