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Financial Counsel Blog

im Eccleston is proud to present his new blog, including downloadable podcasts that you can listen to anytime! Make sure to drop a line to Jim in the comments section and keep the discussion going.
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In Focus

April 28, 2008

iscontent among investors in auction rate securities appears to be matched by equal discontent among the financial advisers who sold those investors the auction rate securities (ARS)!

As one adviser told me, many financial advisers have been duped alongside their clients. In many cases, both investor and adviser were not told that auction rate securities were not risk-free and were not liquid. Still more disconcerting, many advisers didn't know that firms had conflicts of interest, as they cleared out their inventory, or arranged sales of auction rate securities for their favored institutional clients, leaving retail clients holding the bag! What else is new!

Now we learn that one especially troubled type of auction rate securities - those issued by student loan authorities - issued waivers that would make the auction-rate securities easier to sell. That is, easier to sell by institutions unloading their positions and by firm trading desks scrambling to clear out their inventory! And worse, retail investors who bought after the waiver now suffer not only from illiquidity but also from reset interest rates of as little as 0%. Face it; these auction rate securities have little or no prospect of redemption.

My prediction? When financial advisers come to us saying that they were duped too, I know we just are seeing the tip of an iceberg. Nothing less than the spectacular Prudential limited partnership scandal, or more recently, the brokerage firm analyst research conflict of interest scandal, approaches what the ARS scandal will reveal. There should be no shame on the part of financial advisers in working with their clients to refer them to securities lawyers who will seek the legal remedies to which they are entitled! In fact, it is the right thing to do in order to teach firms yet another lesson: the customer must come first!

— James J. Eccleston
FinancialCounsel.com

Caveat Emptor Broker Search

ASD takes disciplinary actions against firms and individuals for violations of NASD rules; federal securities laws, rules, and regulations; and the rules of the Municipal Securities Rulemaking Board. These actions range from mere censures to a bar from the securities industry. Please note that many of the reported disciplinary incidents result without the individual having admitted or having denied the allegations, having submitted what is called an "Acceptance, Waiver and Consent". Regarding complaints filed, the NASD issues this disclaimer: (Click here for more....)

Search here for brokers with significant disciplinary incidents or complaints filed against them:

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James Eccleston Discusses Municipal Bonds on First Business

irst Business, a business magazine show highlighting the latest business and finance news, aired a segment about municipal bonds featuring SNSFE partner James J. Eccleston.

Jim explains that over two-thirds of municipal, or "muni" bonds are owned by private investors, and because there is no uniform standard of accounting, individual investors are at risk of loss.

For more information about the risks of owning municipal bonds, contact James Eccleston at JEccleston@snsfe-law.com or 312.621.4400.

First Business airs weekdays on WCIU Chicago at 5 AM.

What's Up With That?

im Eccleston and SNSFE Law are always on the lookout for suspicious financial activity. Listen to Jim's new "What's Up With That" podcasts to learn about their latest inquiry:
Lancer Group Hedge Fund Manager Michael Lauer and Others Indicted For Fraud and Conspiracy.

SNSFE Investigating London-Based Hedge Fund CSO Partners.

SNSFE Continuing to Investigate Illinois Resident Robert Loffredi Raymond Financial Group and Linsco Private Ledger After SEC Bars Loffredi From Securities Industry.

Contact JEccleston@snsfe-law.com for more information.

Planning For Posthumous Success

lvis Presley, J.R.R. Tolkien, and Vincent van Gogh have something in common: All were artists whose "product" became extremely popular after their death. But which estate will remain successful? While the concept of a "posthumous estate" may seem to be oxymoronic (estates are posthumous by definition), some estates merely provide a concluding coda to a life, while others commence a brand new opus that takes on a life of its own, so to speak. (Click here for more....)

Investor Angst, Regulatory Probes and Litigation Intensify Over Auction Rate Securities

n my column last month I outlined the auction rate securities (ARS) problem, and explored recourse that investors may have to liquidate their ARS investments, to rescind the purchase and/or to recover damages for losses. Since then, the problem for many investors has worsened. Let's discuss why. (Click here for more....)

