Law Blog

Busted brokers continue bilking clients at new firms

Nicholas J. Guiliano — Mon, 08 Dec 2008 15:13:33 +0000

Despite intense pressure from regulators to tighten recruiting standards
for brokers with marks on their records, these bad apples are still
being hired by new firms, recent cases illustrate.

The problem is compounded by an industry practice that condones silence
from broker-dealers when a registered representative leaves under a
cloud, attorneys and regulators said. It’s better to keep mum about a
suspicious broker to limit any potential damage to the firm, industry
attorneys and observers said.

The result is that these bad brokers can damage both clients and firms,
industry observers say.

Take Jeffrey Southard, a recent example, who last month was barred from
the securities business by the New Jersey Bureau of Securities because
he stole $1.3 million from 16 elderly clients.

In 2003, after facing allegations of selling unregistered securities and
mixing client money with his own, Mr. Southard left American Express
Financial Advisors and joined Gunn-Allen Financial Inc.

According to the New Jersey regulators’ order to revoke Mr. Southard’s
license, American Express Financial Advisors, now Ameriprise Financial
Inc. of Minneapolis, came up short in disclosing potential problems
involving the broker.

“Ameriprise made no contact with clients to alert them to the nature of
Southard’s departure,” the New Jersey order states. “In fact, none of
Southard’s clients at Ameriprise received a letter even confirming that
Southard had left the firm at all.”

He deceived his clients about his switch to GunnAllen Financial Inc. of
Tampa, Fla., the order states. Mr. Southard “told his clients that he
was leaving and could do better elsewhere. In response, many of his
Ameriprise clients transferred their investments to GunnAllen” when he
joined the firm in December 2003.

From that date until this year, Mr. Southard continued to deceive his
clients by selling phony bonds labeled as tax-free investments.

Along with barring him from the business, the New Jersey Bureau of
Securities last month ordered him to pay restitution to his clients and
fined him $50,000.

Opinions are mixed as to whether the issue of such brokers’ carrying
problems to a new firm is becoming more or less prevalent, regulators
and lawyers said.

“I think it happens a lot less than it used to,” said Fred Joseph,
president of the Washington-based North American Securities
Administrators Association Inc. Over the past five to seven years, both
the state regulators and the New York and Washington-based Financial
Industry Regulatory Authority Inc. have scrutinized more closely
brokers’ employment and -termination records when a rep changes firms,
sources said.

“I don’t think the problem is as bad as it used to be,” said Mr. Joseph,
who is also commissioner of the Colorado Division of Securities.
Broker-dealers “know they are on the hook” if they fail to supervise a
broker, he said.

One attorney who represents clients in cases against broker-dealers
disagrees.

“I’ve done a number of arbitration cases involving brokers who’ve been
terminated or fired and leave one firm under a cloud and proceeded to
rip off a number of people [somewhere else],” said Brian Smiley,
president of the Public Investors Arbitration Bar Association of Norman,
Okla., and a partner with Smiley Bishop & Porter LLP of Atlanta.

Broker-dealers often “don’t blow the whistle loud enough” when a broker
who faces some suspicions leaves, carrying clients with him, he said.
“In the past few years, we’ve seen more of it than ever before.”

If a firm suspects a broker of wrongdoing and the rep leaves, the
standard practice is to look at the rep’s other clients and see if there
is anything suspicious, said one attorney at a major independent
broker-dealer who asked not to be identified.

Firms eventually are faced with a decision either to hunker down to
prepare to defend themselves against potential lawsuits or arbitration
claims by investors, or to reach out to clients and try to resolve the
issue, the attorney said.

“It’s not an explosion of cases, but it does happen,” the attorney said.

Another case involving a rep who left one firm amid allegations of
wrongdoing to join another broker-dealer surfaced last month when LPL
Financial of Boston and a former broker lost a $1.8 million arbitration
claim.

