Why Only Big Bankers Can Flout the Rules and Get Away With It

Did you hear the one about the stock promoter, the lawyer, three figurehead CEOs and seven auditing firm partners?

No, it isn’t a “walks into a bar” joke. It’s a case brought by the Securities and Exchange Commission last month against the players in a sham stock offering. The agency went after all the people involved in what it called ”a massive scheme to create public shell companies through false registration statements.”

No big deal, right? The SEC is supposed to be going after bad guys, making them pay fines and lose privileges. But it tends to do a lot better in cases against no-name boiler room types like the ones in the January case than it does with players at powerful banks.

In my column for TheStreet this week, I discussed the contrast in enforcement results between cases against small players and cases against Wall Street’s elite.

In December, for example, the Financial Industry Regulatory Authority, or Finra, brought cases against ten household name firms for flouting the rules that govern research analysts when their firms are pitching for initial public offering business. In its complaints against the firms, Finra described the actions of specific people who broke specific rules. But we never learned their names. Indeed they weren’t charged at all.  You can read my column here.

In Push for Change, Finra Is Opposed by the Wall St. Firms It Regulates

Brokerage firms are up in arms over a proposal by one of their regulators to collect information about customers’ accounts and use it to keep tabs on salespeople.

That may sound like a great idea on the face of it, but the regulator in question, the Financial Industry Regulatory Authority, or Finra, gets its funding from the firms it’s supposed to be regulating. And those firms don’t like the idea of sharing data on their customers’ buys, sells and portfolio positions.

I wrote about the battle between Finra and its members in The New York Times today. Barbara Roper, director of investor protection at the Consumer Federation of America, told me that Finra’s proposal to get monthly data about activity in investors’ accounts could go a long way in preventing fraud because it would let Finra jump on problems more quickly:

“It creates a real deterrent,” she said. “Who’s going to churn an account if it immediately sends off a warning siren at Finra?”

You can read the story here.

Brokers Countersue to Thwart Suits by Unhappy Investors

So your broker sold you some shoddy private placements and you sued? Brace yourself, because you might get sued back.

In The New York Times today, I told the story of investors who sued their brokers for selling them private placements that tanked only to be hit with a suit from the broker. The firms’ argument: That the customers signed indemnification agreements when they purchased the securities, and thus owe the firms money for legal fees and other costs.

“The investors make representations to buy these things” and have a legal obligation to be truthful, said Vincent D. Louwagie, a Minneapolis lawyer who represented the brokerage firm Berthel Fisher.

It’s tough to evaluate the cases when the firms win. If you do business with a brokerage firm, you are stuck in private arbitration, where nobody has to explain how they came up with a decision. Suffice it to say, though, that a lot of customers will get spooked when they find out they’re threatened with a countersuit after they already have lost money. You can read the story here.

Unfazed by Finra Charges, Seniors Still Swoon for David Lerner Pitch

Elderly investors are looking for yield. And elderly investors are suckers for a free meal. Put the two together and you’ve got a recipe for packing the grand ballroom of a Marriott hotel with 300 sixty- and seventy-somethings who are prime targets for a brokerage firm looking to peddle illiquid investments.

David Lerner Associates, a Syosset, N.Y.-based brokerage firm whose founder was barred from the securities business for a year in 2012, is still out there wooing seniors to break bread at a local hotel and hear the pitch for its investments.

I went to one of those dinners at a Marriott hotel in Trumbull, Conn. in June, and wrote about it in my column tonight for TheStreet Foundation. Prominent in the pitch that night was the firm’s non-traded real-estate investment trust, a highly illiquid investment that I sure wouldn’t want my elderly mom to buy.

What’s stunning is that investors trip over themselves to attend Lerner events despite the firm’s history. From my story:

Finra said in a complaint on May 27, 2011 that Lerner and his firm targeted many “unsophisticated and elderly” clients to sell illiquid non-traded real-estate investment trusts that were concentrated in the hotel industry. The firm used misleading marketing techniques to sell the REITs, Finra said. In the months after the complaint, Finra said Lerner sent letters to 50,000 customers in an attempt to “counter negative press.” And even those letters had “exaggerated, false or misleading statements,” according to an amended Finra complaint on Dec. 13, 2011. The $14 million in fines and restitution against the firm was Finra’s largest monetary sanction of 2012, said Michelle Ong, a Finra spokeswoman.