A Life Settlement Mosaic

y life settlement views are formed from my experiences with clients. Since I am solicited by clients and not the other way around, I take on what is brought to me. I think this produces a rather accurate mosaic of happenings in the life settlement universe. From these experiences I have done some research into certain issues, but mostly I extrapolate from these client experiences to what I believe are larger lessons. This column updates life settlement issues from this perspective. (Click here for more....)

Securities Regulator Issues Warning Regarding Investors' Use of Reverse Mortgages

or many individuals, their largest asset is their home, and it is their most precious source of retirement security. Unfortunately, over the years financial advisers have convinced homeowners that they should tap into their home equity to purchase investments. In 2004, the NASD (National Association of Securities Dealers), now known as FINRA (Financial Industry Regulatory Authority) issued an investor alert entitled, "Betting the Ranch: Risking Your Home to Buy Securities." That alert addressed the use of new mortgages, refinanced mortgages and lines of credit secured by the home. The NASD expressed its concern that "investors who must rely on investment returns to make their mortgage payments could end up defaulting on their home loans if their investments decline and they are unable to meet their monthly mortgage payments." (Click here for more....)

Retirement Portfolio Durability

urability: toughness, strength, resilience, stability. Building a tough, strong, resilient, and stable retirement portfolio is, very simply, what every retiree wants. Let's examine in greater depth one of these desired attributes, namely stability. In order to achieve "stability", a client may want to park their retirement portfolio entirely (or largely) in cash. This article may help you help them reconsider. (Click here for more....)

Finally, a Prospectus that Investors Can Read and Understand: What Summary Prospectus Means to Investors

n an effort to minimize increasing fulfillment costs, fund companies have been combining multiple fund prospectuses into a phone-book-sized "one-size-fits-all" document distributed in a single mass mailing. What began as a noble effort to inform investors and protect them has resulted in "investor disclosure" that is costly, wasteful and confusing. As the industry moves toward greater transparency in mutual fund sales transactions and standardization of information, a central need has been simplicity. (Click here for more....)

Market Cycle Investment Management

hatever happened to the Stock Market Cycle; the Interest Rate Cycle; Baby Jane? How did Wall Street get away with pushing these facts of financial life down the basement stairs? Most investors, I'm beginning to believe, and all financial advisors, media representatives, and market gurus have abandoned these fascinating curves for the comfort of a straight-edged twelve-month playing field… simple, yes; realistic, not. I have to wonder if things would be different with a more investor-friendly tax-code, but that would be far less lucrative for The Wizards… (Click here for more....)

Alliance Bernstein:

Commercial Real Estate: From the Ground Up

onors — typically parents and grandparents — have made Section 529 plans a vehicle of choice for funding the costs of higher education. And indeed the plans offer many advantages for both beneficiaries and their families. Like most investments, however, 529 plans are complex and need to be evaluated within the context of a donor family’s full array of financial goals. (Click here for more....)

Perspectives on American Depository Receipts (ADRs)

.S. stock markets have not kept pace with inflation thus far in the 21st Century, having earned 3% per year for the 7.3 years ending 4/30/07, while inflation has averaged 3.5%. At the same time, non-U.S., or foreign, markets have performed quite well, earning 9% per year, or 3 times the return on U.S. stocks. American Depository Receipts (ADRs) have also outperformed the U.S. stock market although they have not fared as well as the total foreign market, earning 5% per year, which is almost double the U.S return. These advantages have not gone unnoticed. U.S. investors have intensified their interest in investing outside the U.S. (Click here for more....)

Market Commentary

he Market Commentary provides major security markets' historical data. It is within these markets, Neuberger Berman manages investments. (Click here for more....)

