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A Florida teacher files an arbitration claim against WaMu after he was persuaded by a WaMu Investments stockbroker to take $150,000 from a WaMu home-equity line of credit and invest it in WaMu stock.

By Rami Grunbaum

Deputy business editor, and Seattle Times Business staff

When a stupendously reckless investment gamble goes wrong, who's to blame — the professional who allegedly suggested it, or the customer who followed the advice?

That's the question posed by a case that has Seattle-based WaMu written all over it.

A high-school teacher in suburban Fort Lauderdale, Fla., claims that at the urging of a WaMu Investments stockbroker at his WaMu bank branch, he borrowed $150,000 using his WaMu home equity line of credit and sank it all into WaMu stock.

The investment has evaporated, leaving only a hefty debt — and an arbitration case in which the teacher demands compensation from the broker and WaMu Investments, now part of JPMorgan Chase.

More details only deepen the picture of breathtakingly bad judgment on both sides. The arbitration claim paints Charles (his lawyer redacted the full name from a copy provided to The Seattle Times) as a greenhorn investor with a modest annual salary of $45,540.

His total stock-market experience, says the claim, consisted of an $11,000 employer-funded retirement plan and a six-year-old WaMu investment account in which he'd made one purchase and one sale, losing more than a third of his original $3,200.

Yet on June 13 he bought 20,000 shares of WaMu's downward-spiraling stock at $6.75, tapping his home-equity line of credit for the necessary capital of $135,605. In August he upped his stake by another $17,018 to buy another 4,000 shares, according to the arbitration claim that attorney Paulino Nunez filed with the Financial Industry Regulatory Authority (FINRA), the self-regulatory body that oversees stockbrokers and securities firms.

Nunez, aware that people may see his client Charles as a foolhardy speculator who got in over his head, acknowledges that "at some level we are all responsible for our decisions."

But the higher responsibility, he argues, lay with the broker and WaMu. Independent experts in securities law agree that brokers are subject to a raft of professional rules about recommending suitable investments, keeping clients diversified, and so forth.

"The guy had zero money to invest, and it's four times his annual salary. I don't think it takes a lot to say he can't afford it," says Nunez, a partner at Tramont Guerra & Nunez in Coral Gables.

"This is one of the most egregious cases I've seen. It would have been an egregious situation anyway, because when somebody has all their money invested in one stock, that's never a good thing."

On top of that, "there's a clear conflict of interest in this (WaMu broker) selling WaMu stock. Then the kicker is, this guy didn't have the money to invest. So they tell him we'll lend you the money on your house."

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He notes that the National Association of Securities Dealers, whose regulatory arm was the precursor to FINRA, warned its brokerage members in 2004 that "a recommendation for a homeowner to (borrow against) home equity for investment purposes poses significant and unique risks for investors." One key risk: "The investor may lose his or her home."

Since last summer, South Florida property values have fallen sharply, and Nunez says his client now believes his home is worth less than the recently increased debt.

The WaMu broker only earned $600 in commissions for selling Charles the two bundles of WaMu shares, according to brokerage statements reviewed by Nunez. But the attorney wonders whether WaMu Investments offered brokers additional incentives, either for helping maintain demand for WaMu stock when it was plunging, or for getting customers such as Charles to activate a home-equity line of credit.

A spokeswoman for JPMorgan Chase, which picked up WaMu Investments along with WaMu's banking operation after federal regulators seized them in September, said the company would not comment on the case.

John C. Coffee, a securities law expert at Columbia University School of Law, says FINRA requires brokers to "know your customer" and direct clients to suitable investments. "If you recommend a risky penny stock to an aged widow of modest means, you have probably violated this rule," he says.

Arbitration panels "tend to split the difference, imposing anywhere from 10 to 70 percent of the losses on the broker and/or his firm for recommending unsuitable securities," but they have great discretion, Coffee adds.

William Jacobson, a Cornell University law professor who runs a clinic that helps brokerage customers with arbitration cases, says the single, large, risky investment described in Charles' case "is on its face almost unsuitable for anyone."

"As natural as the reaction may be to say, 'How could this investor have done this,' nonetheless it's the obligation of the broker not to make the recommendation."

Jacobson, too, asks whether extra incentives might have been prompted the WaMu broker to suggest such a dubious investment in WaMu stock. That's an issue Nunez says he will pursue as his client's case makes its way through arbitration, which could take a year or more.

Comments? Send them to Rami Grunbaum: [e-mail] or 206-464-8541

Copyright © 2008 The Seattle Times Company