.Still In Business Why are 381 brokers with long complaint records working in New York State?
By Susan Harrigan
STAFF WRITER
April 27, 2003
His former high school wrestler's physique clad in pinstripes, stockbroker Ross Mandell sits in a sunny, corner office on Wall Street, watching a hive of activity. Traders stare at computer screens, clerks scurry back and forth, and brokers speak urgently into telephones. White boards post the names of salespeople who have signed up new customers.
What many new customers wouldn't know is that Mandell is one of hundreds of New York brokers who are licensed to sell stocks to the public despite a history of repeated customer complaints. His record from the National Association of Securities Dealers, an industry self-regulatory organization, shows six complaints from investors. His state records, which are more complete, show nine others, for a total of 15. Altogether, investors have claimed damages of more than $3.2 million by Mandell since he first began selling stocks in 1983, and he and his employers have paid out more than $417,000 in arbitration and settlements.
"Regardless of the mistakes I have made, I have learned from them," Mandell said. "It's made me a better businessman and, I think, a better person."
Although regulators have promised for years to crack down on brokers with lengthy disciplinary histories, a Newsday analysis of records from the state attorney general's office shows 380 other brokers with NASD complaint records at least as long as Mandell's are licensed to sell stocks to New York residents.
New York's top regulator said Newsday's findings show there are serious deficiencies in federal licensing procedures and this state's law governing brokers.
Nine out of 10 brokers have no complaints on their records. Complaints by customers are not necessarily valid, and one or two, especially over the course of a long career, aren't considered serious. However, "when you get over six, you've got to start looking at [them]," said Constantine Katsoris, professor of corporate and securities law at Fordham University School of Law and chairman of the Securities Industry Conference on Arbitration, a rule-making body.
Utah securities director S. Anthony Taggart said that state "will take a closer look" at brokers anytime there are more than three complaints against them.
Some New York State registered brokers have left much longer trails of aggrieved customers than Mandell. They include a radio talk show host, Gary Goldberg, with 30 complaints on his NASD and state records who works from a mansion in upstate Suffern, and a Manhattan-based broker, David Garfinkel, with at least 47 complaints who gave lavish dinners for clients.
So who has responsibility for licensing brokers? The NASD has the right to refuse registration, and each state has its own licensing requirements.
Attorney General Eliot Spitzer, whose office regulates brokers in this state, said Newsday's findings show there is "recidivism among certain brokers that cries out for more aggressive sanctions." Spitzer said New York's antifraud law needs strengthening before it can be an effective tool against some brokers with long complaint histories. Ironically, that same law garnered headlines for Spitzer when he used it to forge a preliminary, $1.4 billion settlement of conflict of interest charges against Wall Street analysts and investment banks. Spitzer also said "self-regulation" of brokers by NASD has "failed."
Elisse Walter, NASD's executive vice president for regulatory policy and programs, said the organization takes complaints against brokers "very seriously."
She said NASD, based in Washington, D.C., looks at every customer complaint, and is improving the speed at which it can spot possible patterns of broker misbehavior.
Although 381 brokers are only a fraction of a percent of New York's approximately 200,000 registered securities sales agents, just one broker can cause huge damage to investors. A Newsday analysis of NASD fines and other disciplinary actions against brokers during the six months that ended in February showed 64 brokers with New York addresses had run up $26 million in alleged customer damages by the time of the action. That number underestimates the pain because it is based on NASD complaint records, which are often incomplete.
Mandell, a North Woodmere native who has worked for 13 other brokerages, settled eight of the complaints against him by making payments to customers. Professional arbitrators decided four other complaints in customers' favor, and one in Mandell's favor, and two complaints were closed with no action.
Mandell, who keeps two bottles of water on his desk, blames his former behavior on a drug and alcohol problem he says he conquered in 1990. No customer complaints have been recorded against him for more than five years. He says some regulators had "heartburn" about licensing him and his new firm, Sky Capital LLC, but that "I've never had a problem with New York State." In order to work, brokers must be licensed by the NASD and at least one state.
After a wave of small-stock "boiler room" manipulation schemes infuriated the public and some members of Congress in the late 1990s, NASD and many states, including New York, said they would reduce the number of brokers who were still licensed to sell stocks to the public despite long complaint histories. That's because many regulators believe that even though not all customer complaints are valid, multiple settlements and lost arbitrations can be a red flag pointing to possible future mistreatment of customers.
