Household Names No Guarantee of Safety : Firms: The customer might well take pause at the records of some of Wall Street’s biggest and best-known brokerages and their salespeople.
Small investors who decide to risk a first plunge into the stock market often turn to Wall Street’s biggest, best-known brokerages, hoping to find the most trustworthy brokers and reliable advice.
But a six-month investigation by The Times shows that there are brokers at firms with household names such as Shearson Lehman Bros., PaineWebber Inc. and Dean Witter Reynolds--as well as at other top-ranked firms--whose records might give customers pause if they knew about them.
At Prudential Securities, the firm itself mandated hard-sell tactics to steer small investors into highly risky limited partnership investments, and in at least two instances allegedly punished honest employees who tried to warn customers off.
Randall R. Bryan Jr., 46, a Shearson broker in Atlanta, has been involved in two big arbitration cases since 1988 which resulted in exceptionally large awards against him and Shearson, of $370,000 and $275,000. In addition, documents show that as of December Bryan was the subject of a disciplinary investigation by the New York Stock Exchange, although to date the exchange hasn’t taken any action against him.
The $275,000, awarded to Wadleigh C. Winship in August of 1988, was given by a panel of the American Arbitration Assn. The panel found the misconduct so egregious that it awarded punitive damages--$100,000 of the $275,000--something almost unheard of in securities cases decided by the arbitration association.
The arbitration panel didn’t explain its decision. But arbitrators had before them evidence of repeated forgery of Winship’s signature on documents authorizing options trading. Evidence of Winship’s signature being forged was a leading issue in testimony at the hearings and in the documents submitted in the case.
Nevertheless, Shearson denies that Bryan forged any documents, and says it didn’t discipline him or anyone else involved in handling Winship’s account. Shearson contends that a handwriting expert the firm retained for the arbitration hearing “demonstrated conclusively that Mr. Bryan had not altered or forged any client documents.”
Bryan is still there, and in the more recent case, in which a National Assn. of Securities Dealers arbitration panel awarded $370,000 last October, the panel specifically found that Shearson and Bryan had violated state of Washington securities laws by churning the account of customer H. Bond Owens Jr., a Washington state resident. Churning represents the rapid buying and selling of securities for no reason other than to generate brokerage commissions.
Shearson says it disagrees with the panel’s conclusion. Bryan declined to comment on the cases and referred all questions to Shearson’s management.
Bryan’s branch office is still trying to live down one of the biggest brokerage arbitration awards ever. A panel in 1989 awarded $3.1 million to a Florida homemaker whose money, inherited after her parents died in a plane crash, allegedly was squandered when a broker heavily churned her account and made unauthorized trades on margin. That broker is gone. But the branch manager responsible for supervising him, Robert Kaplan, is still there, and is still Bryan’s boss.
Reached by phone, Kaplan declined to comment.
Charles Morris Lewis, 62, is one of Shearson’s veterans. A broker since 1965, he has been with Shearson since 1979, currently in the firm’s 5th Avenue office in Manhattan. Shearson usually forbids brokers to talk to the press. But the firm has allowed Lewis to be one of its public stock market pundits. USA Today’s columnist Dan Dorfman has quoted him often as a “market analyst,” as have the business pages of the New York Post. These newspapers, however, haven’t quoted Lewis about his own record of customer complaints.
Since 1989, four arbitration cases in which Lewis was the broker have cost Shearson and Lewis judgments of more than $315,000. All of the cases involved allegations of churning. In one case, a New York Stock Exchange arbitration panel took the unusual step of referring the case for a disciplinary investigation by the exchange’s enforcement division. The case involved allegations of unauthorized trading on margin. Arbitrators awarded customer Mark A. Popkin of North Carolina $26,000.
Shearson officials said the NYSE investigated and took no action. NYSE officials declined to comment on the inquiry.
Documents obtained in one case, in which Lewis and Shearson were jointly ordered to pay more than $70,000, provide a glimpse into alleged churning. Carole W. Davis, who maintains she had no previous experience as an investor, turned $258,000 over to Lewis to invest. The money was from a recent divorce settlement, and represented most of her net worth.
Records from the case show there were so many purchases and sales during an 11-month period that although her investment was only $258,000, the total value of stocks bought and sold exceeded $2.7 million. Trading in the account was almost daily. Lewis purchased shares of stock in various utilities and other companies, then turned around and sold the shares within days or weeks, often repurchasing the same stock days later.
The result of this trading was that the value of the account went from $258,000 to about $75,000, while Shearson and Lewis, receiving commissions on every purchase and sale, earned over $70,000.
Asked about the arbitration awards, Lewis said, “I think you’re going down a wrong path with this.” He added, “This is an area that causes a lot of heartache and pain” for him. But he refused further comment. Shearson denies there was any wrongdoing, and says trading was consistent with Davis’ stated investment goals. Davis’ lawyer, Stanley M. Ackert III, strongly denies this.
