State Securities Regulators List Unscrupulous Stockbrokers and Research Analysts As Major "Top 10" Investment Scams

ASAA (the North American Securities Administrators Association) has published its annual list of the "Top 10 Investment Scams". Unfortunately for investors, Second Place and Third Place have been "awarded" for mainstream, prevalent types of abuse, which affects millions of investors every day. These are "unscrupulous stockbrokers" and brokerage firm research analysts.

In past years, the "honor" went to isolated types of wholesale frauds and ponzi schemes. Indeed, First Place this year continues this tradition with the not-so-coveted honors going to unlicensed individuals, such as independent insurance agents, selling securities (such as fictitious limited partnerships and bogus promissory notes).

But this year, the "Investment Scams" in the number two and three positions, partially are the result of the rather shocking, almost daily, revelations of the true operations at many trusted, household name brokerage firms: Merrill Lynch and Salomon Smith Barney, to name a few.

Here is what NASAA describes as justifying its "awards" to unscrupulous stockbrokers and research analysts:

2. Unscrupulous stockbrokers. The declining stock market has caused some brokers to cut corners or resort to outright fraud, say state securities regulators. At the same time, some investors have grown more cautious and are scrutinizing their brokerage statements for unexplained fees, unauthorized trades or other irregularities. In North Dakota, regulators investigated a complaint from an investor who received conflicting account statements. They discovered that two brokers working for H.D. Vest Investment Securities Inc. issued phony account statements to cover up losses from hundreds of unauthorized trades. The brokers had also made unsuitable recommendations such as risky options contracts. Under a settlement with state securities regulators, H.D Vest agreed to repay clients' out-of-pocket losses plus 6 percent, totaling over $3.2 million.

In New York, the attorney general's office took action against seven brokers and two firms for bilking hundreds of elderly investors out of more than $12.5 million through a pay telephone scam. The brokers pressured investors into liquidating their CDs, annuities and IRAs, sometimes at significant penalty, and promised them "risk-free" 14 percent returns. So far one firm has agreed to pay $5.9 million in restitution.

3. Analyst research conflicts. In May, the New York Attorney General's office concluded a 10-month investigation into whether Merrill Lynch had issued misleading research reports by entering into a settlement agreement with the firm. Under the agreement, Merrill Lynch agreed to pay a $100 million fine and make significant changes to way it does business. NASAA is assisting a multi-state task force investigating conflict of interest issues at Wall Street firms. The primary focus of the ongoing investigation is to determine whether analysts issued glowing research reports and made "buy" recommendations in order to win investment-banking business. State investigators are now reviewing materials provided by a dozen firms for possible securities law violations.

In June NASAA learned of an attempt by Morgan Stanley Dean Witter to amend an early version of the Sarbanes-Oxley Act with language that would have ended the states' probe into whether Wall Street analysts intentionally misled investors. NASAA held a press conference and met with lawmakers; the draft amendment was ultimately not included in the bill.

The balance of the "Top 10" list is available at www.nasaa.org, and includes investment scams relating to: short term promissory notes; "prime bank" schemes; viatical settlements; affinity fraud; charitable gift annuities; oil and gas schemes; and equipment leasing. For many of these investment scams, the perpetrators, when apprehended, are tried, convicted and sentenced to jail for a long time.

By comparison, consider the frauds occurring on Wall Street. One commentator recently opined that Merrill Lynch was no different than a "boiler room" of the '90s, because its brokers were an integral part of a well-oiled and highly orchestrated sales machine to churn out IPOs and rely upon Merrill analysts such as the infamous Henry Blodget, who hyped the stocks publicly with "Buy" recommendations (and derided them privately). Not to pick on Merrill, other major brokerage firms recently have had their full share of the "limelight" as well. However, jail time is not in store for our Wall Street friends, at least not for a while, anyway.

Instead, investors will need to rely upon filing securities arbitrations to recover investment losses, and will need to avoid "pennies on the dollar" recoveries in class action litigation. But we still can hope for sanctions that will make our newest "honorees" think twice before committing the next "investment scam".