Taggart, of Utah, one of 30 states where Mandell doesn't maintain a license, said that the state scrutinizes complaint histories carefully because "a person with an extensive disciplinary history has a propensity to break rules and hurt investors."
A broker's complaint history "gives you a way to make a judgment," said Melanie Lubin, securities commissioner of Maryland. "Past behavior is an indicator of future behavior."
But attorneys who see lots of broker records say the number of repeat offenders who still are licensed by NASD and some states, especially New York, is not only large, but growing. "I've seen brokers with 20 or 30 customer complaints, and they keep right on working," said John Lawrence Allen, a Manhattan-based attorney who represents investors. "This has gone on too long."
It isn't possible to quantify the number of working brokers in the United States who have substantial complaint histories because NASD, a self-regulatory trade group that collects complaints won't release statistics and will only allow access to broker's records on a case by case basis
Barbara Roper, director of investor protection for the Consumer Federation of America, said the continued registration of brokers with long complaint histories shows there has been "failure at a number of levels, including ... the firms who have the responsibility to fire" such brokers. Although the issue has receded from the headlines, Roper predicted it will heat up again soon because the public has lost faith in "do-it-yourself" investing during the long bear market, and increasingly will turn to brokers.
The Blunt Instrument
Brokers and their attorneys consider New York one of the easiest places in the nation for a person with a complaint history to become and stay licensed. The reason: Unlike most other states, it never adopted a version of the Uniform Securities Act, a model investor protection law that includes a simple administrative procedure for revoking licenses. Developed in 1930 and revised several times since then, the model law also prohibits "dishonest or unethical" business conduct, a concept many states have used to disqualify brokers with histories of customer complaints.
For instance, Ohio's statute forbids registering brokers "not of good business repute," according to Dennis Ginty, a spokesman for Ohio's division of securities. Mandell withdrew his application for an Ohio license last July after that state gave notice it intended to deny him registration "based on prior disciplinary events [including] customer arbitrations [and] complaints," according to NASD records.
By contrast, New York's 82-year-old securities law, the Martin Act, requires the state attorney general's office to go to court and prove fraud if it wants to revoke or deny a license, a costly and time-consuming proceeding.
"It's a blunt instrument, not a scalpel," said Eric Dinallo, head of that office's investor protection bureau.
Spitzer and his predecessor, Dennis Vacco, have repeatedly submitted legislation in Albany that would strengthen the Martin Act by adding language similar to that in the Uniform Securities Act. But the amendments have never made it out of committee.
Last year, the bill was sponsored by Assemb. Robin Schimminger (D-Kenmore) and Sen. Michael Balboni (R-East Williston). Schimminger's office referred questions to Assembly Speaker Sheldon Silver (D-Manhattan), who didn't respond to requests for comment. Balboni said last year's bill needed to be broadened to address corporate and accounting scandals, as well as broker conduct.
Spitzer's office added those wider measures before resubmitting the bill this spring, and Spitzer and Balboni said the bill's chances for passage are better now.
"Overall, how do you restore New Yorkers' confidence to invest?" Balboni said. "This is part of the process."
The Securities Industry Association, a trade group representing large Wall Street firms, said it is studying the bill. Spokeswoman Margaret Draper said she was unable to determine what the association's past position on the measure had been.
The group believes "a complaint alone is not evidence of wrongdoing, and neither is a settlement," Draper said. "There are many reasons why a registered representative may settle a complaint."
She said the association encourages investors to send for brokers' NASD records, and to ask questions about items including settlements.
Consumer advocates said they haven't been aware of the attorney general's proposed amendments to the Martin Act, but support them. Russ Haven, legislative counsel for the New York Public Interest Research Group, said the attorney general also ought to consider publishing an annual "complaint ranking" of brokers, similar to one for insurance companies that the state Insurance Department puts out. "It's a free-market approach," Haven said. "Give people intelligent information, and they can make intelligent choices."
At the national level, reducing the number of repeat offenders is "unquestionably our top priority," said Marc Menchel, NASD's general counsel for regulatory policy and oversight. NASD officials say federal securities laws provide few grounds to automatically revoke or deny licenses, and those grounds don't include customer complaints or arbitrations. Instead, NASD must do a long investigation to prove securities law or rule violations, they say.
To help it make more headway, NASD is seeking Securities and Exchange Commission approval of what officials call "a sea change" in its membership rules. A proposed rule change would put the burden of proof on a broker, rather than NASD, to show why NASD membership should not be denied or revoked. Such membership is a requirement for licensing.
