Mirror, Mirror On the Wall… Who’s the Culprit For My Financial Fall?

As an investor advocate, I’m always on the lookout for easy-to-understand materials that can readily explain why investors should be wary of stockbrokers, insurance salesmen, and other peddlers of financial products that are supposedly a “sure thing” or “totally risk free.”  One of the best legal documents on this subject is the fraud complaint Massachusetts’ securities head William Galvin filed against Merrill Lynch in connection with the sale of auction rate securities.  The document is rich in detail about how Merrill Lynch always put its interests ahead of its customers.

Neil Weinberg, a senior editor at Forbes and one of the most knowledgeable personal finance journalists in the business, earlier this month published a feature that decidedly is one of the most insightful articles I’ve read about Wall Street in recent memory. Weinberg candidly warns his readers that the markets are a “rigged game” and provides a litany of evidence showing how investors are constantly being duped and deceived.  Among his examples: Nearly three quarters of the tax-deferred annuities sold in the first quarter were placed in IRA and other retirement accounts.  Annuities are great products for insurance brokers because they carry whopping commissions; but for investors, they are pricey and “dim-witted” (Weinberg’s words) for a retirement account.

Weinberg also quite possibly is the only mainstream financial journalist to appreciate the significance as to why Wall Street and the insurance industry fought so aggressively — and ultimately successfully — to eliminate a passage in the recent financial reform bill that would have held brokers and insurance salesmen as fiduciaries. Under this standard, brokers and insurance salesmen could be held liable for selling products that were not in the best financial interests of their clients. The upshot: bye, bye, 8 percent commissions for dubious annuities products. But Congress once again opted to put Wall Street’s interests ahead of investors.

Fortunately, there are signs that individual investors are getting wise to Wall Street’s shenanigans.  Merrill, Morgan Stanley, and Smith Barney last year controlled 25 percent of the industry assets under management in 2009, down from 32 percent in 2007, according to Cerulli Associates statistics cited in Bloomberg Businessweek.  Independent advisers and regional broker-dealers have increased their percentage of assets to 32 percent from 28 percent in 2007. That’s a comforting trend.

Merrill, now part of Bank of America, and Wells Fargo, the third-largest full-service U.S. brokerage, apparently are racking up some nice profits cross-selling banking services.  It might behoove investors to be wary of this cross-selling as big banks can no longer claim they adhere to a higher moral standard than brokerage firms.  A District Judge recently accused Wells Fargo of “gouging and profiteering” for changing its policies to process checks, debit card transactions and bill payments from the highest dollar amount to the lowest, rather than in the order the transactions took place. This, in turn, caused customer accounts to be overdrawn, thereby allowing Wells Fargo to pocket additional overdraft fees.  California also charged Wells Fargo with fraud for its aggressive sale of auction rate securities.

The warnings signs are as clear as day. As Weinberg pointedly tells readers: “Wall Street gets rich while you eke by. If you are looking for a culprit, look in the mirror.”

Morgan Stanley, Complex Structured Products… and Nuns

Wall Street never ceases to amaze me. Financial News reported last week that two Catholic nunneries and more than 80 other investors, have filed a lawsuit in London against Morgan Stanley alleging the firm inappropriately managed a complex structured bond it sold them called a “constant maturity swap,” causing an estimated $6.5 million loss.

Specifically, the suit alleges that Morgan Stanley, in cooperation with Saturns, an Irish bank, neglected to redeem the bonds when a mandatory redemption was triggered after they were downgraded in late 2008 as the financial markets imploded. The suit further alleges that Morgan Stanley and Saturns may have deliberately waited to redeem the bonds several months later so that their firms could earn a fee that they otherwise would have lost if the bonds had been redeemed earlier.

In what could be a public relations nightmare, Morgan Stanley is apparently contesting the suit, claiming it sold the the product to Bloxham, an Irish brokerage firm that represented the nuns. However, the suit alleges that the delay Morgan Stanley ostensibly caused prevented Bloxham from hedging losses from the depreciated bonds and thus caused further losses.

While this case is especially shocking given the victims, it’s unfortunately, very common: Wall Street continues to put their own interests ahead of their clients by peddling structured products to retail investors at an alarming rate.

The structured product market is ballooning out of control and is poised to pop.  According to StructuredRetailProducts.com, Wall Street has sold an estimated $30 billion in structured products to retail investors so far this year. Chris Whalen, a risk expert and co-founder of Institutional Risk Analytics, calls structured products the “next investment bubble.”

I’ve advocated that before a structured product can be sold to a retail investor, parties must sign a simple, “plain English,” one-page agreement akin to what Wall Street uses when entering into a derivatives contract, the so-called “Master Agreement.” Obviously, this added measure alone will not solve the problem. The SEC and FINRA also need step up and enforce penalties to the fullest extent possible on those firms that inappropriately sell structured products to individual investors.

So long as the status quo remains intact, individual investors remain extremely vulnerable to Wall Street’s seemingly endless supply of structured products.

