Fraud Against Stockholders

Re the May 26 editorial, “Targeting Rogues in White Collars”:

The growing problem of individual investor abuse in America is not limited to greedy “rogue” brokers on the loose. Hardly. The blame for the continuing rise in investor abuse and resulting increase in requests for resolution and restitution via arbitration can be laid on the collective doorstep of the largest brokerage firms in the nation.

Problems of risky securities (the “new” product of abuse--collateralized mortgage obligations (CMOs)--said to be the “limited partnership of the ‘90s”), lack of investor suitability (“know your customer”), misrepresentations (lying or failing to tell the whole truth), unauthorized trades (on the rise). These problems, and others, would not exist if the firms performed with care and diligence their job of investor protection and worked with their brokers to select and recommend to customers products that fit the goals and objectives specific to that investor.

First, require that each and every customer be provided a written 1-, 5-, 10- and 20-year “strategic plan of action” based on all the important criteria. Second, I have been advocating for years a “dollars-under-management compensation system” for broker pay whereby the broker is paid a flat percentage on all dollars under management each year, a percentage that increases for each year in the business and with the firm. This latter system quickly and effectively removes the conflict between the need for brokers to make sales of high-commission products and the real and mandated duty owed to investors, plus it will stem the tide of brokers switching from firm to firm.

Reform in the securities industry is necessary. The basic fundamentals need overhaul, from poor broker training to a new compensation system, from the end of proprietary product “pitches” to readable monthly statements.

But regulatory and legislative efforts are years away and, if brought, will meet with formidable challenges from Wall Street firms, the same firms that will steadfastly refuse to take meaningful voluntary measures at reform. If they still argue in arbitration that an 85-year-old widow is somehow suitable for long-term, non-liquid, high-risk limited partnerships (as they did recently in an arbitration), then one can be confident that they will need to be dragged “kicking and screaming” to meaningful, structural reform. And that is the “real world” practical fact.

PAUL N. YOUNG, CEO

Securities Arbitration Group Inc.

Marina del Rey