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.

New Evidence May Reopen Broker Fraud Case

You may recall the bizarre story of the Long Island stockbroker who hoodwinked the producers of the Broadway show “Rebecca” into thinking he’d lined up millions of dollars for the show. The producers put up $60,000 and the broker, Mark C. Hotton, put the money in his pocket.

It was a strange tale in many ways, not the least of which was that Hotton had been fleecing investors of millions of dollars for years before he wound up in headlines for picking up a paltry $60,000 from the show biz chumps.

I nearly choked when I read that Manhattan U.S. Attorney Preet Bharara had said in a press release that the FBI had uncovered Hotton’s misdeeds “with lightning speed” in 2012. Hotton had been fleecing people ever since he forged documents and bounced a $31,550 check to buy some used cars in 1990. That’s some pretty slow lightning.

In my story for The New York Times last week, I wrote about the latest twist in Hotton’s story. His former employer, Oppenheimer & Co., had been ordered by arbitrators to pay out only $2.5 million of the $5 million that a married couple had lost at Hotton’s hands. Then, six months later, their lawyer discovered evidence that the firm had held back a smoking gun. Read about it here.

 

Wall Street Says It’s Classier Than “Wolf of Wall Street.” Really?

The depiction of stock brokers in that “Wolf of Wall Street” movie has the securities industry on the defensive. In my column today for Investopedia.com, I talk about how a faction that considers itself the “real” Wall Street is anxious to get the word out that it has no similarity to the thugs who appear in the movie with Leonardo DiCaprio.

Ask a pal at a Wall Street firm about the box-office hit The Wolf of Wall Street, and brace for one of those sour faces that suggests there’s a bad smell in the room. Those sex-obsessed, drug-taking thugs who ripped off investors in Martin Scorsese’s all-time, biggest-grossing film have nothing in common with the refined investment professionals who do business on real Wall Street, they will tell you.

But that’s not entirely true. The Wall Streeters who wear expensive suits and do business in Manhattan may not be tossing midgets around the trading room, as the perhaps less genteel Long Island brokers in the movie did. They aren’t above hurting investors, though.

“If people understood the similarities between Belfort and Wall Street, there would be a riot in this country,” says Dennis Kelleher, CEO of the investor advocacy group Better Markets Inc. Kelleher explains, for example, that Belfort’s operation dealt in barely-regulated penny stocks that came with either skimpy information or documents that twisted or obfuscated the facts. On conventional Wall Street, says Kelleher, firms bask in the convenience of the opaque, too, trading the kinds of over-the-counter derivatives that helped crash the economy in 2008.

Here’s a link to the story.

One in Five Senior Citizens Fall for Financial Scams

As many times as I’ve run across stories about financial ripoffs of the elderly, I still can’t help but be shocked at the cruelty it takes to fleece people who are so fragile. In my article yesterday for TheStreet.com, I wrote about how much worse the problem has become, and how it will only get worse from here.

While elder financial abuse is in some respects nothing new in the annals of fraud, the aging of the baby boom generation and Americans’ increasing longevity are coming together in a perfect storm that could cause the problem to skyrocket. A 2010 survey by the Metropolitan Life Foundation estimated that victims of elder financial abuse lost at least $2.9 billion in 2010, up 12% from 2008.

I begin with a story about 73-year-old Charles S. Bacino, who lay dying in a hospital bed in 2012 when the man he called his “financial affairs manager” came by to visit and persuaded him to invest $82,000 in a cocoa and banana plantation in Ecuador. Mr. Bacino, who was hooked up to a morphine drip to soothe the pain of his pancreatic cancer, gave his keys to the man so that he could fetch his checkbook. Less than a month later, Mr. Bacino was dead and the whereabouts of his money was a mystery.

You can read the full article here.

About that Reformed ‘Wolf’ of Wall Street

Jordan Belfort, who did jail time for fleecing investors at Stratton Oakmont, the Long Island brokerage firm he founded, has put himself out there as a reformed man. Indeed, he has been making money legitimately, giving speeches to audiences enthralled with the idea of spending an hour or so in the same room as a convicted felon who claims to have seen the light.

Belfort is, of course, the author of the 2007 book “The Wolf of Wall Street,” which was made into a movie starring Leonardo DiCaprio (playing Belfort) that was released last month. He’s taken to social media to inform the public that he’s a good guy who is giving all the movie proceeds back to the investors he defrauded. But the prosecutors who put him in jail say he’s not telling the story just right. I write about it in my story today in The New York Times.

 

 

Is Your Stockbroker Smart Enough to Understand the Product He’s Selling You?

