If a recent $5 million judgement by an NASD arbitration panel stands against M. H. Meyerson & Co. and Bear Stearns & Co. for a supposedly botched stock transfer, then every financial institution that relies on power of attorney agreements will be endangered.
That's the contention of officials of Meyerson, a small Jersey City-based bulletin board market maker founded in 1960 by a former car salesman Martin H. Meyerson.
Meyerson officials contend they were put in an impossible position when they were given written instructions to transfer the shares of bulletin board stock Whitehall Enterprises in December 1999. That's because these instructions, Meyerson officials contend, were later contradicted by oral instructions not to go through with the transfer.
"The bottom line is, this is a plain language power of attorney contract and if we lose everyone who uses it will be in trouble," according to Anthony Dudzinski, president and chief operating officer of Meyerson. Meyerson is appealing the $5 million judgement in state Superior Court in Hackensack, New Jersey. However, representatives of the other side said any appeal would have to be heard in federal district court in New York because the case involves several foreign entities.
Meyerson officials said the appeal could take years and, in the meantime, the firm's financial condition could be hurt. Nevertheless, they say they will survive no matter what happens.
"The future of the firm is not in question. We've taken every step to get through this," Martin H. Meyerson, chairman of the firm, said in an interview with Traders Magazine.
The judgement against Meyerson and Bear Stearns was awarded to CVI Group, a Toronto Ontario-Canada based business consisting in part of Emes Foundation and SLR Trust. They charged that Meyerson breached a contract, processed a trade without proper authorization, violated its fiduciary duty and was negligent, according to the NASD arbitration decision.
Attorneys for CVI Group said Meyerson failed to follow their client's orders. The NASD didn't respond to repeated requests for comment. The arbitration decision itself contains the facts of the case but didn't list any reasons for the decision.
"We have no idea why the decision was made. On top of that, part of the tape recording of the hearing is missing," Dudzinski charged. Meyerson produced a power of attorney agreement signed by an SRL official that stated that, "to revoke this power of attorney, SRL hereby agree to submit a written notice addressed to and delivered to Global, but such revocation shall not affect any liability in any way resulting from transactions initiated prior to such revocation." Global Financial Investments was one of SRL's agents.
Custodian Duty
Officials of the Canadian firm delivered some 20 million shares of the stock to Meyerson in July 1999, with the firm directed to act as a custodian. This is where the stories of the various parties to the arbitration start to conflict.
According to Meyerson officials, in December 1999, with the Whitehall Enterprises stock valued at about $1.5 million, CVI's agent provided a written order to transfer the shares to Pershing (Bear Stearns was clearing for Meyerson). They were following this order, they say.
But before the stock had been transferred and later sold, Meyerson officials said they received an oral order from a CVI agent to halt the transfer and give the shares back. Meyerson said it refused because the power of attorney required a written revocation. That, Meyerson officials said, placed the firm in an impossible position because different CVI representatives were asking for different things.
"We are supposed to be operating in a safe harbor using the power of attorney, but, if this stands, that would no longer be the case," according to Dudzinski.
A written revocation of the power of attorney was later supplied by CVI agents, but it was delivered a month later, too late to reverse the transfer, according to Meyerson officials. In this three month period between December 1999 and February 2000 – a period in which there is such a dispute over who was responsible for the transfer of the stock – the value of the stock was exploding as tech stocks were in the middle of an incredible rally. The stock's estimated value was suddenly in the neighborhood of $5 million.
But CVI's attorney, Nathan Nason of West Palm Beach, Florida, said that Meyerson ignored previous written and oral instructions prior to the three month period.
"We told Meyerson in August 2000, not to transfer any of the shares without checking with us. They didn't follow those clear instructions," he said. Nason also said that – even when a written power of attorney revoked the first power of attorney – Meyerson opted to go ahead with the transfer in February 2000. Nason also insisted that, "an oral instruction to revoke a power of attorney is legal."
Bear Stearns, in a statement, sided with Meyerson and also criticized the NASD decision. "The use and public necessity for transferring shares of stock by the effects of powers of attorney has been ignored by their unsupportable decision," according to the statement. Nason also dismissed this comment, arguing that "powers of attorneys that are in order will continue to be binding. Those financial institutions that follow the orders of their clients will have no problems."
In Meyerson's appeal of the decision, it is alleged that CVI Group's agents, "did not deliver to the agent and the attorney in fact a written revocation as required by the powers of attorneys until Jan. 27, 2000, which is after the transfers of shares was completed and this violated the essential and required obligation and duty as set forth by the powers of attorney and this is the basis to set aside and vacate this arbitration award."
Meyerson has taken precautionary steps over the past six months. Nevertheless, either because of the expectation of an adverse judgement or because of market woes, Meyerson's revenues, profits and employee numbers have dropped over the past year. It also decided to take a $3.5 million charge against the possible final judgement. Investors are also worried about Meyerson. Its stock has been recently trading at as low as 55 cents a share. Before the judgement it was trading at around four and a half dollars a share.
Meyerson officials say they have been in negotiations with CVI representatives. They say they would be willing to settle for the value of the stock, which they estimate was about $600,000. Still, they complain that if the appeal drags on over five years, it could cost them about $500,000 in legal costs. "Only the lawyers win in that kind of scenario," Dudzinski said.
One issue that both sides agree on: Officials for both Meyerson and CVI said they don't know what happened to the shares of Whitehall Enterprises.