Regulatory “Reform” Bill Shafts Individual Investors

by Jacob Zamansky on March 11th, 2010 at 6:31 pm : Comments 000

I should have known it was too good to be true.  A few months ago I was enthusiastically optimistic that the regulatory reform bill Congress was looking to pass would include an important investor protection measure known as the “fiduciary duty” standard, which would require brokers to put their clients’ financial interests ahead of their own.  Senator Christopher Dodd (D-CT) said he supported the measure, as did SIFMA, Wall Street’s lobbying arm. Indeed, John Taft, head of the SIFMA committee on regulatory reform, even acknowledged, “It’s a big deal for our industry to do this.”  The SEC and FINRA also indicated support for adopting the standard.

Despite all the declared “public” support, it’s near certain that the regulatory reform bill Congress is expected to pass next week won’t require holding brokers to a fiduciary standard.  The provision has been quietly dropped from the proposed legislation currently being circulated.  The omission should be of major concern to investors who buy stocks, bonds, and other financial products from Wall Street brokers.

Wall Street brokers currently must adhere to what’s known as the “suitability” standard, which Wall Street maintains means that they are only required to sell financial products suitable for clients at the time of sale and they don’t have to disclose commissions.  On a practical level, for example, if a broker puts a client into a certain stock, Wall Street maintains that the broker isn’t responsible for monitoring the performance of that stock after the sale is completed.  The stock only has to be “suitable” at the time of sale.  Under the “fiduciary duty” standard, the broker could be required to monitor a client’s entire portfolio and ensure that it remains consistent with the stated investment objectives.  The broker also could be required to sell financial products at the lowest available cost.

Put simply, the fiduciary duty standard would dramatically raise the standard of client conduct brokers would be legally required to maintain.

There is a compelling argument for requiring brokers to adhere to a fiduciary standard.  They typically market themselves as financial “advisers” and a $875,000 study the SEC commissioned in 2008 found that’s how most investors regard them.  As the saying goes, “It it quacks like a duck…”

It’s not yet clear to me how the fiduciary standard provision from the latest draft bill proposal disappeared, but there is evidence that Wall Street was possibly head-faking support while quietly moving to kill the measure.   A Morgan Stanley memo recently uncovered by Bloomberg advocated that the SEC “should be given the responsibility to thoughtfully review brokerage services and regulations, and promulgate new, specifically tailored rules for the brokerage business.”  Translation: Let’s refer the matter to the SEC and let their staffers study and bury the matter.  Morgan Stanley, the firm with the biggest broker network, has good reason to fear the adoption of a fiduciary standard: the standard could ultimately cost the firm up to seven percent of its earnings, according to an analyst.

Given that Wall Street brought the nation to near ruin, one might have expected that Congress would finally have had the will to stand up to the industry’s powerful lobbyists.  But once again Wall Street has trumped the system.  And the SEC and FINRA, which unilaterally could implement the fiduciary standard, have opted to remain on the sidelines.

Individual investors should take note how there is no one in Washington moving to protect their interests.

Filed under FINRA, SEC, Wall Street
and brokers, fiduciary standard, financial advisers, suitability standard

The Enlightment of SEC Commissioner Luis Aguilar

by Jacob Zamansky on March 10th, 2010 at 11:23 am : Comments 000

The SEC reportedly is considering getting tougher calculating fines in matters involving corporate fraud, the Wall Street Journal has reported. The initiative is apparently driven by Commissioner Luis Aguilar, who believes that fines for fraud should in themselves deter fraud; under the guidelines the agency set up in 2006, the severity of fines is currently determined by whether a company benefited or was harmed by a fraud and whether the penalty would help or hurt shareholders harmed by the fraud.

I’ve long maintained that SEC fines too often are mere love taps and do little to discourage wrongdoing, so I naturally applaud Aguilar’s leadership.

The SEC’s five-member commission must still vote on revising the 2006 guidelines.  Let’s hope that Aguilar can prevail on his colleagues.

