Investors' faith in brokers shaken

November 16, 1994|By ANDREW LECKEY | ANDREW LECKEY,Tribune Media Services Inc.

Honesty is always the best policy.

Yeah, right. Average investors these days are turning a cynical eye not only toward the virtue of Wall Street but their friendly neighborhood stockbroker as well.

Periods of depressed brokerage commissions -- and this year of interest rate and inflation concerns is a good example -- tend to spawn questionable practices by a few desperate investment professionals. Not only penny stock hucksters, but sometimes the elite of the business.

There's ongoing scandal surrounding the firing of Kidder, Peabody & Co.'s government bond chief Joseph Jett amid accusations of his concocting fake profits to mask losses. Parent company General Electric is now unloading Kidder to PaineWebber Inc.

Embarrassment continues at Prudential Securities over failure to supervise 10 former brokers whose limited partnership conduct was fraudulent, including churning (overtrading) customer accounts. Admitting criminal wrongdoing, Prudential must put $660 million into a restitution fund for investors.

Egg is on the face of Merrill Lynch & Co. management, which sued to freeze assets of former employee Janie Thomas, a top-producing broker whose clients included Hollywood stars. The company found Ms. Thomas set up phony accounts and inflated their assets. The FBI was deployed to track her down after she and her husband disappeared.

Driving industry credibility even lower, the antitrust division recently launched a probe into alleged price-fixing in the Nasdaq stock market.

Seeing infractions by advisers of respected firms involving millions of dollars or hundreds of millions of dollars, the little-guy investor sometimes feels he doesn't stand a chance.

"You could argue that in a down time brokers have incentive to churn, and we don't want a few bad guys scaring off the public due to a lack of trust," said Stuart Kaswell, senior vice president and general counsel for the Securities Industry Association.

The worst outcome would be if people become so frightened that they don't invest for their retirement and children's educations, he said.

"Though there aren't rogue brokers on every street corner, there are a sufficient number who don't want to play by the rules and we need to shake them out," said Mark Fitterman, associate director of market regulation at the Securities and Exchange Commission.

The SEC receives more complaints in down markets, which Mr. Fitterman believes reflects that customers complain more when suffering losses. Prohibited conduct includes sale of securities unsuitable to the client; making unauthorized sales or purchases; switching among mutual funds with no investment purpose; misrepresenting facts; removing funds without authorization; and charging excessive commissions.

"Remember that infractions represent only a tiny fraction of the scope of overall industry dollar and transactional volume," emphasized John Pinto, executive vice president of regulation for the National Association of Securities Dealers.

Though most brokers are reputable, in investing, as in every other exchange of money, it's "buyer beware."

"Best way to invest is with someone you've known for a long time, and, if this is your first purchase, go to a friend who invests and ask who he does business with," counseled Thomas O'Hara, chairman of the board of trustees of the 270,000-member National Association of Investors Corp. in Madison Heights, Mich., which sponsors investment clubs.

To check the disciplinary record of a broker, dial the NASD toll-free number, 1-800-289-9999. You'll receive a computer printout.

Once you become a client of a broker who understands your goals and attitude toward risk, thoroughly read and keep all monthly account statements and confirmations. Question any transaction you don't understand or didn't authorize. If you aren't satisfied with the broker's response, consult the branch manager and compliance department. Make complaints in writing. Failure to receive a satisfactory response may warrant filing a written complaint with the NASD or other agency.

About 6,000 cases each year go to arbitration, a resolution mechanism between customers and firms.

Impartial individuals conduct a hearing, listen to oral arguments and testimony, review evidence and render a decision.

The largest arbitration forum is the NASD Arbitration Department, 33 Whitehall St., New York, N.Y. 10004.

The New York Stock Exchange, other exchanges, American Arbitration Association and Municipal Securities Rulemaking Board also have arbitration facilities.

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