You can read the story here.

Finally, the Regulators Are Trying to Protect You. But It’s Nothing But Bad News for Investors

Finra, which is the outfit that Wall Street pays to regulate itself, is pushing hard on a proposal that it thinks will help nail bad guys on Wall Street.

It sounds great on the surface: Give arbitrators permission to refer a rogue to the director of enforcement even as an investor’s hearing is going on. You know, so we can catch people like Bernie Madoff, who was such a trusted name on Wall Street that he was chairman of the Nasdaq Stock Market.

As of now, arbitrators have to wait until a hearing is over before they can tell headquarters that a villain is on the loose. Finra wants to be able to get on the case ASAP.

Nice idea, if only it didn’t have the potential to wreak havoc on the arbitration hearing of the poor slob who’s in the middle of trying to get his or her case resolved. It’s yet another example of the nutty things that can happen when you bar investors from going to court, where you don’t have all the secrecy of arbitration and thus don’t have to jump through hoops to figure out ways to get the word out. Here’s my story published tonight on TheStreet.com.

Anworth Mortgage, Your Greed is Showing

“Do your homework” sounds like reasonable enough advice when you’re leafing through a personal finance magazine or listening to the babble of the talking heads on a financial show. But is it practical?

In my story today for TheStreet Foundation, I write about a publicly traded real-estate investment trust, Anworth Mortgage Asset Corp. Its shareholders will vote at the company’s annual meeting today to determine whether the current board will be ousted in favor of a group proposed by activist investor Arthur Lipson.

I’m not so interested in the pyrotechnics of the fight itself. I’m just wondering if there’s any way that a shareholder without a private investigator’s license could possibly understand the far-flung activities of Anworth management without quitting their day jobs. From my story:

A thorough vetting of the company’s officials would take an investor from Anworth’s standard filings with the Securities & Exchange Commission to a hodge-podge of regulatory documents that occasionally outline mishandling of investor money by stock brokers who worked for a brokerage firm controlled by the CEO.

We really ought to stop giving the public the impression that if they just took the time to read an annual report, or a prospectus, or whatever, that they can take control of their portfolio and stay on top of things.

It’s my first column as founding journalism fellow at TheStreet Foundation, and I’m looking forward to producing more. You can read the column here.

Money Managers Make Their Distress Your Problem

This article originally appeared in Bloomberg View on December 1st, 2011.

Is it possible that, even after the uncountable lessons of the past three years, investors have learned nothing? A popular financial planner and blogger made a very public disclosure of his personal economic meltdown last month, telling the story of how he got in over his head with a Las Vegas house that had two mortgages, no equity, and a date with destiny for a short-sale with Wells Fargo & Co.

What’s stunning to me isn’t that Carl Richards of Park City, Utah, inspired hundreds of online hate-mail postings after writing his tell-all, “How a Financial Pro Lost His House,” in the New York Times on Nov. 8. The thing I’m trying to figure out is why even a smattering of readers would sing his praises. He’s “a brave guy to write what he did,” one reader wrote on the Times’s comment board. “If I lived in Utah, I would hire you in a minute,” another wrote.

Fifteen investors have sent e-mails to inquire about becoming new clients after reading the article, Richards told me in a telephone interview, and not one of his 29 clients have strayed as a result of the confession heard around the blogosphere. Anonymous writers on various blog sites mostly trashed him, but Richards says readers with the courage to contact him directly swamped him with supportive messages.

Which leads me to a single, simple question: Are you people all nuts?

It’s important to make it clear that Richards, despite his bad financial judgment in racking up a mountain of personal debt, has a squeaky-clean record with securities regulators. And it says a lot if clients are sticking with him. But all this honesty-begets-heroism nonsense tells me that some investors are still out to lunch when it comes to evaluating financial professionals. It’s a fair bet that the people applauding Richards don’t have a clue whether he’s a guy with a spotless record or is a financial Jack the Ripper.

Begging for Trouble

Separate from that, as far as I’m concerned, if you hire an adviser who is having a personal financial crisis, you are begging for trouble. It’s axiomatic that some financial advisers will be tempted to make their money trouble your money trouble.

I’m sorry, sort of, if that means deserving advisers are passed over by investors who show an abundance of caution. But this is no time to get hooked up with a broker, financial planner or investment adviser feeling the squeeze. Richards, in fact, has heard from financial planners who wrote to tell him that they, too, were in trouble, but had no one to talk to about it. Heartbreaking, I know.