Sean Vance Dillon, 30, is a broker in PaineWebber’s Boston office. Since 1987, customers have filed at least 14 arbitration cases and formal complaints against him, and so far the firm has paid out over $63,000 in awards and settlements, according to a printout of his record from NASD’s database.
The complaints allege churning, unauthorized trades and fraud. A common theme in several complaints is alleged forgery of customers’ signatures on account agreements. Customers claim the falsified signatures allowed Dillon to carry out unauthorized trading in their accounts.
One individual who recovered part of his losses in an arbitration case was Dillon’s old high school teacher, James Markey. Markey, a former Jesuit brother, had taught Dillon when he was a freshman at a Roman Catholic high school in New York City. In the arbitration, Markey claimed that his signature, and that of his wife, had been forged more than 10 times. Another arbitration case involving allegations of forgery recently resulted in a $72,000 award against Dillon and PaineWebber.
Asked about alleged forgery, Dillon said, “I’m not allowed to comment on it.” PaineWebber General Counsel Robert M. Berson said, “Based on what we know, Mr. Dillon did not forge any signature.”
Berson acknowledges, however, that the complaints against Dillon were so numerous that, “We put him on notice in 1990 that management would not tolerate any further allegations, true or not, about misconduct.” He says there have been no recent complaints. Asked if PaineWebber customers should have complete confidence in brokers such as Dillon, Berson would only say, “That’s a wonderful question.”
Christopher D. Hodges, 46, had no trouble finding a job when PaineWebber in May of 1988 forced him to resign. He was immediately hired by a Sarasota, Fla., office of Dean Witter.
In a telephone interview, Dean Witter spokeswoman Kaye Ramsden insisted that “this guy really does not belong in your story.” She added, “He’s a really good broker.” True, Ramsden said, there had been complaints and arbitration cases filed against Hodges by his former PaineWebber customers. But she says he was vindicated in every arbitration.
Ramsden, however, evidently hasn’t looked closely at Hodges’ record. An official printout of his disciplinary record obtained from the Florida Division of Securities shows that complaints from 14 of Hodges’ customers at PaineWebber resulted in arbitration awards and settlements totaling over $365,000 since 1988. (Four awards by arbitration panels against Hodges and PaineWebber totaled $163,963; the rest of the money paid out was in settlements by PaineWebber.)
Most of the claims relate to Hodges’ love affair with the stock of Syntech International Inc., a Reno, Nev., maker of computer systems for state lotteries. Hodges heavily concentrated much of his customers’ assets in this speculative stock, in some cases allegedly without their authorization. These customers included a woman incapacitated by Alzheimer’s disease. When Syntech’s stock fell sharply after the October, 1987, crash, much of his customers’ investments were wiped out.
Some customers claimed that Hodges used his own personal computer in the PaineWebber office to send out statements to customers about how their accounts were doing. PaineWebber officials say their own investigation shows that the statements consistently overstated the current value of customers’ holdings.
PaineWebber says using a personal computer to send out account reports is a violation of its rules. Hodges’ lawyer, Terence A. Bostic, denies any intentional wrongdoing by Hodges, and says Hodges himself lost about $250,000 from his own investment in Syntech. Bostic contends Hodges had approval to send out the computer statements. But he confirms that the statements contained mistakes. He says, however, that these were “simply human errors.”
In the mid-1980s, Prudential-Bache, the predecessor of Prudential Securities, required its brokers to aggressively market interests in oil and gas, real estate and other limited partnerships to small investors. The partnership interests were hugely profitable to Prudential--generating commissions of around 8%, compared with 2% or less on stocks and most other securities. But today, many of these partnership interests are worthless, and estimates of customers’ losses range into the billions of dollars.
State securities regulators claim Prudential falsely told small investors that the partnership interests were a safe alternative to bank certificates of deposit. A 1987 Prudential internal sales manual for selling partnership interests shows the firm instructing its brokers in hard-sell tactics. The manual tells brokers to “stress safety and guarantees” and “give your personal assurances.” Brokers were told to say things such as, “It’s almost guaranteed so you can feel safe about it.”
In April, an NASD arbitration panel ordered Prudential to pay $982,247 to three Oklahoma retirees who had been persuaded in the mid-1980s to buy Prudential-Bache limited partnerships. Their lawyer says the award was over three times bigger than their actual out-of-pocket losses.
One of them had taken money received as a lump sum payment for early retirement and gone to Prudential-Bache’s parent, Prudential Insurance Co. of America, planning to buy a risk-free annuity. Instead, without explanation, he was steered by the insurance company back to a Prudential-Bache broker, who was identified to him as a “retirement funds coordinator,” who persuaded him that the ideal safe investment would be limited partnership interests.
