Posted in: FINRA | Arbitrations | Ponzi Schemes | SEC | Greedy Brokers | Churning | Risky Investments | RMK Funds |
Boosted by what experts believed were better-than-expected home sales from last month, the Dow Industrial Average rose Monday to over 11,000 Monday, an 18-month high.
But don’t be deceived by this. Hopefully, a surge in the Dow will improve the economy at large, but during a market up-swing too many investors ignore warning signs that they themselves are victims of broker fraud.
As witnessed, there are a few reasons to account for this.
First, overall market conditions can mislead investors. When analyzing stock market performance, you should probably forget John F. Kennedy’s famous phrase, “a rising tide lifts all boats.” Just because a general market is performing well, does not mean most individuals saw similar profit gains. Throughout history, corporate investors have vastly outperformed individual and small investors. If the market performs well over a year, an investor’s shrewd - or disastrous - month-to-month trading can dramatically impact a portfolio.
As Paul J. Lim wrote in his New York Times article, “Patience, Please, With That Investment Plan,” the S&P rose 24 percent by December of last year, while many individual investors were unable to match this increase:
The Standard & Poor’s 500-stock index has climbed more than 24 percent in 2009 - after falling 37 percent the previous year - putting stocks on pace for one of the greatest reversals of fortune in market history. Assuming that stock prices essentially stay put for the next four trading days, this would be the biggest two-year swing in stock returns since the S.& P. 500 lost 26.5 percent in 1974 and then surged 37.2 percent the next year.
Yet many investors missed out on a decent percentage of this year’s rebound, which is typical of investor behavior in sharp market turns, says Russel Kinnel, director of fund research for Morningstar.
“Even when the official returns look pretty good,” Mr. Kinnel says, “investors’ performance can be lousy.”
Second, too few investors scrutinize their broker account statements unless they are losing money. For those who do check, it can be hard to know enough about securities trading to properly scrutinize a statement-and stock broker misconduct can come in many forms.
For instance, your portfolio may be making money while your broker is churning your account-making numerous, unnecessary trades to boost commissions. For an individual investor, a well-performing portfolio can hide higher-than-average commissions, or appear as if those unnecessary trades are legitimate.
A portfolio can also be reaping profits even though the bulk of its investments are tied up in dangerous securities. Investors in Morgan Keegan RMK Funds were riding high in 2007, since too much of those funds were tied in sub-prime mortgage securities-when the housing market tanked shortly after, investors in RMK Funds later over $2 billion.
And third, oftentimes an investor should have no reason to suspect he or she is being defrauded by a broker until it is too late. A broker-client relationship is built on trust, and many of the worst stockbrokers have targeted friends, family, and members of their community. And Ponzi schemers and other bad brokers are more motivated by greed than by a market’s performance.
Bernie Madoff is the quintessential - and most famous - example of a bad broker. Madoff was the former chairman of the board of directors for the National Association of Securities Dealers (NASD), which is now the Financial Industry Regulatory Authority (FINRA). He was first suspected by whistleblower Harry Markopolos as early as 1999, meaning Madoff had nearly a decade to perpetrate his crimes—through market ups-and-downs, he accumulated over $18 billion from investors.
Many fraudulent brokers, including Madoff, have fabricated returns in statements to their customer. If you put enough faith in your broker to manage your money, and you are being provided faulty evidence supposedly proving your portfolio’s worth, why would you think otherwise?
Broker fraud is broker fraud, regardless of market conditions. FINRA is anticipating a record-high number of arbitrations in 2010 related to broker misconduct, and a good number of these complaints involve securities transactions made at or before the recession.