DePaul Advisor

hortly before his death in 2006, Moses Burg signed two letters indicating his intention to leave $100,000 to the Anti-Defamation League Foundation in his will. Burg met with an attorney who drafted a trust, but it was never signed. The probate court determined that the letters were not testamentary instruments. The ADLF argued that the elements of a valid gift – donative intent, delivery and acceptance – had been met. The organization also claimed that Burg’s pledge was enforceable as a contractual obligation under the promissory estoppel doctrine. (Click here for more....)

Auction Rate Securities Present a "Hotel California" Nightmare for Investors

nvestors have discovered Wall Street's version of the Hotel California: they have "checked in" to an investment that they cannot leave. Since mid-February, a significant number of auctions (70% according to Thestreet.com) in "auction rate securities" have failed, leaving the $330 billion market in disarray. (Click here for more....)

DiMeo Schneider & Associates, LLC: April 2008: "A Better Target Date Fund (The 'Better Mousetrap')"

arget date funds are part of a major paradigm shift in how participants invest in 401(k) plans. According to a recent Hewitt study, 57% of plan sponsors currently offer target date funds. Moreover, the Pension Protection Act’s establishment of target date funds as a QDIA ( Qualified Default Investment Alternative) should accelerate their use by plan sponsors and participants. (Click here for more....)

Mandatory Arbitration of Securities Disputes: A Statistical Analysis of How Claimants Fare

n 1987, a sharply divided United States Supreme Court decided Shearson/American Express v. McMahon, 482 U.S. 220 (1987). In its decision the court held that the mandatory arbitration provisions in agreements between investors and brokerage firms are enforceable. Securities firms are required to be members of self-regulatory organizations. The largest of these organizations is the National Association of Securities Dealers (NASD). Virtually all NASD members require investors dealing with them to agree to resolve disputes by arbitration. (Click here for more....)

Market Turmoil Tests Target Date Lifecycle Funds

he last four months have been troubling times for most investors with the S&P 500 losing 14% of its value. But this is just the kind of period that we want to use to test certain types of funds, like hedge funds and target date funds. In this very short commentary we take a close look at how target date funds have fared recently. (Click here for more....)

Securities Regulator Issues Tips to Protect Financial Information

INRA (the Financial Industry Regulatory Authority) has published, "Keeping Your Account Secure: Tips for Protecting Your Financial Information." According to FINRA, identity theft has advanced well beyond "dumpster diving" to recover discarded account statements or other records that have not been shredded, though this old-fashioned method still is a threat. In addition, some identity thieves "use keystroke-logging software to capture usernames and passwords, disseminating these programs through instant messages, emails, or freeware." Likewise, "others 'phish' for sensitive information by sending phony emails that purport to come from a legitimate financial institution but which ask for information your firm would never request through email - such as confirmation of an account number, password, credit card number, or Social Security number." (Click here for more....)

Asset Allocation for Foundation and Endowment Investment Portfolios

oundations, Endowments and other Not-for-Profit organizations come in all shapes and sizes. The assets that they control and manage for the benefit of countless projects, charities, and causes is staggering in total and it has become a primary market for the vast array of investment products developed by Wall Street financial institutions. One can only speculate about how much "Bubble Paper" finds its way into the these portfolios, but nearly all of them are managed by the major brokerage firms, and all such firms bonus their brokers on the basis of product sales. It is not uncommon for Wall Street to re-write the syllabus for Investments 101, redefining Quality, Diversification, and Income to suit its own dark purposes… (Click here for more....)

How to Buy Individual Bonds: A Fixed-Income Toolkit

nce you’ve learned about bond basics and reviewed the vast number of bond choices, you’re ready to make decisions on how to invest your funds in bonds. Basically, you have two choices: You can purchase individual bonds, or buy them packaged together as funds. Both choices offer certain advantages. (Click here for more....)

Clueless: What Graduates Need to Know About Making Financial Decisions

oday’s college graduates are usually enthusiastic and well-trained in their discipline. But they are often clueless about financial matters. Unfortunately, the fallback position is typically to do nothing. But these early-year “non-decisions” can have a detrimental effect on their financial well being throughout their working lives, and especially in retirement. If only they had known how important it is to make good decisions in these early-year financial matters! This article is aimed directly at the younger generation, and it designed to help them avoid such financial mistakes. (Click here for more....)