Filed under SEC, fraud

Annuities and the Avoidance of the Fiduciary Standard

by Jacob Zamansky on February 24th, 2010 at 4:02 pm : Comments 000

There’s a saying on Wall Street: “Structured products are never bought, only sold”. The same could be said of annuities.

Selling annuities is an extremely lucrative and virtually risk-free business, which is one of the reasons why insurance companies and some Wall Street firms are aggressively lobbying Congress not to require brokers and other purveyors of financial products to adhere to a so-called “fiduciary standard.” Under the proposed standard, brokers and insurance salesmen would be required to put their clients’ interests ahead of their own, likely forgoing high-commission annuities for other, more appropriate investments.

Not surprisingly, Morgan Stanley has voiced concerns that the fiduciary standard would cut into its business. Morgan Stanley has good reason to worry: The firm earned $37 million from selling annuities in the first quarter of 2009 alone, or 1.22 percent of its noninterest income, according to a report by the American Bankers Insurance Association (ABIA). A Morgan Stanley spokesman recently told Bloomberg that expanding the fiduciary standard to include brokers would impinge upon the firm’s ability “to provide clients with products and services they want.” Or, perhaps more accurately, don’t want.

Some annuities are suitable products for investors, however, more times than not, they come with hidden costs and penalties (commissions can be as high as 7-10%) that vastly diminish their value.  Even FINRA has acknowledged the problem.  Richard G. Ketchum, the head of FINRA, recently acknowledged in the New York Times that there “had long been problems with how brokers disclosed their conflicts and how they pushed products.” Last year FINRA fined Fifth Third Securities $1.75 million for what they declared to be 250 unsuitable variable annuity transactions and five other broker-dealers were fined a total of $1.65 million for unsuitable sales of annuities, mostly to elderly investors with conservative investment objectives.

The securities industry likes to say it supports a broad fiduciary standard, but that’s far from the truth.  SIFMA, Wall Street’s lobbyist, has publicly supported a proposal by the House of Representatives which would create a new, “limited” fiduciary standard for brokers only when they are giving “personalized investment advice” to their retail clients.  In other words, brokers would have the discretion to decide when they are providing financial advice and when they are selling snake-oil. FINRA also supports the House bill.

Senator Chris Dodd has issued a much needed proposal that removes the distinction between brokers, insurance agents and an investment advisers.  This, combined with a comprehensive fiduciary standard would go a long way to protecting investors.

However, it’s increasingly unlikely that the fiduciary standard, under pressure from the insurance lobby and Wall Street, will ever see the light of day. Once again the interests of individual investors will be ignored.

Filed under Uncategorized
and annuities, fiduciary standard, insurance industry, Wall Street

Elder Financial Abuse Rampant During Economic Downturn

by Jacob Zamansky on February 18th, 2010 at 5:54 pm : Comments 000

Mention the phrase “elder abuse” and most lawmakers conjure up images of the fleecing of Brook Aster’s estate or an elderly relative kept in squalid conditions.  Cases like these usually make for excellent tabloid fodder.  In fact, recently the New York Post prominently featured a story about Cher Thompson, a young woman who allegedly bilked a near deaf 90-year-old man with dementia of his life savings.

But what gets lost is perhaps the most prevalent form of elder abuse-financial elder abuse by stockbrokers.  FINRA, Wall Street’s governing and enforcement body, defines financial elder abuse as the “misuse of an older adult’s money or belongings by a relative or person in a position of trust.”

A clear cut example recently made headlines in a number of financial trade publications.  Two stockbrokers named Thomas B. Cooper and Peter L. Boorn at Beverly Hills-based StockCross Financial Services Inc. allegedly bilked a 95-year-old investor named David Wolfson of nearly all his assets and put his house at risk after recommending unsuitable and risky investments.  The brokers dropped Mr. Wolfson as a client once they drained him of his cash.  An arbitration panel awarded Mr. Wolfson triple damages in the amount of $1.6 million, an unprecedented amount, underscoring the severity of the abuse.

Exploiting the elderly is actually quite common on Wall Street.  There isn’t a lot of money to be made managing the accounts of risk-averse investors who are looking to clip coupons and live off the interest income from their investments. Some Wall Street firms just can’t help themselves and see the elderly as ripe for the picking.