According to the arbitration’s statement of claim, which was filed last
year, the clients, Ronald May and Kathryn Chapman, are siblings whose
parents died when they were young children in the early 1990s.

In violation of industry rules, the broker, Michael McClellan of
Bakersfield, Calif., set himself up as both trustee and broker of the
parents’ estate, which was in a trust.

According to the statement of claim, he joined LPL in 1983, before the
1989 merger of two firms to create the company. At the time, Mr.
McClellan already had marks on his record, including an NASD — now Finra
— action involving improper outside securities transactions and a report
on his termination statement that he mixed client funds with his own.

From 1990 to 2006, he stole $921,000 from the siblings’ trust,
according to the suit.

After months of stalling his clients, Mr. McClellan admitted his
wrongdoing in April 2007.

At that time, he met with Mr. May and Ms. Chapman, and admitted that he
spent all the money and that the trust was worthless, according to the suit.

In a tearful confession, he told the brother and sister, “I’m a crook,
and I stole all your money,” the lawsuit said.

Stock Broker Arbitration Claims Up 49% From 2007

Nicholas J. Guiliano — Tue, 02 Dec 2008 15:58:44 +0000

Stock Broker Arbitration Claims Up 49% From 2007

According to the latest figures from the Financial Industry Regulatory
Authority (FINRA), through October 2008, investment arbitration claims are
up 49% from 2007. In addition, during the first 10 months of 2008, more
cases have been already been filed than were filed in all of last year

Most brokerage agreements contain provisions that any disputes between the
investor and the broker must be submitted to binding arbitration through
FINRA, which oversees about 5,000 different firms throughout the United
States

Stock broker arbitration claims are filed by investors who feel that
misconduct or negligence of their broker or financial advisor caused them to
suffer financial loss.

According to the latest figures released by FINRA, there have been 3,972
broker arbitration claims filed through the end of October 2008, compared
with 2,672 through October 2007 and 3,238 filed for all of 2007.

The most common types of controversies involved in the stock broker
arbitration claims filed this year include breach of fiduciary duty (2,263
cases), misrepresentation (1,577), breach of contract (1,309), negligence
(1,244), and unsuitable recommendations (919).

The most common types of securities involved in the investor arbitration
claims were mutual funds (811 cases), common stock (599), derivative
securities (674), common stock (599), auction rate securities (264) and
annuities (177).

When compared to 2007, the largest increases were seen in arbitration cases
involving mutual funds, with more than twice as many cases filed so far this
year involving mutual funds than in all of last year.

Following the collapse of the subprime mortgage market towards the end of
2007, a number of mutual funds have dropped substantially, leading to a
number of stock broker arbitration claims over funds that were sold as
relatively safe investment alternatives to cash or money market funds.

In particular, there have been a number of cases filed in recent months by
investors who lost substantial portions of their investments placed in bond
funds, like Schwab YieldPlus and Regions Morgan Keegan Bond Funds.

You and the Law: Claims against your financial advisor? (Part 1)

Nicholas J. Guiliano — Thu, 27 Nov 2008 13:38:40 +0000

You and the Law: Claims against your financial advisor? (Part 1)
Dennis Beaver
Published: November 21, 2008
If your stockbroker sold you improper, excessively risky investments, or — failed to disclose the riskiness of what appeared as an otherwise conservative investment, and as a result you lost your shirt — then today’s story will be especially relevant. For my readers who are stockbrokers, I’ll tell you right now that I’m going to make some of you angry, revealing what most of your clients would never suspect.

This article began with an e-mail sent to me by Hal, a few days ago.

“My wife and I are both 67 and retired, living off small withdrawals from our 401K retirement account and Social Security.”

“The final stages of our retirement planning were about three years ago, getting our house paid off, telling our broker that we wanted to gradually move into much more conservative, virtually risk-free investments. Yet, in 2006, 2007 and early 2008, close to 85 percent of our money was in the stock market, invested in things our broker insisted were super safe. We trusted him to watch out for us,” he continued.