NASD officials also said they have set up a "triage group" to focus on firms with large numbers of broker complaints. They have begun to scour customer arbitration claims for possible rule violations, rather than waiting for arbitrators to come to them with information. And they are considering disclosing more information about brokers to the public, including some statistical data to help investors determine if a person's record is better or worse than average.
Going Global
Meanwhile, Mandell, 46, is expanding his firm. With older securities firms shrinking their operations because of a market downturn, "I saw an opportunity coming, a global opportunity," he said. "I didn't want to just [open] another New York broker-dealer." In addition to the brokerage business, the firm provides investor relations and financial services to companies, and has a venture capital affiliate.
Sky Capital recently purchased a London brokerage firm and plans to "build a footprint" to Europe and Asia, as well as across the United States, by making acquisitions, Mandell said. On one morning last winter, workers in a conference room were making phone calls in German.
Donald Jaffe, 72, a former Long Island oil company executive and financial planner who said he and his wife "were almost wiped clean" by Mandell, said he's "surprised he is still allowed to be in the business." In a complaint filed in 1991, Jaffe and several other family members sought compensatory damages of $780,000 from Mandell and his current and former employers for allegedly unsuitable and excessive trading. They settled in 1993 for $190,000 - $185,000 coming from the brokerages and $5,000 from Mandell.
Jaffe said because of the losses he had to postpone retirement and take a job as a traveling hardware salesman, staying in cheap hotels and not seeing his wife for months. He sold a Florida vacation home and his home in Lawrence and now lives in a Jamaica, Queens, house owned by his wife's parents.
Through a spokeswoman, Mandell said last week that it took up to a month to transfer Jaffe's accounts from one brokerage to another when Mandell changed jobs in 1987. During that time, the stock market crashed, and neither brokerage was able to sell Jaffe's stocks, Mandell said. "It's unfortunate that [Jaffe] used me to try to recoup some of his losses," Mandell said. Jaffe said the allegedly unauthorized trading continued at Mandell's new firm.
Mandell said he is "absolutely truthful and candid" in his business dealings now, and has been since becoming clean and sober in 1990. Although he occasionally becomes impatient with questions about his past, tapping his foot or twitching a leg, the former Lawrence High school wrestler and football player said he doesn't "blame anybody for having second thoughts" about him. "It takes time to get to know me and realize I'm telling the truth," he said.
In 1997, a customer complained he had lost $1 million because of misrepresentation, unauthorized trading and unsuitable investments by Mandell that allegedly occurred at a firm where Mandell had worked from 1995 to 1997. Mandell settled the case for $75,000, noting on his record that it was an "economic decision" to avoid the cost of arbitration. In an interview, he called the complaint "blackmail" and a "hold-up" in response to a 1996 Wall Street Journal story about his record. The customer couldn't be reached.
Speaking on condition of anonymity, a NASD official said Mandell's record with customers "was of tremendous regulatory concern" when the broker sought licensing for himself and a new brokerage firm he controlled. Because Mandell doesn't meet any of the limited legal criteria for refusing a license, "we did as well as we could under the circumstances" by imposing a "heightened supervision" requirement on Mandell, the official said.
That requirement isn't disclosed on Mandell's publicly available records from NASD, although it is mentioned in a prospectus that Sky Capital Holdings Ltd., the brokerage's parent company, filed when it went public in England last May.
Among other restrictions, Mandell can't oversee anyone in Sky Capital's U.S. brokerage unit, can't maintain "discretionary" accounts in which he makes decisions for customers, and must have all his customer transactions reviewed in advance by a supervisor.
The heightened supervision rule is supposed to be enforced by Sky Capital personnel, even though Mandell is the holding company's chief executive, and holds more than 40 percent of its stock. Mandell said he is too busy with the firm's other business to have brokerage clients of his own at the moment.
Sky Capital's board of directors includes former U.S. Rep. C. Thomas McMillen (D-Md.) and a former member of Parliament, Matthew Carrington. Its chairman is Alexander Duma, a London-based attorney and accountant who has been a director for several investment banks including Chase Investment Bank Ltd.
"I might have had reservations [about Mandell] 10 years ago," but the broker's complaint record is "really the record of a different man," Duma said. "It's a pity that once somebody does something, it always pops up ... but you can't get away from the file."
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