Another recent example was the case of Sergio M. Del Toro.  Mr. Del Toro is now banned from the securities industry for defrauding a 90-year-old Minnesota man who lived in a nursing home of $511,000.  Mr. Del Toro recommended that the elderly man put his entire net worth into the company stock of a firm called 3rd Dimension, for which there was no market or publicly quotable pricing.  Mr. Del Toro’s alleged motiviation was a classic one: he received a 15 percent commission, or about $76,650.

Elder abuse can also take the form of sales of securities that on the surface seem reasonable but in fact are inappropriate.  Although FINRA specifically warned brokerages in 2007 against taking advantage of elderly investors, it didn’t stop Wall Street in 2008 from targeting the elderly with investments that preyed on their need for liquidity.  The most common of these investments were the preferred shares of major financial institutions that offered attractive dividends.

Sophisticated investors knew that in 2007 and 2008 many banks were teetering on the brink of insolvency.  Because the banks needed capital to stay afloat, they increased the dividends on preferred shares of their stock, a tell-tale sign of financial distress.  Preferred shares of companies like Lehman Brothers, Fannie Mae, Freddie Mac and Wachovia offered dividend payments of more than eight percent.  Brokers from some of the most recognizable firms in the country pitched these investments to retirees like fixed income instruments which can provide an ongoing stream of cash for monthly bills.

In many cases, including a number of those our firm represents, elderly investors were convinced to sell very conservative investments such as CDs in order to purchase these supposedly safe, liquid securities.  A very common pitch elderly investors heard was that Fannie and Freddie were “government backed” so the securities were “safe.”  In reality, Fannie and Freddie stock was not government backed and the preferred shares were rendered nearly worthless as the market crashed.

An implicit “guarantee” is also commonly pitched when brokers attempt to sell what’s known as “structured products.”  These synthetic derivative securities carry names like “Principal Protected Notes,” which implies that the initial investment is safe.  We represent retirees that were sold these toxic products issued by Lehman Brothers, which of course, became worthless after the firm collapsed.

Untold thousands of elderly investors lost “irreplaceable money” last year, in what can only be described as a racket.  Typically out of the workforce, their only option is to file an arbitration claim against their bank.  Tragically, most cases are never reported and the ones that are, are pursued only after an elderly investors next of kin realizes a fraud has taken place.

Inexplicably, there is little if any attention to financial elder abuse in the current financial regulatory reform packages.  Congress and the White House would be wise to roll into their proposals a modest bill introduced by Senator Orren Hatch (R-UT) and co-authored by Senator Blanche Lincoln (D-AR).  Dubbed the “Elder Justice Act,” the proposal centers on advocacy and awareness of “elder abuse, neglect and exploitation at the local, state and national level.”

By 2030, one in five Americans will be over the age of 65.  At a White House Conference on Aging it was determined that one out of every six elderly people will become victims of financial exploitation. It’s very clear that if regulators do not act quickly financial elder abuse could become an epidemic.

Filed under Wall Street
and elder financial abuse

Securities America and Medical Capital Holdings Investigation

by Jacob Zamansky on February 11th, 2010 at 3:14 pm : Comments 000

Zamansky & Associates is investigating potential investor claims against Securities America, an independent brokerage firm, as well as its parent company, Ameriprise Financial, for the sale of private placement notes in Medical Capital Holdings, a medical receivables company that is facing charges of fraud from the Securities and Exchange Commission.  We are also looking into claims against other broker-dealers who sold notes issued by Medical Capital Holdings.

According to reports, the SEC has accused Medical Capital Holdings of fraud for the sale of $700 million of private securities in the form of notes. Since that time, a court-appointed receiver has evaluated Medical Capital’s assets and has questioned the structure of the six deals Medical Capital sold from 2003 to 2008. In total, Medical Capital raised $2.2 billion from investors.

Apparently, brokers continued to sell Medical Capital notes even after an executive at Securities America sent an email to an official at Medical Capital, in which he expressed grave concerns about a possible “run on the bank” at Medical Capital.

