I’ve been thinking about how to address a question that is hard to answer: If you are shopping for an investment firm, at what point should you feel comfortable that it has earned your trust?
Since I got my start on Wall Street as a lawyer, my immediate reaction is to turn to regulatory and enforcement matters. Sometimes they can shed more light than sales pitches and marketing material.
My first stop is usually the U.S. Securities and Exchanges Commission website (www.sec.gov). Look under “enforcement” for litigation releases, which show claims brought by the SEC for violations of the law.
This type of review is an education that every investor would benefit from. The following are a few examples of the type of information you can find.
(While I’m sharing the end result here, as you read along, think if you would have trusted this person if you had met him before the SEC action.)
In this case, the SEC claimed that the defendant, who was in his early 20s, fraudulently induced over 100 investors to invest more than $27.4 million in his business. One venture was an online digital platform that enabled people to book live performances (musicians and other talent). Other defendants, also in their 20s, helped raise capital by “falsifying ‘offer reports’ that were designed to, and did, exaggerate the success of the platform.”
The offer reports created the illusion that the company had revenues and the ability to book talent. For example, “an offer report showed 15 ‘accepted’ offers totaling $5.4 million, an average of $360,000 per offer. This offer report included million dollar purported ‘accepted’ offers from A-list artists such as Jennifer Lopez ($1.75 million), the Foo Fighters ($1.5 million), and Selena Gomez ($1 million).”
These were the SEC’s allegations: “(The defendant) engaged in a host of deceptive and fraudulent acts in furtherance of the offering scheme, including ... touting ‘exclusive’ — but, in fact, nonexistent — relationships with artists and talent.”
This second example is an SEC order against a large financial institution.
The order of June 25, 2018, reported a settlement reached “for Improper Sales of Complex Financial Products.”
The SEC found that “(the firm) generated large fees by improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity. As described in the SEC’s order, the trading strategy — which involved selling the (securities) before maturity and investing the proceeds in new (securities) — generated substantial fees for (the firm), which reduced the customers’ investment returns,” quoting an SEC press release.
What’s interesting here is that the financial advisers “did not reasonably investigate or understand the significant costs of the recommendations.”
Even worse, the firm’s “supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or ‘flipping’ of the products.”
“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “The products sold by (this firm) came with high fees and commissions, which (this firm) should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products.”
The result? The firm agreed to return just short of $1 million “of ill-gotten gains” and had a $4 million penalty.
Would you have trusted this major financial institution if you were pitched these types of products?
We’ll look into this topic further in future columns; if you have any thoughts on the subject, I welcome them.