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.
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.
Most of these misfortunes could have been avoided had investors done minimal checking:
The Securities and Exchange Commission sued a Newport, R.I., 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 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?
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, Mich., didn’t return calls. Mark Kowalsky, a Southfield, Mich., lawyer representing him in the civil suits against him, declined to comment.
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.
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 is a Bloomberg News columnist.
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