articles by Susan

Custodians don’t always take custody: investors beware

Custodial banks typically earn their fees based on a percentage of the value of the assets they’re holding for you. But do they have any obligation to confirm whether there are any assets there in the first place?

A Hartford jury is deliberating over that and other questions in a case brought by former customers of Bernard Madoff. Westport National Bank was custodian of the investors’ accounts. But, as it turns out, when the bank took over the accounts in 1999, no assets existed, and the bank didn’t bother to check.

The custodial issue is becoming ever-more important as investors increasingly put “alternative” investments such as hedge funds in their retirement accounts. Pricing those investments can be dicey, and you shouldn’t expect that your custodian is doing any analysis to ensure that the prices they show on your statements are realistic.

I attended several days of the trial against Westport National Bank in Federal court in Hartford in June. Here’s a story I wrote about it for The New York Times.

Kim O’Grady becomes “Mr. Kim O’Grady” and Gets the Job

I missed this one when I was off on vacation last week. A management consultant in Perth, Australia — Kim O’Grady — told the story of how perplexed he was back in the late 1990s when he shipped out his impressive resume to employer after employer, but received nothing but rejection letters.

So he studied his CV to see what might be putting people off. “A horrible truth slowly dawned on me,” he wrote. “My name.”

That is, potential employers were probably figuring that  “Kim O’Grady” was a woman, not a man.

So he says he made a single change — “Kim O’Grady” became “Mr. Kim O’Grady” — and canvassed potential employers all over again. “I got an interview for the very next job I applied for,” he wrote. “And the one after that.”

(I’m awaiting a reply from Mr. O’Grady to understand why he’s revealing a story from the late 1990s all these years later.)

I wish I could say that things have changed in the two decades since Mr. O’Grady’s apparent epiphany. Academics at Yale University asked professors in the biology, chemistry and physics departments at six major universities to evaluate applications from recent graduates looking for jobs as lab managers, slapping the name “John” on half the applications and “Jennifer” on the other half. (There was no difference in the copy other than the first names.) “John” got an average score of 4 out of 7 for competence while “Jennifer” got only a 3.3.

Similarly, a female website developer who was having a tough time drumming up new business changed her name to “James Chartrand” and business picked up nicely. I wrote about that in a blog post on September 24.

There are no doubt neanderthals out there who consciously exclude a woman when they’re evaluating job applications, but the problem is more complicated than that. A New York Times story about the Yale study said that while scientists found bias to be pervasive, it “probably reflected subconscious cultural influences rather than overt or deliberate discrimination.”

Translation: Pay attention when you’re evaluating job applicants. You may not even be aware of what’s motivating you to proceed with some applicants, but to reject others.

When markets come undone from crisis fraud, regulators investigate something else

The public was pretty peeved about the financial crisis in 2008, and regulators felt the pressure to produce a few scalps in response. So what did the regulators do? They investigated something that had nothing to do with the crisis.

I reviewed Charles Gasparino’s new book “Circle of Friends: The Massive Federal Crackdown on Insider Trading — And Why the Markets Always Work Against the Little Guy” for Bloomberg Muse this week.

Gasparino tells the story of the all-out war on insider trading that began in 2008, and he questions the regulators’ priorities in pursuing inside traders when there were people who’d just about brought down the economy roaming free.

The book has some problems, but Gasparino is right that our regulators are chasing all the wrong people. Here’s the review.

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.

Amaranth hit death spiral as sycophants, fools cavorted

The Greenwich, Connecticut hedge fund Amaranth Advisors LLC collapsed in September 2006 after losing more than $6 billion in the natural-gas futures market. I reviewed the new book about the debacle, “Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster,” for Bloomberg Muse today. You can read it here.

How banks keep the lid on sex discrimination cases (and thus avoid having to change)

In my Bloomberg View column earlier this week, I wrote about the disconnect between image and reality when it comes to Deutsche Bank’s record on diversity. The Frankfurt-based global bank wins all those warm-and-fuzzy prizes for “Best Company” for working mothers, for example, but is the target of lawsuits brought by women who say are treated with nasty little barbs at work such as “Maybe I should get pregnant so I can work from home.”