There are lots more where they came from. And not all have the pristine record that Richards has.

When the credit crisis hit in 2008, financial advisers who were overleveraged, afraid of losing their jobs, or just plain crooked suddenly had an elevated motivation to maintain their income with tricks that ranged from dipping into clients’ accounts to old-fashioned churning in order to drum up commissions. No matter the state of the economy or the stock market, it’s in your interest to find out if your financial expert has liens, big loans from an employer or a history of bankruptcy. When bad times hit, you forsake that sort of investigating at your peril.

Liens and bankruptcies by brokers licensed with the Financial Industry Regulatory Authority, or Finra, are listed at the end of their public Broker Check reports. Certified financial planners with certification from the CFP Board of Standards can wind up with an online citation of any bankruptcies in their CFP histories, although it pays to check Finra, too. I’ve seen CFP records that don’t include red flags such as the short sale of a broker’s home — when a property is sold for less than the mortgage amount.

A caveat is that if the broker doesn’t report it, or the regulator doesn’t catch it, you’re not going to see it. Pay a few dollars to search Public Access to Court Electronic Records and you might catch something an adviser is trying to keep off the radar.

Professional Crisis

There’s a rash of finance professionals going through personal financial crises, says Bill Singer, a New York securities lawyer since 1985. “I’ve never seen it like this,” he told me.

A Finra spokeswoman says the agency doesn’t compile aggregate statistics about broker bankruptcies for public consumption. The CFP Board of Standards — which tests and vets financial planners – says that this year it has held 49 disciplinary hearings of planners who declared bankruptcy, up from 20 in 2010. But those numbers don’t include other warning signs, such as short sales of homes.

It doesn’t help that stockbrokers often are motivated to cheat because of six-figure upfront bonuses that convert into personal debts to their firm if they leave or get fired. Scot Bernstein, a California lawyer who represents aggrieved investors, says it keeps the pressure on brokers to follow management’s sales agenda even if it means fleecing customers. The shady firm desperate to do business sends a message “that we can toss you out on your ear for any reason, including if you don’t want to sell variable annuities to a 90-year-old,” Bernstein says.

Public records at Finra and the CFP show the link between financially pressed investment pros and customer complaints over recent post-credit-crisis years. A Minnesota broker was barred from the brokerage industry in October after using the Social Security number of a customer and personal friend — without that person’s permission — to co-sign a college loan for his daughter. The broker told Finra at a hearing that he and his wife had gotten used to doing “things we never did before” and that when times got tough, he had to “mask things a bit.” He’s appealing Finra’s bar.

A broker from Long Island was suspended for two months beginning Nov. 21 after he neglected to tell Finra about a felony charge: A Las Vegas casino filed charges, saying he’d bounced a $10,000 check with the intent to defraud. He already had contributed to settlements of two customer complaints since 2009 and has four liens listed in his records with Finra, which waived a monetary penalty because he couldn’t have paid a fine anyway.

Great Timing

Sometimes brokers file for bankruptcy with remarkable timing that gets them off the hook just as a hearing looms. Another Long Island broker has a Finra dossier that lists two criminal items; four resolved complaints that involved payments to investors; and four pending client disputes. He filed for Chapter 7 bankruptcy in February, just as a $5 million claim against him was headed for arbitration.

If you think I’m just a crank who is overstating the risk when bad times set off the cheating side of advisers, consider the perspective of an expert who has a more forgiving view of financial types who make personal mistakes: Carl Richards.

We didn’t agree on some issues when we spoke last week. I told him, for instance, that I would never let someone with his history run my money. But when I asked him whether investors should worry that ethically challenged advisers with personal money troubles might be more inclined to cheat a customer in bad times, he conceded I was “spot on.” It’s “a legitimate concern,” he said.

There are always conflicts when you are taking care of other people’s personal finances, Richards told me. But it’s “harder to handle” for the adviser whose own checkbook balance begins with a minus sign. You can see Richards’s own record under “David Carl Richards III” here.

It’s clean. Do the same thing with the name of anyone who is pitching to run your money. If you are looking to steer business to someone who is needy, get a list of deserving workers from your local church or homeless shelter. Parking your money with needy brokers is just too risky.