“In January this year (2008) we met with our stockbroker, concerned about the economy and the safety of our investments. Most of what we were sold proved to be the worst imaginable, including Washington Mutual, Wachovia, Lehman Brothers, Indy Mac Bank and other financial institutions who have gone out of business, and I should not forget Freddie or Fannie. From a retirement nest egg of over a million dollars — built over 25 years — we have something like $200,000 remaining, in bank CDs. Both of us are now under the care of our family physician, who has us on anti-depressive medication. We tried to play by the rules and now feel so badly cheated.”

“From what we have described here, do you feel there is anything we can do? Do we have realistic claims against our stockbroker for putting us into those investments?”

Those Hurt Worst Did All The Right Things

The last several months of 2008 will be seen by future historians as one of the most destructive economic times in our nation’s history. So often, those who did “all the right things” in terms of financial planning were the worst hurt.

In many cases, they were the ones with responsibility, discipline and, most of all, fear of poverty handed down to them by parents who still had memories of the Great Depression.

They used credit cards sensibly. They bought what they could afford and what they needed. They didn’t buy a home well beyond their means or drain equity from a house they had nearly paid off, committing themselves to many more years of house payments just to buy an SUV or take a vacation. In short, they realized that unnecessary debt was dangerous. In a nation where only the few maintained a savings account, they took joy in the simple act of saving.

“Your readers are an example of the couple who did everything right. They saved for retirement, avoided debt and trusted a broker to guide them towards the right investment decision. In an incredible number of instances, it was trust wrongly placed, not only because clearly improper investments were sold them, but had the truth been known as to broker’s compensation or the real risk associated with these securities, the customers would have never purchased them,” argues Securities Attorney Nicholas J. Guiliano, who specializes in the area of Investment Litigation.

“You were lucky to get through,” the straight-talking Philadelphia lawyer told me during our recent conversation. “Our phones are lit up like Christmas trees, but it is going to be a sobering Christmas for millions of Americans this year, and very likely for several more years to come,” he fears.

His beliefs were shared by a high school principal turned stockbroker, with whom I discussed how so many hard-working people got taken. We spoke with my assurance of confidentiality.

Your Stock Broker Is Only a Salesman

“Dennis, the public needs to see past the lovely offices, expensive furnishing, and appearance of prosperity this industry creates. I and thousands of stock brokers like me are salespeople — that’s all we are. So much of what we call “investing” is really a form of gambling — so much hot air — with the assurance if you stick with the program, we’ll deliver just what you need for a secure retirement, your children’s college expenses, or whatever your goal.”

“Our training includes an enormous element of sales psychology — how to create the image that we care, can be trusted, and our experts see the future. The truly dangerous part of this is the art of making the client feel just a little bit silly, stupid or ignorant if they don’t follow our recommendations.”

“We are very good at making the typical client feel inadequate to make sound financial decisions, and to therefore rely on our advice. We replace their legitimate doubts with soothing assurances of our concern for their welfare, and their feelings are well known and have been taken into consideration by management in forming our recommendations,” he added.

“Think of a stockbroker as one of those pretty ladies at the perfume counter of your local department store. She is there for one purpose only — to make a sale. As she is probably on commission only, if there’s no sale, her time with you has been wasted. Of course, if you buy the perfume, at least you’ll smell nice. We can’t guarantee anything similar — and lately, nice isn’t the fragrance which has come to mind — and the public needs to realize that.”

“Sure, there are brokers who do care and don’t knowingly sell junk to their clients. But one of the ethical challenges is our Football Team mentality, where we are encouraged — in part through generous perks — to push certain investments, and to laugh off questions a few gutsy brokers occasionally ask about excessive risk. They are usually patted on the head and told not to worry,” he concluded.

Next week: The warning signs were obvious years ago. But do you have a case against your broker?

