Brokers turning to fraud
by Liz Skinner
The downside has a dark side.
Stockbrokers increasingly are turning to deception to keep commissions up in the down market, according to state securities regulators.
Unscrupulous brokers, for the first time this year, slithered their way onto the regulators’ top-10 list for deceptive practices, finishing second based on their involvement in various nefarious schemes.
Only sales practices by insurance agents — and others — not licensed to sell securities were rated more deceptive, according to the regulators.
The declining market pushed some brokers to make unauthorized trades, charge new fees and mislead investors about the value of their portfolios to keep them trading, says Joseph Borg, president of the North American Securities Administrators Association, which has compiled the list for the past three years.
“People were trading like crazy before March 2000,” says Mr. Borg, an Alabama regulator. “Now commissions are down, but brokers still have bills to pay. For the morally challenged, the pressure’s too great.”
RISK FREE?
Episodes of fraud ranged from the merely odious to the outrageous, according to the group, which released its list last week.
In New York, for example, seven brokers and two firms allegedly swindled hundreds of elderly investors out of $12.5 million, according to an NASAA official.
The brokers pushed the investors to liquidate their annuities, retirement accounts and certificates of deposit to invest in a phony pay-telephone scam that promised a “risk-free” 14% return. One of the firms has agreed to return $5.9 million to investors, the official says.
The New York state attorney general’s office brought the case.
Deceptive brokerage practices aren’t limited to small, unknown investment firms, Mr. Borg says.
In what appears to be the largest broker-related case this year, a private arbitration panel in July ordered Merrill Lynch & Co. Inc. in New York to pay $7.7 million to a Pennsylvania couple.
The panel ruled that the firm’s brokers didn’t sell certain shares as requested and didn’t advise the couple on strategies to protect their investments.
A Merrill Lynch spokesman calls the award “outrageous.”
“Very simply, the individuals involved did not give us an order to sell their stock on the date the arbitrators claimed, or at any other time. Somehow, these arbitrators looked past that fact and are attempting to hold us responsible for not executing a sell order that was never given.”
A dissenting arbitrator — a retired federal judge — concluded in a separate opinion that Merrill was not liable for the couple’s stock losses, the spokesman notes.
In another high-profile case, Frank Gruttadauria, 44, of the Cleveland suburb of Gates Mills pleaded guilty last week to securities fraud, mail fraud, identity theft and making false statements as part of a stock swindle.
According to authorities, Mr. Gruttadauria — who worked for SG Cowen Securities Corp. and later Lehman Brothers Inc. — shifted money among accounts to cover up $270 million in losses in the accounts of 28 rich clients. Both brokerage houses are based in New York.
The Securities and Exchange Commission, which targets investment fraudsters in cooperation with state regulators, says declining markets tend to generate scams.
“The kinds of frauds we are seeing are where investors are promised higher returns than they could ordinarily expect to receive from legitimate investments,” says Susan Wyderko, director of the SEC’s office of investor education.
The scammers also adapt quickly to changing market conditions, Ms. Wyderko says.
BASIC TRUST
With current market pressures, some financial advisers say they are taking extra care to fully inform customers about their investments.
“It’s especially imperative now to explain all the risks,” says Timothy Chase, an adviser at Wealth Management Services, a Towson, Md., firm with $300 million under management.
“I think most people’s guard is up now,” he says.
Adviser Judith Lau of Lau & Associates in Wilmington, Del., says her clients haven’t reported being especially concerned about frauds.
“If you’re comfortable with your relationship with your adviser, and there’s a basic trust, then the concern just isn’t there,” says Ms. Lau, whose firm manages $350 million,
Ms. Lau adds that she routinely reviews venture capital and other deals that are offered to her clients to help them decide whether they are good investments.
With the Dow Jones Industrial Average down 1,000 points from a year ago, a lot of clients are “at a point financially where they really can’t afford to lose any more money,” Mr. Chase says.
Rounding out the top five abuses on this year’s list are analyst conflicts of interest, sales of fake promissory notes and scams that promise to produce triple-digit returns by giving investors access to the portfolios of the world’s biggest banks.
The other five are viatical settlements, schemes that target religious or ethnic groups, sham charitable-gift annuities, bogus oil and gas investment opportunities, and equipment leasing frauds that in-volve pay telephones, automated teller machines or Internet kiosks. |
