Browsing August 18th, 2010
Expect Stonewalling of ‘Stoneridge’
In one quick stroke of the pen, Congress could put an end to one of the most dangerous outcrops of the past decade’s laissez faire financial regulation: Ponzi Schemes.
The pen stroke I’m referring to is the recent development that Barney Frank (D-MA) is considering including a provision in the regulatory reform bill that will combat the devastating effect of the 2007 Supreme Court decision known as “Stoneridge.”
The Stoneridge decision made it extremely difficult for an investor to sue a firm that may have aided or abetted fraud. Amazingly, corporate America can earn fees by helping fraudsters with relative impunity because of the Supreme Court’s ill-advised decision.
The Stoneridge decision was a special gift to the so-called “gatekeepers” of financial fraud. Accounting firms, law firms, investment banks, ratings agencies and others are relied upon by the public to report and internally police fraud when it rears its ugly head.
Yet our gatekeepers have chosen to stick their heads in the sand and sometimes even help fraudsters ply their trade knowing they probably won’t be held accountable.
Indeed, gatekeepers have no incentive to take their responsibilities seriously. I’ve written about numerous Ponzi Schemes, including Bernie Maddoff’s, that could never have been pulled off were it not for the involvement of household name financial services firms.
Congressman Frank’s adoption of this issue follows an earlier effort from Senator Arlen Specter (D-PA). Senator Specter, who lost his primary election this year, should consider this provision his legacy and urge his colleagues to stand strong against what will be an onslaught of lobbying.
Not to sound flippant, but expect a lot of stonewalling of Stoneridge. Senator Chris Dodd (D-MA), has already said that he’d prefer yet another “study” into the provision’s effect, adding to the over 28 studies the bill already calls for.
There is nothing to study: if third parties are held legally responsible for their actions, you can rest assured they will be more careful about who they do business with.
Goldman, Not Yet Officially Served by SEC on Fraud Charges, Ramps Up Settlement Talks
‘Repo 105′ Deals Could Aid Investor Claims On Lehman Notes
Elder Financial Abuse Rampant During Economic Downturn
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.