To learn more about our investigation or to pursue a potential claim please contact us here.

Filed under Investment Fraud
and Ameriprise Financial, Securities America

Reuters Reports Zamansky & Associates and Co-Counsel Rich & Intelisano Win Major Case Involving Defunct Bear Stearns Hedge Funds

by Jacob Zamansky on February 9th, 2010 at 5:17 pm : Comments 000

As reported in Reuters, Zamansky & Associates and co-counsel Rich & Intelisano represented an investor who won $3.4 million in the first arbitration case involving the Bear Stearns hedge funds laden with exposure to the sub-prime mortgage market.  To read the article please click, here. To read the award please click, here.

Filed under Bear Stearns Hedge Funds

The Perils Of Letting A Relative Manage Your Money

by Jacob Zamansky on January 29th, 2010 at 12:15 pm : Comments 000

In journalism they say three makes a trend and regretfully my office has identified a disturbing one relating to investors who let a family member manage their money.  During the past few months we’ve been contacted by various individuals whose accounts were grossly mismanaged by a family member, including a father whose son put him into some investments that were patently unsuitable for his risk tolerance.  The father has a compelling case, but he’s torn about filing a case against his own flesh and blood.

In theory, choosing a relative to manage your money makes sense on the belief that a relative is more likely to act in one’s best interest.  Brokerage firms prey on this perception; when a broker enters the business he or she typically is instructed to contact family members to attract assets to the firm and build his or her book of business.  It’s tough saying no to young Johnny or Jane when they politely hit you up for some assets to manage at the outset of their careers.

But it’s dangerous to assume that a family member always can –or will — serve a relative’s best interests.  Brokers are under tremendous pressure to push commission-based products and often even they are not fully informed — and sometimes misled — by their bosses about the securities their firms are pressuring them to peddle.  Auction rate securities and structured notes are but two egregious examples where brokers were pressured to sell products to clients without them fully understanding the risks.

Another risk is that brokerage firms don’t properly monitor the accounts brokers manage on behalf of relatives with the same diligence as regular accounts.  Indeed, there have been several instances where brokers engaged in insider trading tried to avoid detection by parking securities in the accounts they managed on behalf of relatives.  Even if a family member isn’t doing anything untoward, it’s best that your account be subject to the customary firm due diligence to ensure your goals and objectives are being followed.

But perhaps the biggest risk of all is that most investors are incredibly reluctant to sue a family member for mismanaging an account because it could potentially cause a major rift in the family.  But I predict this is going to change, as the dramatic downturn in the market in 2008 dramatically eroded the life savings of  many individual investors. Mark my words, there are going to be some rather extraordinary cases being filed in the months ahead involving parents and their children and other close family members.

Based on what I’m increasingly hearing, if you value the intimacy of holiday gatherings and special occasions, it’s best to keep family and money management separate.

Filed under Investment Fraud, Wall Street
and elderly abuse

Bank of America’s Brian Moynihan Pulls A “Mark McGwire”

by Jacob Zamansky on January 19th, 2010 at 11:05 am : Comments 000

As I was watching yesterday’s hearings convened by President Obama’s Financial Crisis Inquiry Commission I couldn’t help recall how former baseball slugger and admitted steroid user Mark McGwire sidestepped a question at a Congressional hearing about whether he ever used performance enhancing drugs.

“I’m not here to discuss the past,” he replied, a response quite likely coached by his attorneys to ensure he didn’t say anything legally culpable.

Similarly, Bank of America CEO Brian Moynihan gave a deft legal response when testifying before the Financial Crisis Committee.

“It has been clear how poor business judgments we have made have affected Main Street,” he said.

Though the significance of Moynihan’s comment was lost on the media,  he, too, was making certain he avoided saying anything that could legally come back to haunt him.  There is an aptly named legal doctrine called the “business judgment rule” which states, among other things, that a court will not review the business decisions of directors who performed their duties (1) in good faith; (2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the directors reasonably believe to be in the best interests of the corporation.

