OT.....Sort of long (.See list at bottom..........)..Tantalizing Tales From the Brokerage Industry
By Roland Jones
ABCNEWS.com from TheStreet.com
If there was ever a compelling
argument for keeping your money
under the mattress, this might be it.
License to Steal: The Secret World of
Wall Street Brokers and the Systematic Plundering of
the American Investor tells the inside story of Wall
Street?s full-service brokerages, where stockbrokers are
alleged to routinely trick, cheat and defraud their
customers just to line their own pockets.
Investors are portrayed as
victims; their investments
nothing more than capital to
make more commissions for
money-greedy brokers.
Playing the Spread
Shocking stuff, to be sure.
And the book, co-written by
an anonymous former Wall
Street broker and journalist
Timothy Harper, lays out the
tale to maximum effect.
A first-person account of a one former broker?s career,
the book follows him from his early efforts as a cold-caller
and trainee broker at ?the Harvard of financial institutions?
to his days selling shares in IPOs worth millions of dollars
at a second-rate brokerage.
Along the way, the authors don?t forget to include
details of the murky inner workings of the brokerage
industry.
In this whistleblower?s tale, brokers are shown using
questionable, and sometimes illegal tactics to maximize
their income at the expense of their clients.
At one point, the book?s greenhorn broker is
introduced to the art of hidden commissions.
It works like this: A broker contacts a client and
recommends that the client purchases a stock trading at
?around 10.? The client agrees to buy 500 shares. He
expects to pay $5,000, plus the broker?s 3 percent
commission, making a total of $5,150.
But the broker has other ideas. The recommended
stock is actually trading at $9.75 by $10, making for a
spread of a quarter. The broker buys the stock from the
market at $9.75, and then sells it to the client at $10.
The client pays $5,150, but the
stock actually cost just $4,875.
The client is denied the better price
and the broker pockets $275,
which includes a hidden
commission of $125.
?Figure that hidden commission
many times over, many times a
day, on trades large or small, and
it?s easy to see how brokers can
play the spread to boost their
incomes,? write the authors.
Bait for the Bulls
The book?s message is extremely relevant, especially given
that more Americans than ever before are investing their
hard-earned dollars in the burgeoning bull market, the
longest in U.S. history.
Equity ownership among Americans is on the rise.
Nearly half of all households invest in equities ? a total of
78.7 million individuals as of early 1999, up 85.6 percent
from 42.4 million in 1983 ? according to a study by the
Securities Industry Association, a trade group for the
securities industry.
Most investors hand over their money to stockbrokers,
who buy and sell stocks and bonds on their behalf. But
most Americans know little or nothing about how the
nation?s brokerages work, and they continue to entrust
their money to brokers who they believe will aim to make
them as much money as possible.
In truth, write the authors, most brokers are only
concerned with selling and reselling the stocks in a client?s
portfolio in search of more commissions for their sales ?
an inherent conflict of interest.
?Remember, when they send in that money, it?s not
theirs anymore,? a senior broker tells the rookie broker in
the book, in a scene worthy of Oliver Stone?s movie Wall
Street. ?It?s ours. It?s ours to make money with. We?re
never giving it back to them.?
Sensational Story
But the book is not without its flaws. The anonymity is one
problem. Naming names is ?less important than telling what
these stockbrokers did and saw, and how they and other
stockbrokers routinely abused their relationships with
clients,? write the authors.
Indeed, while anonymity gives the authors more
freedom, especially in the case of the co-author, who is
described as a senior vice president and broker on Wall
Street, it also leaves the reader with lingering questions
about his or her credibility.
Another obstacle is a rather one-sided view of the
industry, focusing on a small hard-core of cold-calling firms
and boiler rooms that tout stocks to vulnerable investors.
The book has little relevance to the many regional
brokerages nationwide that maintain good long-term
relationships with clients and encourage long-term
investing.
Like the story of Gordon Gekko, the Michael Douglas
character who liked to boast that ?greed is good,? License
to Steal makes a compelling read, but sometimes comes
off more like a Hollywood movie than a serious study of
U.S. brokerages.
Investor Protection Groups
The NASD Regulation Complaint Program (NASDR): The
NASDR?s complaint program acts on behalf of investors to
discipline brokers and brokerage firms that have violated
securities rules and regulations.
The NASDR's Central Registration Depository (CRD): The CRD
is a searchable database of qualification, employment, and
disclosure histories of the more than half a million registered
securities employees ? including brokers ? of NASD member
firms.
The North American Securities Administrators Association
(NASAA): NASAA is an organization for the 50 state securities
agencies responsible for investor protection, and it is the oldest
international organization devoted to that cause.
The Securities and Exchange Commission (SEC): The
investor's advocate, the SEC is the federal agency responsible
for protecting investors and maintaining the integrity of the
securities markets.
The National Fraud Information Center (NFIC): Established in
1992, the NFIC is the oldest nonprofit consumer organization in
the U.S. dedicated to fighting telemarketing fraud.
Warning Signs of Broker Cheating
1) The broker says a stock is trading at ?about? a certain
price, but then either sells your stock for less than that price,
or buys it for you for more.
2) The fine print at the bottom of the trade confirmation you
receive in the mail says, ?Your broker acted as a market
maker.?
3) Your broker tells you that buying more of a declining stock
will help you ?average down? your costs.
4) Your broker wants you to buy shares in the IPO, or initial
public offering, of a small company, and you cannot find any
information on it except from your broker.
5) Your broker offers to sell you shares in an IPO that he
says is oversubscribed, but only if you promise to buy more
shares once the stock has been issued.
6) Your monthly statement shows that you bought stock you
did not ask your broker to buy.
7) Your broker calls you and says there will be a mistake on
your next monthly portfolio statement, and asks you to ignore
it.
8) Your broker tells you that you should buy a stock because
big investors are buying it.
9) Your broker tells you that a stock will go up a certain
amount within a certain time frame.
10) You ask your broker to sell out a position in a small stock
and buy a position in a well-known stock. But the broker tries
to talk you into buying another small stock instead.
Source: HarperBusiness
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