Assessing the Damage of January, 2008 on Global Stocks and Target Date Lifecycle Funds

lobal stock markets were hammered in January, with US stocks losing 6% and foreign companies faring even worse, losing 10%. This follows a 2-month November-December, 2007 US loss of 5%, so the US market is down 11% for the 3 months ending January 31, 2008. It’s been miserable and worrisome. The following commentary assesses the January damage. We first examine domestic style and sector returns, and then move outside the US for more bad news. (Click here for more....)

Alliance Bernstein:

If It Feels So Right ... How Can It Be So Wrong?

aedalus warned his impetuous son, Icarus, to travel between the extremes, and that's also good advice for investors — but difficult to heed. Think back to May and June of 2006 when, after a four-year run, it suddenly seemed like the bottom was dropping out of the stock market. Over a 36-day period, US stocks fell by 7%, major foreign markets stocks by more than twice as much, and emerging markets shares even more steeply. A brutal bear market seemed to be gaining traction — and investors were anxious. (Click here for more....)

RAND Report Confirms Investor Confusion Regarding Roles and Responsibilities of Brokers Versus Advisers

AND Corporation recently released its report entitled, "Investor and Industry Perspectives on Investment Advisers and Broker-Dealers" (the "Rand Report"). The Securities and Exchange Commission (SEC) commissioned RAND to conduct a study of brokerage firms (known as broker-dealers) and investment advisers. (Click here for more....)

Securities Regulators Reveal Widespread Compliance Deficiencies On the Part of Investment Advisers

he North American Securities Administrators Association ("NASAA") has released a report that details significant compliance deficiencies among investment advisers nationwide and in Canada, and outlines a set of recommended best practices to avoid those compliance deficiencies. Let's highlight the key compliance deficiencies and the recommended best practices. (Click here for more....)

Qualified Pension Plan Participants Should Look Forward to Receiving Specific Investment Advice

he Pension Protection Act of 2006 (the "PPA") should benefit plan participants (and beneficiaries) by providing participant education. Under the PPA, qualified "Fiduciary Advisers" will help plan participants navigate through their investment selection and allocation decisions. Although we await the issuance of regulations by the Department of Labor to amplify the provisions of the PPA, let's review the PPA and what plan participants may expect to receive by way of guidance. (Click here for more....)

Perspectives on Capital Markets in 2007 and Beyond

he U.S. stock market, as measured by the S&P 500, earned 5.5% in 2007, which as shown in Exhibit 1 is substantially below its long-run ( 82-year) history of 10% returns per year. Similarly, a 3% return on bonds, as measured by the Citigroup High Grade Corporate Bond Index, is below historical norms. Completing the annual picture, inflation at 4% and T-bill returns at 5% are both above historical averages, but the real (above inflation) return on T-bills of 1% matches history. It was not a good year for stock and bond investors. (Click here for more....)

“Enhanced” Index Funds: Can They Beat the Market?

ince the inception of the first index mutual fund in 1975, indexing—investing in passively managed, broadly diversified, low-cost, stock and bond index funds—has proved to be both a remarkable artistic success and a remarkable commercial success. (Click here for more....)

Investment Products:
If It Has to Be Sold, Don’t Buy It!

on-financial firms can make consistent profits by combining parts into a whole. For example, GM buys parts, puts them together, and sells cars for more than the cost of the parts. GM adds value by putting the parts together. But financial firms cannot add value merely by buying securities and combining them into a portfolio. Mutual funds can charge a convenience fee for combining securities into a portfolio and for reinvesting the distributions, but these conveniences can be attained for 0.20% or less. Thus, there is, at best, a very small value added merely from combining securities into a portfolio. (Courtesy of AAII, November 2007 AAII Journal) (Click here for more....)