Brokerage firms spend big bucks on TV and print ads that depict their stockbrokers as informed, sophisticated professionals who are looking out for clients. So it might come as a surprise to know that when investment products blow up, brokers have been known to complain that they had no way of knowing that the product was bad.

In my story for The New York Times tonight, I show how brokers wiggle out of responsibility  when they sell customers a product that turns out to be garbage. You can read the story here.

Investors’ Story Left Out of Wall Street ‘Wolf’ Movie

You’ve seen the trailers.  A convicted stock fraudster played by Leonardo DiCaprio parties it up on his 170-foot yacht and entertains his office of crooked stock brokers with a half-naked marching band that celebrates the group’s  latest money haul from their clueless clients.

Paramount’s “The Wolf of Wall Street” is a 3-hour movie that opens Christmas Day. I saw a screening in New York on Wednesday night. The mostly 30-something crowd loved watching the hard-partying life that comes when you perfect a method to steal from the public.

My prediction: Young people will be wowed by DiCaprio’s character, Jordan Belfort, just as they were by Michael Douglas aka Gordon Gekko (remember “Greed is Good?”) in the movie “Wall Street.” Douglas said in this story that he was “shocked” that young people decided to work on Wall Street after watching him play a Wall Street bad guy.

Ask your college-aged kids what they think when they see the movie, and let me know.

It was sort of bothering me that amid all this hard partying and cocaine-snorting that nobody had bothered to mention that people actually got hurt by the funny brokers who throw midgets at a bullseye for fun. Thus, my story in today’s New York Times: “Investors’ Story Left Out of Wall Street ‘Wolf’ Movie. You can read it here.

Black Marks Routinely Expunged from Brokers’ Records

Stock brokers who settle with an aggrieved customer are able to get the go-ahead to delete the customer’s complaint from their records almost every time they ask, according to a study released Oct. 16. I wrote about it in today’s New York Times.

To understand the history of these broker shenanigans, take a look at an earlier story that I wrote for The Times on June 10: A Rise in Requests From Brokers to Wipe the Slate Clean.

It’s a topic I’ve been watching for some time. Eleven years ago, brokers were on an earlier push to make their bad records look good, and I wrote about that for Bloomberg Markets Magazine — How Wall Street Protects Bad Brokers. So when Wall Street’s self-regulators at The Financial Industry Regulatory Authority (Finra) tell you this problem emerged in 2009, consider this article from 2002:

Schwab Case Could Mean Even Fewer Chances for Investors to Get Into Court

If you’re an investor who’s lost money at the hands of a broker who may have broken securities laws, you are pretty much stuck. In 1987, the Supreme Court said in Shearson v. McMahon that a brokerage firm had the right to force investors to forego court — and instead use industry-run arbitration — in the event of a grievance. Brokers did that by including a so-called “mandatory arbitration” clause in their customer agreements.

That means no public filings, no judge, no jury and no members of the public permitted in your private courtroom. Once the McMahon ruling came down, virtually every brokerage firm raced to add a mandatory arbitration agreement.

The only way since then that the investing public could get before a judge and jury has been in egregious cases where multiple investors claim to have been ripped off in the same way — a class action. Those cases, up to now, have been allowed to proceed in public view.

In 2011, though, Charles Schwab & Co. added a provision to its customer agreements saying that its clients couldn’t partake in class actions, either. Finra, a regulatory organization funded by Wall Street, objected to that. I write about what it all means in my story tonight for The New York Times. You can read it here.

How to be a problematic broker with a good record

Don’t believe everything you read – or don’t read — when you check up on your stockbroker.

Brokers and Wall Street executives with black marks on their public records are working hard to get those blemishes deleted, a topic I got into in my story for The New York Times last week.

In “A Rise in Requests From Brokers to Wipe the Slate Clean,” I summed up some of the more egregious examples of Wall Street employees persuading arbitrators at the Financial Industry Regulatory Authority (Finra) to recommend expungement of their peccadilloes.

Kimon P. Daifotis, for example, managed to get arbitrators in eight different cases against him to recommend expungement since last August – a remarkable feat considering that on July 16, the former Charles Schwab executive had agreed in a settlement with the Securities and Exchange Commission to be barred from the business and to pay $325,000 in penalties and forfeited profits related to his role the Schwab Yield Plus fund, in which investors had lost millions of dollars.

He didn’t admit or deny wrongdoing in that case and will be allowed to reapply for Finra membership in 2015.