In Dallas, R. Park Downer, a special investigator in the district attorney’s investment fraud section, said Tuesday he is conducting a criminal investigation into Prudential-Bache’s marketing of oil and gas limited partnerships. A Prudential Securities spokesman said he had no knowledge of the investigation.
In addition, at least two states, Florida and Kansas, have actions pending against Prudential for sale of the limited partnership interests. James W. Parrish, the Kansas securities commissioner, said in an interview, “I think that their management in place at the time and many of their agents (brokers) were seriously overreaching the ethical bounds that govern our industry.”
Many of the brokers who did the firm’s bidding and dutifully sold the partnership interests to investors are still with the firm--in contrast to some brokers and managers who were forced out because they tried to warn clients about the dangers of investments Prudential was aggressively promoting.
Eugene L. Boyle III was forced to resign as a Prudential broker in 1989 after he warned customers about the dangers of a new security Prudential was marketing known as “Risers,” and suggested that customers who had already invested in them and lost money hire lawyers to sue the firm. Risers were a newly invented investment vehicle indirectly linked to pools of home mortgages. Hundreds who invested in Risers sustained heavy losses.
Evidence presented in an arbitration hearing showed that while Prudential was telling customers that Risers was virtually risk-free, Merrill Lynch had rated the same units highly speculative.
“What they did at Prudential was market these Risers as something that was supposed to be for the proverbial widows and orphans,” Boyle said. “They turned out to be as wildly speculative an investment as was ever devised by the mind of man.”
Boyle won a claim that Prudential attempted to defame him after forcing him to resign. In an apparent attempt to prevent him from finding work again as a broker, the firm wrote on a termination form filed with NASD that Boyle had complaints against him by many of his customers. In fact, the complaints were against the firm for marketing the Risers. An arbitration panel ordered the notations expunged from Boyle’s record.
James E. Trice, a former Prudential regional manager, won a large settlement from Prudential in 1991 after filing an arbitration case claiming he was wrongfully fired. One of Trice’s claims was that Prudential forced him out for questioning the firm’s policy of marketing Risers to smaller investors. Trice’s arbitration claim alleged that he “questioned and never supported activities which were bending or breaking of the rules regulating brokerage houses, although Pru-Bache management had an attitude of complacency and even encouragement and support of such conduct.”
Howard A. Bartnick, Prudential’s compliance director, denies that Prudential pressured its employees to do anything unethical.
Common Abuses by Brokers
Churning: Heavily trading an account to generate brokerage commissions, without regard to a customer’s investment goals.
Unauthorized Trading: Purchases or sales of securities that the customer never authorized. One variation is overbuying--a customer who ordered 100 shares of company X may find that 500 shares were purchased for the customer’s account.
Unauthorized Accounts: Brokers sometimes open margin, options or other types of accounts customers never asked for. This is often done by forging customers’ names on new account forms.
Unsuitable Investments: Brokers have a legal obligation to know their customers’ financial goals and the level of risk they can withstand. Brokers may not make unsuitable investments, even if customers ask for them. For example, for a retired person concerned about safeguarding a retirement nest egg of $100,000, a broker may not concentrate the funds in highly risky investments such as options or highly speculative over-the-counter stocks.
Misrepresentation: Brokers may not falsely minimize the risks of a security, or give false information about a company, or leave out important information about a stock or bond the broker is recommending.
Excessive Commissions: Commissions, as well as markups charged on over-the-counter stock transactions, shouldn’t exceed the rate a customer agreed to. In addition, the size of commissions and markups is regulated by stock exchanges and National Assn. of Securities Dealers rules.
How to Avoid Trouble
Lawyers who represent brokerage customers say small investors can take these steps to protect themselves:
Read confirmation slips and account statements closely as soon as you receive them. Look for unauthorized trades or heavy trading in an account. Complain immediately and, if problems continue, close the account promptly. Arbitration panels sometimes hold customers partly to blame for their losses if they ignored their account statements or allowed trading after they became aware of problems.
When possible, give your broker written instructions, and keep copies of the instructions.
Beware of brokers who call up unsolicited and claim to have access to special investment opportunities that the investor must commit to quickly. Such offers are often exaggerated or fraudulent.
Check out a broker before investing. In California, this can be time-consuming and may not yield a full record of complaints against a broker. But write to the California Corporations Department and request a “CRD printout,” which will include a record of disciplinary action and arbitration awards against a broker and settlements of customer complaints. Write to: California Department of Corporations, 3700 Wilshire Blvd., Suite 600, Los Angeles, CA 90010.
Some brokerage firms routinely reject customer complaints, even when the complaints are valid. If you feel that you have been victimized and can’t get redress from the firm, consult a lawyer experienced in representing brokerage customers. You may also complain about improprieties by brokerage firms to the New York Stock Exchange, the National Assn. of Securities Dealers and the Securities and Exchange Commission.
