Bad advice shrivels nest eggs

La. retirees handed over savings to now-barred securities broker

December 31, 2006|By Jonathan Peterson | Jonathan Peterson,Los Angeles Times

BATON ROUGE, La. -- Like many co-workers, Bradley Simon had put in decades at the Exxon Mobil refinery, building up a stout 401(k) retirement account and enviable pension benefits.

So he listened carefully to the investment broker's pitch that he should seize a head start on the golden years. "He said, `Why are you still working?'" Simon recalled. "He said, `I can make you more money staying at home.'"

At 54, Simon quit his job making ethylene and turned over more than $700,000 to David L. McFadden, a broker for Omaha, Neb.-based Securities America Inc. McFadden promised to keep the portfolio growing and told Simon that he could safely withdraw $65,000 a year for living expenses. Then the stock market tanked. Simon's savings dropped even more than the market, 65 percent over two years.

Regulators later said McFadden defrauded his clients by exaggerating the returns they could expect under his program. He steered them into overly risky investments with high fees and encouraged them to withdraw more than they could afford.

Simon had to sell his condominium on southwestern Louisiana's Vermilion Bay and go back to work - this time hauling oil equipment to distant cities on a used truck.

"That's my epitaph: `This guy was stupid,'" said Simon, sitting at the kitchen table of his home in Vermilion Parish, deep in Cajun country. "I'm the rock star of stupid."

As guaranteed pensions are replaced by 401(k) plans, more Americans have been left to make their own investment decisions with their retirement savings. As Simon's experience shows, the results are sometimes very bad.

Americans have $2.9 trillion in 401(k) accounts and similar plans that are largely funded and controlled by workers.

Companies are under no obligation to offer guidance on how to manage this money. Most do not, said Don M. Blandin, president of Investor Protection Trust, a nonprofit company that promotes financial education.

"The increasing responsibility on individuals to manage their long-term financial security has reached an urgent stage in American society," Blandin said. "Too many people are getting scammed."

Regulators last month banned McFadden for life from working as an investment broker, saying he squandered the savings of dozens of Exxon Mobil Corp. retirees and others in the Baton Rouge area.

The case fits an increasingly common pattern: Workers with limited investment experience fall for rosy sales pitches. Required warnings are soft-pedaled or omitted. Brokers steer retirees into investments that pay lucrative sales commissions.

In New York, early retirees from Eastman Kodak Co. are pressing claims against Morgan Stanley. In Mississippi, Chevron Corp. workers are taking action against a broker for Prudential Financial Inc. In North Carolina, BellSouth Corp. retirees brought suit against brokers from Smith Barney, now part of Citigroup.

Telecommunications workers in California's Central Valley, airline pilots in Texas and railroad workers in the Midwest all say they have been victimized by brokers who persuaded them to stop working and live off their assets. Many other cases have been settled in secrecy.

"The retirement security of American workers is at risk from unscrupulous salesmen pitching `pie in the sky' investment programs to those about to retire from a lifetime's work," said Joseph P. Borg, president of the North American Securities Administrators Association.

Once the retirees realize they have made a calamitous mistake, there often is little they can do.

"Now they're 60. They can't get a job at the plant where they were working," said Peter J. Mougey, a Pensacola, Fla., attorney who is representing Chevron retirees in the Mississippi case.

"They're out mowing lawns. Who's going to hire them when they're 60 years old? The advice ruins them for the rest of their life," Mougey said.

The potential for harm is rising as employers push older workers to take early retirement. In the automotive industry alone, about 200,000 hourly workers became eligible this year for buyouts.

"It's almost the perfect storm in terms of the opportunities it presents for folks to be taken advantage of," said James S. Shorris, head of enforcement at NASD, formerly the National Association of Securities Dealers.

The Louisiana retirees, most of whom made their decisions in the booming stock market of the late 1990s, concede that they lacked financial sophistication.

They put their trust in McFadden, a Baton Rouge broker who conjured visions of wealth and teased workers that they would have to learn how to spend their newfound riches.

"I think we were a little bit greedy ourselves," Simon said. "I bet some of us thought deep down inside we were taking too much money."

The problem, regulators say, was that McFadden shirked his obligation to warn clients about the risks of certain investments, especially those promising higher returns.

McFadden also told clients they could make sizable withdrawals from their nest eggs without compromising their financial security.

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