Brokers have to take their expungement recommendations to court to be approved once an arbitration panel has recommended deletion, and Pasadena, California broker Debra Reda-Cappos will be doing exactly that on August 15. Investors Howard and Karen Snyder accused Reda-Cappos of breach of fiduciary duty and fraud in a complaint filed with Finra on October 12, 2010, and the two sides told the panel on October 3, 2012 that they had settled.

Neither Reda-Cappos nor her lawyer Kasumi Takahashi responded to my email queries. But in granting a recommendation that the Snyder case be expunged, the arbitrators noted that the claim was “false” and that the couple “did not prove their claim.”

It’s a no-brainer that they would not have proven their claim: There was no hearing to prove or disprove it.  So it’s more than a little weird that the arbitrators would use that as a way to justify cleaning up a broker’s record.

The Snyder case settled for $116,000, according to Reda-Cappos’ Finra records.

Before those arbitrators recommended the expungement, a lawyer for the investors, Leonard Steiner, told the panel that his clients were willing to say under oath that everything in their claim was true, according to the arbitrators’ award. But the panel didn’t ask the Snyders to do that, and gave the go-ahead on the expungement anyway, Steiner says.

Plaintiffs lawyers have been getting steamed that brokers are strong-arming investors to endorse expungements before they’ll settle. There’s a “disturbing trend” of firms routinely asking investors to agree that they won’t oppose expungement, says lawyer Brett Alcata of San Mateo California.

Those arrangements put the plaintiff’s lawyer in a box. They have an obligation to get the best settlement possible for their clients, but cringe at the idea that the next investor who comes along won’t get the full story on the errant broker. Finra shouldn’t allow settlements to include provisions that the customer won’t oppose expungement, says Steiner.

Sometime this summer, Finra will propose new rules that will make it even easier for brokers to expunge their records. Brokers have been irritated by a Finra rule enacted in 2009 that forces them to reveal complaints even when they are not named in a lawsuit. So if John Smith’s firm is sued because of fraud that Smith allegedly committed, the broker now has to list that on his BrokerCheck even if he isn’t a defendant.

Under pressure from the industry, Finra is expected to propose  a new “expedited” process to clean up black marks: The broker would be able to ask a panel for expungement at the end of an arbitration hearing, and the arbitrators would have the power to approve – but not deny – the request. Should that not work, the broker could take another stab at getting an expungement in a separate proceeding.

The proposals were mapped out in a Dec. 6 Finra memo to members of its National Arbitration and Mediation Committee. “We cannot comment on Board deliberations or confidential memos to Finra committees,” Finra spokeswoman Michelle Ong told me in an email.

Stockbrokers say the darndest things

I was at a local bank this morning, filling out the paperwork for a Certificate of Deposit, when I overheard a stockbroker in the next cubicle trying to answer questions from a worried elderly couple who’d come in with an account statement that had alarmed them.

“As long as you hold the CMO to term, you can’t lose money,” the broker said, referring to their investment in a collateralized mortgage obligation. I couldn’t help but wonder which would happen first — the maturity date of the CMO or the year of the couple’s estimated life expectancy.

I looked up at the bank officer who was doing the paperwork for my CD. “You guys sell CMOs?” I asked. Yes, indeed, she told me, not the least bit taken aback when I asked “Why are you selling risky stuff like that at your bank?”

He’s doing great!” she said of her huckster colleague, and I could hardly argue with that. “I’m sure he is,” I replied, my sarcasm going totally over her head.

I’d begun to scribble notes as the back-and-forth continued between the seniors and the broker. “It’s backed and guaranteed by the U.S. government,” the salesman told his customers. But the husband kept coming back with questions. “But the value’s gone down,” he said.

No sweat, the broker told him. That’s just partial return of your principal, he said. “This valuation number means nothing.” But no, the value’s gone down more than the amount of the principal repayment, the husband countered. “Pay no attention to the losses,” said the broker. “I have no concerns. This is the best buy in the industry.”

Best buy in the industry for the broker, maybe. Even if that investment winds up working out fine for the couple, they clearly didn’t understand what they’d purchased. And if they wind up losing, smart money says that broker will swear he never told those customers that anything about their CMO was “guaranteed.”

Best investment advice: Vet brokers yourself, because regulators aren’t doing it for you

Just because a stock broker has a license to do business doesn’t mean they’ve received a meaningful stamp of approval from regulators. Next time some financial person is pitching you for business, go back and read the stunning coverage of Mark C. Hotton, a guy who allegedly was fleecing investors for years as regulators sat back and ignored a stream of red flags.

Hotton is the fellow who fooled the Broadway producers of “Rebecca: The Musical” into thinking he’d raised millions of dollars in financing for them. The producers of Rebecca only lost $60,000 doing business with Hotton. Others haven’t been so lucky.

