Number of rogue brokers appears to be
rising
All Charlie and Grace Svrcek ever wanted was a comfortable
retirement.
The Svrceks (pronounced Zever-cheks) lived without extravagance for
40 years while Charlie worked at as a manager at the Lipton tea
company's Galveston, Texas, plant. A special night out was a $25
dinner at Red Lobster.
But the Svrceks' modest dreams vanished in the fall of 1993 when they
learned their stockbroker and financial planner - a smooth talker the
Svrecks treated like a son - had squandered their entire $580,000 nest
egg.
In a heart-stopping moment, the Svrceks joined thousands of investors
who have been duped by so-called rogue brokers. These stock
pushers use high-pressure sales pitches and grandiose promises to prey
on novices looking to ride the bull market.
While rogue traders, like the copper trading chief who lost $1.8 billion
at Japan's Sumitomo Corp., generate front-page news, their
counterparts at brokerages do serious damage at a personal level. The
losses add up to tens of millions of dollars every year, and government
watchdogs paid to crack down on such activities seldom show up -
until it's too late.
"Regrettably, regulators almost always get there after the fact, after
customers have lost their money," says David Robbins, the former
compliance director of the American Stock Exchange.
Obviously, slick salesmen preying on gullible investors isn't new. But
lately, the feeding has become a frenzy. Regulators say investors filed
6,000 arbitration cases against brokers last year - an all-time high. And
the pace continues: 2,300 cases have been filed through May.
Rogue brokers tend to recommend high-risk stocks and make trades
without permission in order to rack up hefty commissions.
The brokers' victims, mostly the elderly and small business owners,
frequently end up broke - full of shame and embarrassment.
The Svrceks' despair has become so deep they've told family members
they will commit suicide if they are unable to recover their losses.
As the Svrceks discovered, no one is beyond being reeled in by a
rogue:
An Indianapolis builder says he lost $215,000 in six months on
the advice of a broker who claimed to be the vice president of
Monroe Parker Securities in suburban New York. Steven Hoss,
44, later learned that the broker, Jim Dawes, was only 21 and
had been a broker for just three months.
Jacob Zamansky, a lawyer for Monroe Parker, says Dawes left
the firm voluntarily in January and that Monroe Parker denies
any wrongdoing. The firm claims that Hoss' net loss was just
$9,000.
A 67-year-old retired Detroit police officer says he lost
$101,000 over four years on bad advice from brokers at Olde
Discount. Lured by a cold call, he was persuaded to buy
speculative over-the-counter stocks when brokers told him that
the firm's chairman, Ernie Olde, had bought 1,000 shares of one
of the stocks. Olde officials declined comment.
Hundreds of cases are pending against Stratton Oakmont, a
200-broker house on Long Island, N.Y.
One victim was Robert Barsk of Atlanta. After a barrage of cold calls,
the real estate developer was pursuaded to buy 10,000 shares in
Octagon, a tiny satellite telephone firm. Barsk, 43, says he lost $67,000
in 1994 because a Stratton broker failed to honor his request to sell all
10,000 shares.
"I just didn't think this kind of behavior could occur," Barsk says. A
National Association of Securities Dealers (NASD) arbitration panel
recently awarded Barsk $120,000.
Stratton Oakmont was immersed in a front-page controversy in early
June involving U.S. Sen. Alfonse D'Amato, R-N.Y. The SEC revealed
that Stratton made a special arrangement that allowed D'Amato to
make $37,000 in a one-day stock deal. D'Amato isn't accused of
wrongdoing. But the arrangement raised questions about Stratton's
motives because D'Amato is a member of the Senate Banking
Committee, which has oversight over the SEC.
Securities industry officials emphasize that rogues make up a miniscule
portion of the USA's 500,000 registered brokers. Nevertheless, federal
and state regulators have made cracking down on rogues a top priority.
"Our goal is to run unethical brokers out of the industry for good," SEC
Chairman Arthur Levitt told USA TODAY "The public trust in our
profession stands threatened."
The SEC, the NASD and the New York Stock Exchange can levy
fines, suspensions and bar brokers from the industry for life.
Recently, the SEC has zeroed in on penny stock firms that regulators
believe have become breeding grounds for rogue brokers. They
managed to shut down several, including Hibbard Brown, F.N. Wolfe
and L.C. Wegard.
But rogues at scores of larger brokerages carry on undetected by
regulators, who admit they only have sufficient resources and staffing to
target brokers with the worst disciplinary records.
In March, the SEC said it had discovered problems with sales practices
at half of the 101 small and midsize brokerages it examined last year.
The regulatory sweep began in 1992 with a review of the nine largest
brokerages. Regulators also examined brokers with lengthy disciplinary
records. They determined that the majority of them had been able to
change jobs at least once. Some brokerages hungry for aggressive
brokers tend to look the other way when hiring a broker with a long
record of customer complaints.
"Every time a broker churns and burns a client and then bounces to the
next firm with no problem, the profession is tarnished," Levitt says.
Stratton Oakmont lawyer Peter Anderson says that since February
1995, about half the firm's brokers with poor disciplinary records have
been let go. But many have been showing up elsewhere, experts warn.
"It's like hitting mercury with a hammer," says Mark Maddox of Public
Investors Arbitration Bar Association, an advocacy group for investors.
"We are beginning to see a large number of Stratton alumni working at
new firms that are showing the same patterns as Stratton."
Under pressure from regulators, Stratton is negotiating special
arrangements for resolving disputes in 20 states. The states register
brokers and, like federal regulators, can bring their own charges against
brokerages on behalf of victims.
Sometimes a rogue doesn't even need to pick up a phone to drum up
clients. Charlie Svrcek heard about stockbroker Benjamin Rex Moses
from coworkers at Lipton. In 1991, the Svrceks handed over Charlie's
pension and severance to Moses, who soon moved from Merrill Lynch
to Dallas-based financial firm H.D. Vest.
The couple didn't realize Merrill Lynch had allowed Moses to resign
from the brokerage for "poor selling practices," according to SEC
documents.
Last summer - nearly two years after the Svrceks discovered what
they'd lost - the 42-year-old Moses was arrested after a high-speed
car chase through a Houston suburb. He was charged with embezzling
from the Svrceks as well as other investors. He pled guilty and is
serving an 8-year prison sentence in Texas.
A spokesman for H.D. Vest said the firm has paid the Svrceks more
than $230,000 for their out-of-pocket losses. The Svrceks dispute
Vest's calculations and say the $230,000 went to lawyers and
accountants they hired to fight the case. Grace, 69, and Charlie Svrcek,
68, are trying to recover their money. But the case is tied up in a
lengthy arbitration process and the Svrceks continue to slide deeper
into depression as they struggle to live on Social Security payments.
"This is a couple that for 40 years never took a vacation," says the
Svrceks' lawyer Bonnie Spencer. "Now, instead of the golden years,
they face a tenuous future and the death of their dreams." |
