'Bad' Broker's Career Is in Question Again
By Ruth Simon
Staff Reporter of The Wall Street Journal
From The Wall Street Journal Online
If anyone should know about bad stockbrokers, it is Robert A. Magnan.
Mr. Magnan, 38 years old, was stripped of his securities license by Wall Street regulators in 1995 for securities fraud and banned from the brokerage business. In 1997, he pleaded guilty to five counts of securities fraud in one of the first criminal prosecutions of a broker for excessively trading customer accounts, a practice known as churning.
Now Mr. Magnan is using the skills he learned as a broker to troll for individual investors who believe they have been abused. His Investment Recovery Network Inc. promises to evaluate an investor's claim and, if it seems worthy, provide referrals to lawyers who will handle the case. Mr. Magnan doesn't take any money up front or from the lawyers, but gets 10% to 20% of any award or settlement.
"I'm basically trying to make amends for my 10 years in the brokerage business," says Mr. Magnan, who once owned a 31-foot speedboat called The Big Ticket. He recently appeared on NBC's "Nightly News," telling investors how to protect themselves from crooked brokers.
But Mr. Magnan's activities again are under scrutiny. The Florida Bar Association is investigating whether he is engaged in the unlicensed practice of law. Some securities lawyers assert that his fees are excessive, noting that investors could wind up with less than half of any amount recovered after paying attorney's fees and Mr. Magnan.
Securities lawyers say investors can get the type of help Mr. Magnan offers at no charge elsewhere. Bar associations offer lawyer referrals and attorneys typically review client records before deciding whether to take a case. (Securities lawyers typically charge between one-third and 40% of any recovery.)
Meanwhile, Mr. Magnan also has persuaded some of his arbitration clients to buy stakes in his privately held company -- an activity that "could raise questions" about whether he is engaged in securities transactions that would violate his ban from the brokerage industry, Don Saxon, head of Florida's securities division, says. Mr. Magnan doesn't believe his actions violated his ban.
Mr. Magnan's activities highlight how people who have run afoul of securities laws often continue to operate in related areas of the investing business. Investors should "simply reject out of hand doing business with anyone who has violated federal securities laws," says former Securities and Exchange Commission Chairman Arthur Levitt, who declined to comment specifically on Mr. Magnan.
Mr. Magnan says he's "highly confident" that investors helped by his firm "would disagree" with Mr. Levitt's advice.
One such investor is R. Stanley Crick, an airport-maintenance worker in Houston, who says he invested $10,000 in Mr. Magnan's company in 1999 after the ex-broker helped him recover about $7,000 of the $22,000 Mr. Crick had lost buying risky penny stocks.
"The fact he helped me" was an attraction, says Mr. Crick, whose mother invested about $1,500 in Mr. Magnan's firm. Mr. Crick says the value of his investment in Mr. Magnan's firm has "increased," and that he is "totally satisfied." Investment Recovery has been trying to raise $3 million in a private placement that would value Mr. Magnan's stake at $4.5 million.
A former beer salesman, Mr. Magnan became a broker in 1986 after a friend introduced him to some young stockbrokers who were working for Stuart-James Co., a now-defunct brokerage firm that specialized in penny stocks.
"One guy was driving a Porsche," he recalls. "They lived in expensive houses. They wore nice clothes."
Within three months, Mr. Magnan was making 400 to 500 cold calls a day for Stuart-James in Clearwater, Fla.
He received more than $300,000 his first year, was promoted to branch manager in 1987 and became regional vice president two years later. At 24, Mr. Magnan bought a $485,000 waterfront home in Tierra Verde, Fla. Later, he says, he bought a Porsche and a Ferrari.
Some of Mr. Magnan's customers didn't fare nearly as well. Kent Abel, then business manager for an Illinois school district, had lost about $30,000 investing in penny stocks with Stuart-James when Mr. Magnan called. "I'm the manager," Mr. Abel recalls Mr. Magnan saying. "I understand your situation. I really feel bad about it. I want to get your money back for you" Mr. Abel says he lost another $30,000 investing in penny stocks with Mr. Magnan. Mr. Magnan says "there is a good possibility that [Mr. Abel] did lose money with me."