Those same women say they endured more than Neanderthal-style comments from the guys: They say lost their jobs when they became mothers, too. Deutsche Bank dodged a bullet big-time when two women who were considering a class-action pregnancy discrimination suit settled with the bank earlier this year. In a court filing, the bank denied one of the pregnancy claims against it, and its spokeswoman Michele Allison declined to comment on the others.

Discrimination against women on Wall Street is a persistent problem that hasn’t been fixed despite an assortment of programs that purport to address it. Deutsche Bank, in fact, takes a deep bow for its programs around the world for women in finance. The bank says that 5,000 women from Deutsche and other firms attended their conferences for women last year alone.

Despite all the woman programs, diversity training and new “heads of diversity” jobs at financial firms, the lawsuits and internal investigations around gender discrimination just keep on coming.

Deutsche Bank is far from the only problematic bank out there — they all are. But  it does have some history that illustrates how hard financial firms work to keep the public from knowing how bad things are for their female employees. In a splashy lawsuit filed more than a decade ago, Virginia Gambale, a partner in Deutsche Bank’s Capital partners unit, said she was passed over for a promotion because of gender discrimination and that the bank’s work environment was hostile to women. She would wind up with a “multi-million dollar settlement,” according to a transcript of a court conference in her case.

Gambale’s lawsuit described a September 1999 business meeting she was required to attend in Cannes, France where approximately 100 men and 5 women had to walk past “a welcoming committee of ‘sex goddesses’ who were wearing revealing clothing that was highly inappropriate for a business meeting.” The complaint said that entertainment at the meeting included “a scantily clad Marilyn Monroe look-alike, who publicly fondled several male executives.”

The most interesting part of her lawsuit, though, were the lengths Deutsche Bank went to to avoid having information about the gender breakdown of salary and promotion at the bank become public. In an August 2, 2004 ruling by the U.S. Court of Appeals for the second circuit, Judge Robert D. Sack described some of the history around efforts by the bank to lock up documents.

During discovery, Deutsche Bank had produced compensation planning charts “and four pages of an internal Bank study of diversity at the Bank, which contained information about the gender composition of the Bank’s employees,” Sack wrote. The judge added that the bank had said the settlement was “motivated significantly by its desire to avoid public disclosure at trial of the temporarily sealed documents.”

Sack wrote that Harold Baer, the district judge in the case had “wondered aloud why the public should not know about discrimination at a major banking institution.” Baer told the bank that he’d disclose the contents of the settlement agreement unless Deutsche Bank agreed to hire a third party to do a global gender review and provide the results to the court. No way, said the bank, cooking up a stipulation of dismissal with Gambale to get the case out of Baer’s jurisdiction.

Over the years, I’ve spoken to a number of women who’ve taken settlements after years of emotional and expensive litigation. They get worn out, and often wind up feeling guilty that they didn’t fight to the bitter end in court so that the ugly details of gender differences in pay and promotion would be exposed. Those who can’t sue in court because of mandatory arbitration agreements don’t even get satisfaction when they win: Men who lose a discrimination or harassment case do not have to reveal that in their public “BrokerCheck” records. Is there any wonder the problems go on and on?

What we really need is a system that forces employers to report how many internal complaints they’re getting that allege discrimination, and how much men and women are being paid for doing similar jobs. We’ve got an Equal Employment Opportunity Commission, after all, and it’s time that agency’s mandate was expanded to demand those statistics. The way things work now, there are too many ways for banks and brokers to keep evidence of their discrimination under lock and key.

A bit of welcome news in all this: It turns out that six years after Gambale’s 2003 settlement, some of those Deutsche Bank documents were unsealed. They are not available electronically, but I’ve put in a request with a document service to get them. Look for another post when I’ve got them in hand.

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.”