Securities Regulator Makes Protection of Senior/Retiree Investors A High Priority

enior investors, as well as Baby Boomers who are retired or who are approaching retirement, should take some comfort from a recent notice to financial services firms, Regulatory Notice 07-43. The Financial Industry Regulatory Authority (FINRA) states that the purpose of the notice is "to urge firms to review and, when appropriate, enhance their policies and procedures for complying with FINRA sales practice rules, as well as other applicable laws, regulations and ethical principles, in light of the special issues that are common to many senior investors." (Click here for more....)

Exercise Caution in Purchasing Structured Investments, the Latest Hot Product from Wall Street

wo seminars that I recently attended both shared the common element of having a speaker discuss the virtues of "structured investments", or "structured products" as they sometimes are called. A financial publication recently ran a story entitled, "The Next Big Thing; Structured Products May Be Difficult to Define, Explain and Track - Yet They're Touted As the Next 12 Figure Asset Class." Indeed, both seminar speakers claimed that, in Europe, structured products are so popular that investors can buy them at the post office! Hype or reality? No one can be sure, but we know that for 2007, analysts predict that investors will purchase $100 billion of them. (Click here for more....)

Prudent 72(t) Retirement Planning Requires More Than Just Wishful Thinking

dvisers, and their clients, have been warned about "early retirement investment pitches that promise too much." A FINRA Investor Alert has cautioned employees to "look before you leave", and two well-publicized regulatory actions have highlighted problems with misleading sales practices and ineffective supervision. Let's review the warnings, and provide guidance to advisers on how best to stay clear of trouble. (Click here for more....)

Subprime Mortgage Problems: What to Look For and Where to Look

ubprime mortgage problems are much in the news these days. Some subprime mortgages originate with standard underwriting and documentation procedures. They are subprime because the borrowers’ credit quality is poor, the loan-to-value ratio is high, or for some other reason that impairs creditworthiness. Other subprime categories are ‘low doc’, ‘no doc’, and ’pure schlock’, which means that the documentation and underwriting of the mortgages are substandard, nonexistent, or potentially fraudulent. (Click here for more....)

Sub Prime Risk Grows as World Leverages Up

couple of weeks ago, another large sub prime mortgage lender, American Home Mortgage Investors, said it could no longer fund home loans and may liquidate assets, putting its survival in jeopardy. The stock traded as high as $36 a share in December and recently it reopened at $1, wiping out almost $2 billion in investor funds. As late as July 30, with the stock trading at $10, two major brokerage firms still had the stock rated as a “buy.” Can you imagine being a client of these firms and holding this stock all the way down from $36 to $1? Can you imagine being a broker at these firms and advising your client to hold, or maybe even buy more, because your firm still recommended the stock? (Click here for more....)

A CMO Primer: The Law of Conservation of Structured Securities Risk

he collapse of Brookstreet Securities and the bailout of two Bear Stearns hedge funds on the brink of collapse have focused attention on collateralized mortgage obligations (“CMOs”). The collapse of the subprime lending market, lax loan underwriting standards and misleading credit ratings have combined to cause dramatic investor losses in 2007. These recent CMO losses closely parallel earlier CMO losses. In 1994, a significant increase in interest rates and misleading interest rate risk disclosure caused many bond mutual funds to fall in value far more than expected. These funds had invested heavily in CMOs, for which the funds’ simplistic interest rate risk disclosure was misleading. Today’s CMO losses resulted from the relatively recent introduction of CMOs with substantial credit risk and the inadequate or misleading way in which that credit risk was disclosed. This article provides a selective history and a brief description of CMOs in an effort to enable practitioners to evaluate the merits of a potential CMO case. (Click here for more....)

Employees Warned Of Early Retirement Investment Pitches That Promise Too Much

securities regulator, the National Association of Securities Dealers (NASD) has issued an Investor Alert to employees contemplating early retirement in reliance upon early retirement investment pitches. These pitches have been "flawed, even fraudulent", and have caused retirees great financial harm. (Click here for more....)