In 1995, the SEC fined Mr. Magnan and revoked his securities registration for churning, unauthorized trading and other securities-law violations. Two years later, Mr. Magnan pleaded guilty to criminal charges of securities fraud brought by federal prosecutors in U.S. District Court in Tampa, Fla. He was sentenced in 1999 to five years probation and ordered to pay $161,000 in restitution.
At PaineWebber Inc. in St. Petersburg, Fla., where Mr. Magnan worked after Stuart-James closed in 1990, Mr. Magnan's trading activity was so high, according to the plea agreement, some clients needed to earn an average return of 50% to break even. Mr. Magnan was forced to resign from PaineWebber, according to the plea agreement. A PaineWebber spokesman declined to comment.
Mr. Magnan founded Global Investment Recovery Services, as his company was previously known, in 1998. "In my heart, I wanted to help people," he says. The company lost $768,000 on revenue of $51,000 last year, according to the private-placement memorandum.
Mr. Magnan receives a base salary of at least $127,000, according to the private-placement memorandum, and will receive a $75,000 loan after the offering is completed. In 2000, Mr. Magnan filed for protection under Chapter 7 of the U.S. Bankruptcy Code, listing $39,875 in assets and more than $520,000 in liabilities.
Mr. Magnan says his company employs 15 telemarketers and has a referral network of 13 lawyers. It has a "backlog" of more than 300 clients with a total of about $40 million in losses, he says. The company says it expects to bring in 6,085 cases next year, according to the private-placement memorandum. That is a hefty number, considering that NASD Dispute Resolution Inc., a leading arbitration forum in Washington, received 5,558 arbitration claims last year.
Some investors question whether Mr. Magnan's services are a good deal. Gary Lavigne, 65, a teacher in Naples, Fla., decided not to hire Mr. Magnan after he learned that his 20% fee came on top of an attorney's 33% contingency fee and any expenses.
"I was really kind of shocked," says Mr. Lavigne, who says he lost $20,000 in an investment unrelated to Mr. Magnan.
Mr. Magnan says even investors who wind up with small sums are grateful because "it's such an improvement over their current position."
Some investors who put money in Mr. Magnan's company say they didn't receive the tell-all document known as a prospectus at the time they invested. Charles Swindell, a small businessman in Henderson, Texas, says he invested about $25,000 in Mr. Magnan's company a few years after the ex-broker helped him recover $27,000. "There were no financials to talk about," Mr. Swindell says in an interview. "I don't think there was anything that could be called an actual disclosure statement." Mr. Swindell says in the interview he learned about Mr. Magnan's past troubles "probably about the same time" he made the investment or shortly thereafter. Mr. Swindell says he initially had qualms about investing, but by the time he did, "I was confident the idea would work."
In a subsequent letter by Mr. Swindell forwarded by Mr. Magnan's company, he says Global Investment "always supplied monthly financial reports or quarterly reports." Mr. Swindell says in the letter: "Over the years we have developed a special relationship of openness and trust."
Mr. Magnan says "any investor that put money into our company has signed a subscription agreement and reviewed a private-placement memorandum that outlines my entire history in great detail."
The company's Web site includes a section devoted to "The Robert Magnan Story." There, Mr. Magnan says he got into trouble because he made "the critical mistake of relying on others."
The SEC went after him, he adds, mainly because he had clients buy stocks with borrowed funds, "activity which I had been instructed to do by my managing broker and employer!"
But the Web site fails to mention churning or Mr. Magnan's criminal conviction. "The tenor of his explanation of his being barred from the business is misleading at best," says Thomson von Stein, a former SEC attorney who worked on the investigation of Mr. Magnan. Mr. Magnan says he is revising the Web site.
Mr. Magnan could be facing new legal troubles. The Florida Bar Association is investigating whether his activities violate state laws against practicing law without a license, Lori Holcomb, director of its Unlicensed Practice of Law Department, says.
Mr. Magnan says the Florida Bar told him a year and a half ago that "everything we were doing was within their guidelines and, if there was any wrongdoing, they would immediately contact us." Ms. Holcomb says the investigation continues.
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