Dennis Beaver practices law in Bakersfield and welcomes comments and questions from readers, which may be faxed to him at (661) 323-7993, or you may e-mail him at lagombeaver@hotmail.com.

You and the Law: Legal claim against stockbroker

Nicholas J. Guiliano — Thu, 27 Nov 2008 13:06:29 +0000

(Part 2)

By Dennis Beaver

Last week I told you about what happened to Hal and his wife, both 67, retired, and long time readers. From more than a million dollars in their 401K account as of January, 2006, their investments have lost close to $750,000.

Why? What went wrong?

“In our final preparations for retirement, in early 2006 even though we stressed wanting to be ultra-conservative, our broker steered us into some of America’s largest financial institutions who failed,” Hal’s wife, Martha, told me, sobbing.

“Invest in America, invest in your country,” he always told us, showing charts at what buying stock does. When we suggested selling our investments which had gone up in value-taking some of your winnings off of the table-he said we would miss out on further stock gains. He treated us like his son, and we trusted him,” she added.

Today, they are under a doctor’s care, taking anti-depressive medications. The fact they have a $200,000 bank CD was, “my doing, over Hal’s objections, because I realized that everything we had was in stocks, and it scared me,” Martha related.

I ran my reader’s factual situation by Philadelphia Securities Lawyer Nicholas J. Guiliano, who gave me the following analysis.

Investing Means Risks

“Your readers suffered tremendous losses which went far beyond the acceptable risks of being an investor. Fannie Mae and Freddie Mac were not safe, conservative investments contrary to what brokers all over the country were telling their clients. In early 2004, Regulators warned too many people were being placed into home loans they could not repay. This information was published in the trade publications brokers read,” he pointed out.

“Since February 2007, there was ample, credible information in the marketplace in the form of billion dollar write downs at the world’s largest financial institutions that confirmed the extent of the subprime loan crisis and ensuing financial meltdown.”

“Fannie and Freddie-among others-was a time bomb, with huge losses and write downs. The writing was on the wall at least two years back.”

“An investment advisor who has a conscience and is competent should never put clients in your reader’s situation into an incredibly risky investment such as these,” he said.

Brokers have a very high duty of care for their clients, known as a Fiduciary Duty. “The investments offered must be appropriate for their age, financial resources, risk tolerance and not because it generates a fat commission for the broker,” Mr. Guiliano stated.

“We are seeing so many cases where brokers downplayed known risk and knowingly made completely inappropriate recommendations to clients just like your readers. Given their age and present economy, they will probably never recover,” Attorney Guiliano observed.

“But what about large life insurance annuities that are now being pushed?” I asked the securities lawyer.

His answer gave reason for concern.

“If you place the bulk of your retirement funds with an annuity company and it fails, you could lose most of your money, regardless of their so-called guarantees. While there are State Guarantee Associations, you would be surprised at how little is actually protected,” he pointed out.

“A good broker or financial adviser needs to carefully explain the real possibilities of what happens when a company goes bankrupt and you own its stock, or if you have purchased a large insurance annuity,” he warns.

The Need for Balance

“Investments need to be age balanced. In general the younger you are, more risk can be assumed, but when you are getting close to retirement, common sense dictates less risk and more cash. This means bank CD’s and US Government Full Faith and Credit investments.”

“Losing money goes hand-in-hand with being in the stock market. If your broker’s recommendations were consistent with what you understood and wanted, there is very little basis for a claim, he was quick to point out.

“67-years old, retired and most assets in stock is simply inappropriate, actionable and your readers should have this potential claim evaluated by a lawyer who has particular experience in securities arbitration,” he firmly maintains.

For any reader interested, there is an association of The Public Investors Arbitration Bar Association at: www.piaba.org

Finally, Mr. Guiliano opened one additional door where innocent employees have lost much of their employer sponsored pension and profit sharing retirement accounts.

