O.C. Case Spurs New Safeguards : U.S. Acts to Protect Investors After Wymer
The case of Steven D. Wymer, the Newport Beach investment adviser who pleaded guilty in 1992 to charges that he bilked clients of more than $200 million, sent a shock wave through the financial community.
It was also one of the factors that led to an extensive review of how the U.S. Securities and Exchange Commission regulates investments. In March, SEC Chairman Arthur Levitt cited the Wymer case when he announced new rules that, among other things, prohibit investment advisers from making decisions about client accounts unless the client receives periodic account statements directly from an independent custodian.
Elaine Cacheris, regional director of the U.S. Securities and Exchange Commission and former chief of the regulator’s West Coast enforcement division, answered questions last week about new provisions of the Investment Advisors Act Rule, formulated to protect large and small investors.
Cacheris, 38, directs an office that covers California, Arizona, Nevada, Oregon, Washington, Hawaii, Alaska, Idaho and Montana. She headed the SEC investigation of Wymer, who is serving 14 years in federal prison and last week began paying restitution to his former clients.
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Q. You described the case against Steven Wymer as one of the “most significant and financially devastating cases of securities fraud ever perpetrated.” Why didn’t the SEC rules in effect at the time protect the investors?
A. Several factors contributed to Wymer’s ability to perpetrate the fraud on his clients and to disguise the amount of money that was missing.
First, he maintained two sets of books and records. Wymer spent a great deal of time creating fictitious trade confirmations and customer account statements that were virtually indistinguishable from genuine documents.
It also appears that he may have been assisted by others, including account executives at the brokerage that held the defrauded investors’ accounts. Our investigation into this is continuing.
Third, Wymer was also able to convince the defrauded investors that receipt of trade confirmations and account statements was unnecessary.
He provided sometimes genuine and sometimes forged letters from his clients to the brokerage, authorizing it to send account statements and confirmations to Wymer alone, bypassing the investors, so they never saw the real status of their accounts.
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Q. How have the rules changed since then? What is the major new safeguard?
A The new rule . . . is specifically designed to prevent a Wymer-type situation by prohibiting investment advisers from trading discretionary accounts unless the holder of the securities has agreed to send--and does send--account statements to the clients on at least a quarterly basis.
By requiring the custodian to send account statements directly to each client at least every quarter, the rule will make it less likely that the adviser can gain unauthorized access to client accounts without being detected.
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Q. Why weren’t changes made sooner?
A Although the number of investment advisers has expanded greatly and we have recognized the need for additional examiners to conduct periodic inspections, there are many existing investor protections. By and large, the industry is relatively safe.
The proposed rule will complement the existing regulatory protections by adding a provision designed specifically to address the type of fraud perpetrated by Wymer.
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Q. Was the Wymer case a phenomenon of the ‘80s?
A It was definitely an era of higher interest rates and high earnings. When Wymer offered a better-than-market rate of return supposedly using a sophisticated trading strategy, clients may have found it easy to believe him.
It’s important to realize, however, that in any era there will be individuals who are bent on committing fraud.
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Q. Could the same thing happen now?
A The new rule would make it substantially more difficult to carry out such a scheme, although investors must be diligent in learning all they can about their money manager and how their funds are invested.
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Q. Are new kinds of scams being perpetrated on investors today? If so, how do they work?
A. As long as greed and deceit are human characteristics, there will be investment frauds. The particular types of cases we’ve seen in Southern California of late are wireless cable offerings and prime bank investment schemes.
Recently, the commission issued an alert to investors advising of the escalation of fraudulent schemes involving “prime” bank financial instruments. Typically, these instruments are in the form of notes, debentures, letters of credit or guarantees.
Generally, there is a promise or guarantee of unrealistic rates of return. The purported association with prime financial institutions itself serves as an inducement to the unwary investor. In addition, the transaction is described in highly complex terms that make it extremely difficult for the investor to analyze.
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Q. What tips would you give to small investors looking for a safe place to put their money?
