Financial Fraud within Financial Brokerages
Rather than do what I usually do during my Fraud Files columns, where as I grab a stack of stories from around the country and report on various instances of malfeasance. Instead, I decided that this time I am going to do more of what one might call a think piece.
Every day, I print out investment fraud and scam stories. Some of which we talk about on the radio, all of which I save to use when preparing for our newsletter. I went to my files to prepare for our regular Fraud Files piece and I realized that I had collected easily over 500 pages of stories. I started going through them, got aggravated and bored, took the entire pile and tossed them.
I have been reporting on investment and financial fraud for over two decades I really don’t see much of anything new. The experience is analogous to listening to the same lousy songs over and over again. So, instead I decided to do some rigid research this time. I was going to attempt to find a new and distinctive way to scare our readers straight.
Lo and behold, it just so happened that I stumbled upon a research paper by Mark Egan from Harvard Business School, Gregor Matvos from the University of Texas and Amit Seru from Stanford. The piece, The Market for Financial Advisor Misconduct was published in the Journal of Political Economy.
To summarize…
At the average brokerage firm, at least 8% percent of brokers have a record of severe wrongdoing. Of that group of brokers almost 50% actually maintained their job after being caught. Of the ones that did get terminated, nearly half were hired at another brokerage firm. So, 75% of brokers that were caught ripping clients off are still managing money. Of that group, 38% are caught screwing investors over again. In our opinion, just give it time, the others have not been caught yet. The too big to fail banks actually have the foulest numbers, with more than 15% of their advisors having serious violations. They found that these financial marauders often focus on the easiest possible target. They are often condensed in areas that have large populations of retirees.
These guys did a tremendous job of going through the numbers, and in the 78-page study, they have a plethora of mathematical equations with Greek letters that my brother Matthew would understand. I guess they proved some of the things that we have been telling you for years.
Pretty cool, Watchdog wisdom, proved accurate, using math!
After reading the piece, I started to look for more fancy papers that can prove things that we have been teaching for years through mathematics and sure enough I found another. The Market for Financial Advice: An Audit Study came from the National Bureau of Economic Research and was put together by Sendhil Mullainathan from Harvard, Antoinette Schoar from MIT and Markus Noeth from the University of Hamburg.
Their piece looks into the conflicts of interest that are ever evident with countless brokers and advisors around the country. Their study establishes how firms manipulate their clients into purchasing certain products that are more beneficial to the broker/advisor than the client. They found that brokers/advisors reinforce biases that are in their interests. These broker/advisors encourage faulty returns-chasing behavior rather than proper asset allocation and diversification.
An experiment they conducted involved sending “make-believe” investors into 284 brokers/advisors in the Boston, MA area. When these “make-believe” possible clients came into the office with a well-performing diversified low-cost portfolio only 2.4% of the advisors agreed with the existing portfolio and 85% recommended making changes. The broker/advisors were eight times more supportive if the “make-believe” clients had a return chasing strategy that generated much larger commissions. These “make-believe” clients also bought the pitch, hook, line and sinker with 70% of them stating that they would use the advisor to manage their portfolio. Again, none of this is new, nothing they put in their study was a surprise to us.
Now for the surprise…
I did save one story. After all the years covering Wall Street fraud and investment scams nothing really surprises much. It usually it is the same con, same rip-off in a slightly different form. This tale is about investment advisor Dawn Bennett. If the name sounds familiar, you would be correct. We smelled a rat with her business years ago and talked about it pretty extensively on air. This same Dawn Bennett also had a radio show as well. Some of the crap that she used to tell investors was she guaranteed a 15% return. Also claiming that her performance returns for her clients was in the top 1% of firms. Through her firm and radio show she defrauded investors out of more than $20 million which she used for her personal use. This story is quite similar to countless other examples we have warned investors about for decades.
Here is where it gets a little weird.
Some of the personal items that Ms. Bennett bought with her client’s money included astrological gems, cosmetic procedures, a sportswear company and a $500,000 luxury box at AT&T stadium.
But wait there is more…
Ms. Bennett paid Hindu priests in India more than $800,000 to ward off federal investigators while her entire investment scam firm was falling apart. After reading that the first thing that came to mind was, that I thought Indiana Jones dealt with all those nasty Thuggee cult members years ago. The FBI found evidence inside her home that showed she tried to also silence Securities and Exchange Commission (SEC) investigators by casting spells. She wove spells around jars of beef tongue, labeled with SEC lawyers’ names that she stored in a freezer in her kitchen.
I am not making this up…
According to the search warrant she invoked the hex, “I cross and cover you! Come under my command! I command you to hold your tongue!”
Since I was in the research mood and wanting to have a little fun I did some homework on that Thuggee cult that was from Indiana Jones and the Temple of Doom.
Wouldn’t you know it…
The Thuggee happened to be one of the most notorious and murderous cults to ever exist. Ironically, they were also con-artists and thieves. The would travel around India befriending travelers. They would use their charm to gain peoples trust (sound familiar?) Then at night while the travelers slept, they would tie silk scarves around their necks, strangle them, and steal everything. To Thuggees, like most investment con-artists they felt no immoral implications. The Thuggees believed that they were spiritual beings selected to offer balance to the world. Investment con-artists are just sociopaths.
By the way…
The Rolling Stones sang about the Thuggee cult! In Sympathy For The Devil Mick Jagger sings, “And I laid traps for the troubadours. Who get killed before they reach Bombay.”
One more thing…
I should probably go thank my Greek mother-in law and also my wife for making sure that we have ample evil-eye protection amulets all over my house, car and office. Who knows what has been cast upon me over the years.
