Investors are still miffed with the securities industry for the havoc that resulted from the credit crisis. Financial advisers are somehow escaping that wrath.
At the annual meeting of the Securities Industry and Financial Markets Association last month, Kent Christian, president of Wells Fargo Advisors Financial Services Group, said that while investors are down on Wall Street as an industry, they often express “trust and confidence” when it comes to their financial advisers.
From what I can tell, Christian is right, and that isn’t always good news for individual investors. Yet it may explain the results of some bad choices by people who are too trusting or too lazy to check a broker’s background.
I’ve been watching in horror over the past year as cases have come public where financial advisers with blemishes on their records still managed to win the confidence of investors.
In an arbitration won by actor Larry Hagman and his wife in October, Citigroup Inc. was ordered to pay $1.1 million in compensatory damages and $439,000 in legal fees related to the mishandling of the couple’s account by a broker who has seven customer disputes on her publicly available records with the Financial Industry Regulatory Authority -- excluding the Hagman case. Citigroup was also ordered to donate $10 million in punitive damages to charities of Hagman’s choice.
Morgan Stanley Response
The broker, Lisa Detanna, didn’t respond to telephone messages at her home and her office, but a Morgan Stanley spokeswoman, Christine Pollak, told me on Nov. 29 that Detanna “will be leaving the firm.”
Citigroup, whose stockbrokers operate in a joint venture with Morgan Stanley, has filed a petition in California Superior Court in Los Angeles to have the award nullified.
Finra’s records aren’t perfect: Brokers can get complaints expunged under some circumstances, and some black marks don’t show up at all. But this stuff isn’t brain surgery: Look up the less-than-perfect Finra BrokerCheck, invest two minutes in a Google search, and visit the “inmate locator” on the website of the Bureau of Prisons.
The one thing you can probably count on: You’re asking for trouble if you’re picking a broker based on a tout from your country-club pals. If you don’t believe me, ask one of the suckers from Bernie Madoff’s old client list.
Most of these misfortunes could have been avoided had investors done minimal checking:
The Securities and Exchange Commission sued a Newport, Rhode Island, man in October after he allegedly misappropriated “substantially all” of the money he had obtained from 10 investors who invested in an online medical-registry company he was pitching.
The investors should be embarrassed. David G. Stern had been convicted of mail and wire fraud in 2002, serving two years in prison -- or “a camp,” as he called it in a telephone interview -- and was disbarred as a lawyer by Massachusetts in 1997 after he transferred millions from a client’s trust to a company he had an interest in.
The disbarment pops up on a two-second Google search. The prison record can be found at http://www.bop.gov. Stern told me he didn’t defraud anyone with his medical-registry company and that “everyone was repaid in full” from his previous legal difficulties. Maybe so. But wouldn’t it be smart to know about his past before you signed up to do business with him?
Strippers and Gambling
Then there is Keith Epstein. In a criminal complaint filed in the U.S. District Court for the Eastern District of Michigan on Nov. 22, a Federal Bureau of Investigation agent said the former broker had taken money from mostly elderly investors, indulging in jaunts at strip clubs, online gambling, and even handing over signed, blank checks to three exotic dancers. Ron Chapman, a Bloomfield Hills, Michigan lawyer who is handling $8 million in claims against Epstein, says one investor entrusted new money to Epstein as recently as three months ago.
Michigan took away Epstein’s three insurance licenses in October 2009, describing his actions as “thievery” in a news release. Finra barred him from the securities business for two years beginning Jan. 20, 2009, a lenient temporary ouster considering they said he’d engaged in “misuse” of investor money. Why should any broker be let back in once that’s happened?
Epstein was arrested in October and awaits trial on four felony counts in a jail at the Macomb County sheriff’s office. His criminal lawyer, Eva Tkaczyk of Warren, Michigan, didn’t return calls. Mark Kowalsky, a Southfield, Michigan, lawyer representing him in the civil suits against him, declined to comment.
Sadly for investors, Finra knew in May 2007 that Epstein had been put under review by a former employer and then fired, but it doesn’t shares details like that with the public.
Then there are cases like those of Irving Stitsky, a man with a long record of abuses who was barred from the securities industry in 1998 for his role in the New York securities firm Stratton Oakmont Inc. In July, federal Judge Kimba Wood sentenced him to 85 years in federal prison for his role in defrauding more than 250 people in a $23 million real estate investment.
Stitsky’s New York lawyer, Denis Kelleher, said Stitsky has filed a notice of appeal and is “in the process of forming his brief.” The government said that Stitsky didn’t disclose his role in the real estate deal to investors. But when you consider how lax investors can be about checking the people to whom they entrust their money you have to wonder if it would make any difference.
Not everyone is as careful as Stitsky about covering his tracks when he gets back into business after a regulatory tiff. Still, that makes it worth doing some checking. You should never be surprised to discover that the adviser who reminds you of your favorite nephew turns out to be a conman who stayed out of the headlines because he had a craftier lawyer than you could ever afford.
(Susan Antilla, the author of the 2002 book “Tales from the Boom-Boom Room,” is a Bloomberg News columnist. The opinions expressed are her own.)
To contact the editor responsible for this column: James Greiff at firstname.lastname@example.org