Update on Citigroup Employee FA CAP Stock and Options Class Action Case

To read Judge Stein’s decision, click here.

Update on the ProShares Class Action Lawsuits

December 2010 Update on the ProShares Class Action Lawsuit

Zamansky & Associates has been appointed co-lead counsel in the consolidated class action proceedings concerning exchange-traded funds (”ETFs”) issued by ProShares.  In September we filed a Consolidated Amended Complaint containing allegations regarding 31 different ETFs.

We are still seeking named plaintiffs for a number of those funds, all of which failed in the same manner as the SRS fund that was the subject of our original Complaint.  Please contact us at (212) 742-1414 or by emailing jake@zamansky.com if you purchased any of the following funds anytime between August 6, 2006 through June 23, 2009:

AGQ       Ultra Silver

GLL        UltraShort Gold

MZZ       UltraShort MidCap 400

SFK        UltraShort Russell 1000 Growth

SIJ         UltraShort Industrials

SJF         UltraShort Russell 1000 Value

SKK        UltraShort Russell 2000 Growth

SZK        UltraShort Consumer Goods

TWQ      UltraShort Russell 3000

IF YOU HAVE ALREADY RETAINED COUNSEL, PLEASE DISREGARD THIS INFORMATION.

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JULY 2010 PROSHARES UPDATE

By order dated July 12, 2010, Federal Judge John G. Koeltl of the U.S. District Court for the Southern District of New York, named Zamansky & Associates LLC and Lovell Stewart Halebian Jacobson LLP as co-lead counsel in the class action case against ProShares Advisors LLC over alleged hidden risks in its inverse exchange-traded funds.  The case alleges that ProShares, the fifth-largest ETF seller in the U.S., marketed its Ultra and UltraShort ETFs (SRS Fund) as “simple” directional plays, but it were in fact risky short-term investments that should not have been marketed to retail clients.

The case is In re: Proshares Trust Securities Litigation, case number 1:09-cv-06935, in the U.S. Districted Court for the Southern District of New York.

To read Judge Koeltl’s order, click here.

The Symbolic Importance of Fannie and Freddie Delisting

Today’s announcement that shares of Fannie Mae and Freddie Mac are being delisted from the New York Stock Exchange serves as a painful reminder to a large group of retirees whose brokers convinced them to buy the preferred shares of both companies in 2008 when they were trading near $30.

Nearly every large Wall Street firm pushed Fannie and Freddie preferred stock and their brokers repeatedly assured clients that the shares were “government backed” and as risk free as Treasury bonds.

We represent about a dozen of these victims and many more have filed claims arguing that preferred shares of Fannie Mae and Freddie Mac were entirely unsuitable.  Given the chaos in the market during 2008, any investment with significant exposure to the collapsing mortgage market should have been deemed high risk and unsuitable for investors with conservative goals and objectives.

The collapse of Fannie Mae and Freddie Mac was ultimately caused by  misguided government policies.  However, greedy Wall Street brokers were responsible for exacerbating the damage.

Goldman Sachs and the “Fabulous Fab”

Goldman Sachs’ first day of reckoning may be dawning.  Today the SEC filed charges that a hedge fund seeking to short the mortgage market helped Goldman Sachs build a product so toxic, it would collapse in the matter of months…a plan executed with precision.  The arrangement was not disclosed to investors, who are otherwise known as Goldman Sachs’ customers.

Though the victims in this case are institutional investors, the SEC’s allegation that Goldman Sachs withheld material information from its clients is as much about fraud as it is restitution for the millions of families whose nest eggs were destroyed because of Wall Street’s greed.

I’m heartened the SEC is finally taking a critical look at Goldman Sachs’ activities, but it’s noteworthy the only person named in the complaint is a pretty small fry, albeit one with an outsized ego.  His name is Fabrice Tourre, or the “fabulous Fab” as the 31 year-old banker likes to call himself.  ‘Fabulous Fab’ was a lowly vice president, and he was likely following the ethical direction and guidance of his superiors.

Nevertheless, the allegations against Goldman Sachs are devastating in that it confirms what everyone suspected: the firm has little regard for disclosure rules and thinks nothing of ripping off customers if the price is right.  So let’s hope the SEC is up to the challenge. Indeed, it’s one thing for the SEC to bring charges, but the real test will be if the agency has the talent, resources and resolve to take on the mighty and politically connected Goldman Sachs.

Regardless, a bigger worry for Goldman Sachs are the inevitable private lawsuits from investors.  Institutions that purchased Goldman Sachs’ allegedly fraudulent securities will be seeking recourse for billions in damages of investment losses.

On cue, Goldman Sachs’ much ridiculed PR apparatus responded to the SEC’s charges by saying that, “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

We’ll see about the charges, but as far as Goldman’s reputation, there’s not much to defend there.

Aura of Invincibility Weakens

Can the SEC Beat Goldman Sachs?