Moynihan, a lawyer by training, plays possum with a skill that would do famed heavyweight boxer Muhammad Ali proud.

Filed under Bank of America, Congress, Wall Street

Phil Angelide’s Sorry Beginning

by Jacob Zamansky on January 19th, 2010 at 11:01 am : Comments 000

As I noted in my post earlier this week, I don’t detect enough taxpayer outrage to ensure that Phil Angelide’s Financial Crisis Inquiry Commission (FCIC) will lead to any meaningful discoveries or reform and thus, my worst fears appear to be well on their way to being realized.  The first two days of hearings were merely political grandstanding and didn’t uncover one iota of new information. It was already well known that Goldman Sachs peddled mortgage-backed securities to its clients and then bet against them. Furthermore, the mea culpas of Messrs. Blankfein, Mack, Moynihan and Dimon didn’t strike me as all that sincere.

Similarly, the decision to probe the actions of regulators back to the Clinton administration is a colossal waste of time and taxpayer resources.  Regulation of Wall Street has been virtually non-existent for the past decade; the little wrongdoing that regulators have uncovered has been addressed with fines so paltry that they barely put a dent in the profits earned from such deeds.  Indeed, Wall Street has long regarded regulators as mere gnats who are using “public service” to further their careers and then land high paying jobs with the companies they are supposedly “regulating.”

If Angelides really wants to elicit some new perspectives and insights, he might consider calling the folks who had the prescience to predict and profit from the collapse of the subprime market.  It would be interesting to know more about these people and why they were so much smarter than the vast majority of people working on Wall Street.

It would also be interesting to find out if the folks who bought Goldman’s mortgage-backed securities really were advised by Goldman that they were shorting the securities….as the company has claimed. I wonder if these clients continue doing business with the firm?

Filed under Congress, Wall Street

Sean Coffey for NY Attorney General 2010

by Admin on January 15th, 2010 at 12:36 pm : Comments 000

In the more than three decades I’ve been practicing securities arbitration law in New York, there has never been a candidate that has had the legal smarts, the experience, the integrity — and most of all — the independence to take on Wall Street.  The New York Attorney General position too often has been sought by professional politicians more interested in advancing their political careers rather than truly serving the public good.  Accordingly, they ultimately needed to curry favor with Wall Street and never took meaningful actions that would even limit, let alone eliminate, the industry’s systemic wrongdoing.

Enter, John P. (”Sean”) Coffey.  Coffey is unquestionably one of the most successful trial attorneys in the U.S. and he’s been favorably profiled in various publications including The Wall Street Journal, American Lawyer, and Bloomberg Markets magazine. If the attorney general election were decided purely on accomplishments and experience, Coffey would handily win in a landslide.  He has practiced law from multiple vantage points: as an assistant U.S. Attorney where he tried multiple cases to verdict; as partner in the top-tier law firm Latham & Watkins defending Fortune 500 companies; and as a partner with the class action law firm Bernstein Litowitz, one of the most prominent plaintiff’s firms in the country.

Coffey’s victories are too numerous to mention here, but of special relevance to New Yorkers is the historic $6 billion recovery he garnered as the lead attorney in the WorldCom securities litigation representing the New York State Common Retirement Fund and thousands of other aggrieved investors.  What was especially significant about that settlement was the requirement that all of WorldCom’s outside directors pay a portion of the settlement from their personal funds.

Coffey has an ethical issue with companies using only shareholder money to pay fines and settlements, so you can rest assured that if he’s elected, the WorldCom settlement won’t remain an isolated instance.  I expect that Coffey will mete out justice responsibly and fairly.  He understands the meaning and responsibility of “prosecutorial discretion”.

It is said that an electorate gets the government it deserves.  New York deserves to have a world-class attorney overseeing its levers of justice. Sadly, New York party politics being what they are, a political candidate of Coffey’s unparalleled caliber cannot be assured of victory even given the state’s pathetic state of affairs.  At the end of the day, if New Yorkers are able to hear and meet Sean they will vote for and support him.

Filed under Jake Zamansky, Wall Street