A. Ask a lot of questions before you invest. Ask directly about fees, commissions and all compensation to be received by your broker or financial adviser. Never invest merely on the basis of a phone call. Take your time to understand the investment. And never invest in anything you don’t completely understand.
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Q. What other sorts of questions should people ask when they are considering an investment?
A. Just last month the SEC joined a group of securities regulators in launching a public awareness campaign to help investors better understand how to invest in stocks, bonds and other securities.
Together they issued a brochure, “Invest Wisely,” which provides basic information to help investors select a brokerage firm and salesperson, identify decisions to be made before making an initial investment decision and address a problem that may arise.
The brochure also helps investors identify questions they should ask, provides background information about the securities industry and describes practices that may signal problems.
A copy of the brochure may be obtained at no charge from the SEC or from the other co-sponsoring regulators.
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Q. How would you pick an investment adviser?
A. For probably a majority of small investors, it may make some sense to find a “fee-only” financial planner who will recommend allocating the family’s resources among a variety of investment types based on the family’s means and financial goals.
These advisers are called “fee-only” because they receive compensation based only on the time spent reviewing your financial situation and recommending investments.
These advisers do not receive commissions on the sale of any particular products, so their advice is presumably the most objective. They may recommend placing some assets into a portfolio of no-load mutual funds, for example. Then the investment strategy and allocations should be reviewed on a periodic basis as the markets and family circumstances evolve.
Many advisers are also registered representatives with a brokerage firm. They may not charge separately for their financial advice but will receive a commission based on the recommended products that you purchase.
Advisers who manage client money on a discretionary continuous basis generally have a minimum account size, such as $100,000. They will charge an annual fee--from 1% to 3%, for example--for assets under management.
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Q. Do you think further protections for investors are necessary?
A. With that goal in mind, the chairman of our agency recently announced the creation of a Consumer Affairs Advisory Committee to assist us in resolving investor problems and being more responsive to their needs.
The committee will explore broad, fundamental issues of concern to investors, including matters currently under consideration by the SEC and topics of emerging concern to investors and the financial services industry.
Selecting an Investment Adviser
The Securities and Exchange Commission recommends taking these steps before you pick a financial consultant:
Get referrals: Ask your accountant, attorney or trusted friends with experience in this area.
Do a background check: Once you are considering a possible adviser:
* Call the Securities and Exchange Commission, (202) 942-7040, to find out if the person is registered.
* Call the North American Securities Administrators, (800) 289-9999, or the state securities agency in your area to find out if the person has a disciplinary history or if past arbitration awards have been made.
* When you interview the adviser, go armed with lots of questions. Ask all of them, and make sure you get answers you fully understand. Also ask to see the adviser’s FORM ADV, which is information provided to the SEC when an adviser registers.
Before investing: When considering an investment, do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions. Do not rely on verbal representations not contained in the written agreement.
QUESTIONS TO ASK
* Who will control decision-making for your account?
You are responsible for all investment decisions involving your account unless you provide your broker with discretionary authority, which allows investment decisions to be made without consulting you first. Do not grant discretionary authority without considering the potential pitfalls, which include poor judgment or outright fraud on the part of the broker.
* How will you pay for your investment?
Most investors maintain a cash account requiring full payment for each security purchase. An alternative is a margin account, which allows you to borrow money from the brokerage to buy securities. You will be charged interest on the amount borrowed and will be asked to sign an agreement disclosing interest terms. The brokerage has authority to sell any security in your account, without notice to you, to cover any shortfall resulting from a decline in the value of your securities. If the value of your account is less than the amount of the outstanding loan--even if the cause is a one-day market drop--you are liable for the balance.
* How much risk should you assume?
That depends on your investment goals. Understand the distinctions among “income,” “growth” and “aggressive growth.” Each indicates a different risk level, with income considered safest and aggressive growth the most risky. When opening a new account, you will be asked to specify your investment goals. Be sure that the investment products offered reflect your risk category.
Source: Securities and Exchange Commission; Researched by JANICE L. JONES / Los Angeles Times
