By Julie Jason, originally posted on Forbes.com.
Are high-net-worth investors more at risk of suffering investment fraud because of their wealth?
Attorney Niel Prosser of Prosser, Clapper & Johnson Law of Memphis, Tenn., believes they might be. Prosser, a litigator, explained that those with wealth can be at the greatest risk of possible fraud.
A Litigator’s View
This is a position that I personally have not seen taken. However, Prosser’s experience is far different than mine. Although we both started out on Wall Street as lawyers, my experience was with investment companies, investment advisers, and holding company matters.
Prosser earned his Wall Street spurs as head of litigation at Morgan Keegan & Company, a large regional broker-dealer. According to his website, Prosser “has seen nearly every facet of investor and broker litigation – disputes spanning thousands to billions of dollars.”
Do High-Net-Worth Clients Lack Fraud Protection?
Given that background, you might be interested in Prosser’s perspective. Prosser says that Wall Street firms treat high-net-worth clients as if they can protect themselves from investment fraud.
“The compliance departments at the big firms tend to think wealthy investors are knowledgeable and sophisticated based upon their wealth alone and can thus look out for themselves.” He continues: “Many of these investors, however, know little more about investing than the average Joe or, if they do, are preoccupied with their business or profession.”
Further, he believes that “the bad brokers at these firms know this well and hence it can be open season on these investors.”
That’s something to think about.
Avoid Big Wall Street Brokerage Firms?
The question is, what do you do with this information? Avoid big Wall Street firms?
Hardly. “The vast majority of brokers at well-known firms are reputable,” explained Prosser.
“The converse, however, is also true — there are bad apples even among the most well-known firms.”
Searching for Examples
If you look, you can easily find examples. Just do an internet search of brokers barred by FINRA, the Financial Industry Regulatory Authority, which regulates the brokerage industry.
Also, do a search for Prosser’s cases, which include a $7.5 million win for a customer of a major, well-known brokerage firm.
The bad apple broker in that case was listed in Barron’s Top Advisor Rankings by State for seven consecutive years (2009-2015) and was a top producer for the firm, in fact, the firm’s top producer in his state.
But, his record was not free from disclosures. A customer filed a complaint against him in 2006 seeking about $75,000 in damages, which was settled for $75,000.
I found the complaint on BrokerCheck, the free tool from FINRA that enables a person to research the backgrounds of brokers and brokerage firms, as well as investment adviser firms and advisers.
I also found the broker’s comment: “This matter was settled to avoid the cost and time of an arbitration proceeding,”
Some customer complaints are without merit; they can be denied by the arbitration panel. Or, the parties can settle with each other at a fraction of the claim. A red flag in this case is the amount of the settlement being equal to the amount of the claim.
The customer complained about excessive fees and an unauthorized purchase of a security.
When you fast-forward to 2015, you can see a pattern emerge: other customers (about 30 of them) also complained about excessive fees and unauthorized trading.
This top-producing broker caused his customers, his firm, and himself a lot of grief. Not only was he let go by the firm, but he was also stripped of his broker’s license for a lifetime (a permanent bar), charged with securities fraud and served jail time after pleading guilty.
The question is, could this outcome have been avoided? Was Prosser right about high-net-worth customers being more likely to be viewed as savvy investors who can protect themselves?
Insight From FINRA
I spoke with Gerri Walsh about the high-net-worth connection. Walsh is president of the FINRA Investor Education Foundation and senior vice president of Investor Education at FINRA.
Walsh confirmed that fraudsters do go after individuals with wealth. That’s simply where the money is.
Are high-net-worth investors more investment-savvy than others? “You can’t assume that,” explained Walsh. “Having wealth doesn’t automatically endow you with knowledge of sophisticated financial concepts.”
How prevalent are bad apples? “The vast majority of brokers are hard-working individuals who are looking out for the best interests of the client,” said Walsh. “There are cases when FINRA, the SEC, and the states go after brokers for breaking with their obligations. However, they represent a small fraction of the brokers FINRA regulates.”
Vetting Your Current Broker
This particular broker’s story is not the norm. It is highly unusual. However, it is worth telling because there are lessons here that all investors, particularly high-net-worth investors, need to know about. It has to do with understanding how brokerage services are provided, how to do your due diligence, and how to review your accounts on an ongoing basis, which depends on understanding the broker’s potential conflicts of interest — topics I write about often.
My next post will be about how to vet your current broker and why you should do so. If you want to share your insights or experiences on a confidential basis, I invite you to write to me (firstname.lastname@example.org).
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