Hotton is in jail today, and it’s a joke when you consider that, after years of alleged stealing of millions from investors, he finally got caught because he fleeced a few big-shots from show-biz. It’s even more of a joke that U.S. prosecutors took a deep bow for their “lightning speed” sleuthing after catching Hotton 22 years after his first crime — which should have been a reason to keep him out of the brokerage business altogether.

I wrote about Hotton’s capers in a recent Bloomberg column. A week after that story, I wrote a second one, this time for TheStreet.com, about a fresh complaint against (the now-incarcerated) Hotton filed by Finra, which is the Wall-Street-funded regulator that is overseen by the Securities and Exchange Commission. There really ought to be a special judicial forum where the public can bring complaints against regulators who are utterly clueless.

‘Dumb Money’ Is Staring Most of Us in the Face

Americans are pretty much illiterate when it comes to finance. They don’t know how to read a stock trade confirmation and have problems figuring out how much commission they’re paying their brokers on a mutual fund sale.

For years, professionals on Wall Street have sneered at the public as “the dumb money.” Well, they may not be geniuses on Wall Street, either. But they’re right that retail investors could use some serious coaching.

A recent report by the Securities and Exchange Commission mapped out in 182 painful pages how little the public understands about finance (which suits some people on Wall Street just fine, by the way). I talk about the grim details in my latest Bloomberg View column:

 ”Consider the profile of the 4,800 investors surveyed for the report, which concluded that they “lack basic financial literacy.” More than half had full-time jobs, 11 percent had part-time jobs, 70 percent had at least a two-year college degree and 63 percent had annual income of more than $50,000. We’re not talking about Mitt Romney’s indolent moochers here. The dumb money could be your neighbor. Or you.”

The results have inspired calls for financial literacy programs starting even in elementary school, but let’s get real. From the looks of things, school administrators don’t even have the resources for plain-vanilla literacy programs, let alone special classes in personal investing.

An alternative to new programs: At least get the public smarter about avoiding fraud. I have some ideas about that that you can read here.

Vetting a Stock Broker? Pay Attention to Who’s Supplying the Records

Investors are spending more time checking on the backgrounds of the financial types who pitch for their business, and that — mostly — is a good thing.

The public used a regulatory database to check the records of 14.2 million stockbrokers and advisers last year, according to the Financial Industry Regulatory Authority, known as Finra, a self-regulatory group that’s financed by Wall Street. That’s more than double the 6.7 million searches in 2007, the year before the financial crisis began.

Nothing wrong with investors getting more vigilant, of course. But there are some important caveats about what investors get when they check in with a broker-vetting site.

Finra’s records don’t include lawsuits against brokers that aren’t considered “investment-related.” That means that a lot of brokers who are exposed to the possibility of big judgments have official records that say nothing about that exposure.

And then there’s the issue of the freebie websites popping up to help investors vet brokers. Check the fine print, and you learn that some of those sites get their revenues from advisors who pay to be featured. If you get it for free, and the broker pays to get his or her name in front of you on the site, can it really be investor-friendly?

I took a look at the broker background-checking business in my latest column for Bloomberg View. Read article.

25 Years of Business Dodging the Courts: Happy Anniversary, Folks

It’s happy 25th anniversary to somebody today, but not to you if you’re an investor, a consumer, or an employee who toils outside of the executive suite. On June 8, 1987, the Supreme Court said it was OK for brokerage firms to require customers to give up their rights to court in the event that a broker ripped them off. Instead of open court with public records and annoying reporters who could chronicle the sordid details of abuse of the little guy, investors since then have been stuck in “mandatory arbitration” that’s run by — guess who? — the brokerage industry. Continue reading

Ex-Con Man Says JOBS Law
Makes Guys Like Him Rich

The JOBS Act is a slapdash attempt at securities-law deregulation, plain and simple.

Mark L. Morze knows a good investment opportunity when he sees one, but he hasn’t pursued his fortunes quite the way the rest of us have. Morze, 61, hung his hat for 4 1/2 years at federal prisons in Lompoc and Boron, California, after pleading guilty to two counts of fraud for cooking the books at the infamous carpet-cleaning company ZZZZ Best (ZBSTQ) in the 1980s.

He says he’s baffled that President Barack Obama plans to sign a law today that amounts to an open invitation for fraud. “I wish legislators would consult with people like me before they write something like this,” he says, sounding dead serious about the offer. “I could tell them, ‘I know what your intent was with this wording, but we can get around it so easily, it cracks me up.”’  Read article