“Lawyers in my field are expecting to see another casualty of the stock market crash: employer managed office retirement accounts. Where the boss managed employees’ retirement money in high risk ways-and suffered huge losses-this will hurt employees deeply and lead to suits alleging mismanagement,” he feels.

But that is a story to be written another day.

Attorney Nicholas J. Guiliano has an extremely informative website that’s worth looking at — especially if you see yourself in today’s story. www.Stockbrokerfraud.com.

Dennis Beaver practices law in Bakersfield and welcomes comments and questions from readers, which may be faxed to him at (661) 323-7993, or you may e-mail him at lagombeaver@hotmail.com.

J.P. Turner Fined $250,000 for Failing to Supervise Commissions Charged on

NJGESQ — Fri, 31 Oct 2008 19:34:10 +0000

J.P. Turner Fined $250,000 for Failing to Supervise Commissions Charged on
Stock Trades

Washington, D.C. - The Financial Industry Regulatory Authority (FINRA)
announced today that it has imposed a $250,000 fine against J.P. Turner &
Company, LLC of Atlanta, GA, for failing to have an adequate supervisory
system designed to ensure that its registered representatives charged
customers fair and reasonable commissions on stock trades.

As part of the settlement, FINRA ordered J.P. Turner to retain, at its own
expense, an independent consultant to conduct a comprehensive review of the
adequacy of the firm’s policies, systems, procedures, and training relating
to FINRA’s Fair Pricing Rule.

“In order to establish a fair commission or mark-up, brokers must take into
consideration all of the relevant circumstances and not just whether the
commission is below a certain percentage of the total price of the
transaction,” said Susan Merrill, FINRA Executive Vice President and Chief
of Enforcement. “In this case, J.P. Turner allowed its brokers to charge
commissions of up to 4.5% on almost every stock trade without regard to the
circumstances, such as the size of the transaction, the cost of executing
the order, or whether the securities were readily available in the market.”

FINRA requires firms to implement a system and reasonable procedures to
ensure that customers are fairly charged for transactions, taking into
consideration all relevant factors. FINRA’s mark-up policy lists seven
factors for firms to consider: the type of security involved; the
availability of the security in the market; the price of the security; the
size of the transaction; disclosure to the customer; the pattern of the
firm’s mark-ups; and, the nature of the firm’s business.

FINRA found that between January 2002 and March 2005, J.P. Turner’s
supervisory system and written procedures failed to take these factors into
account and failed to provide adequate guidance to its registered
representatives to determine a fair commission or mark-up on equity
securities transactions.

FINRA found that under J.P. Turner’s system and procedures, representatives
had discretion to establish the commission on such transactions, limited
only by whether the price of the security was above or below $25 per share.
On all equity securities transactions in which the price of the security was
below $25, registered representatives were allowed to charge up to 4.5%,
while they could only charge up to 3.5% if the price of the security was
above $25. During the review period, 91% of the firm’s equity securities
transactions involved securities priced below $25 per share.

J.P. Turner’s trading manager was responsible for reviewing and approving
trades for fair and reasonable charges. Those reviews, however, were limited
to reviewing the transactions to ensure that the commissions charged did not
exceed the firm’s 3.5% and 4.5% guidelines.

In concluding this settlement, J.P. Turner neither admitted nor denied the
charges, but consented to the entry of FINRA’s findings.

Investors can obtain more information about, and the disciplinary record of,
any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck.
FINRA makes BrokerCheck available at no charge. In 2007, members of the
public used this service to conduct 6.7 million reviews of broker or firm
records. Investors can access BrokerCheck at
www.finra.org/brokercheck or by calling
(800) 289-9999.

FINRA, the Financial Industry Regulatory Authority, is the largest
non-governmental regulator for all securities firms doing business in the
United States. FINRA is dedicated to investor protection and market
integrity through effective and efficient regulation and complementary
compliance and technology-based services. FINRA touches virtually every
aspect of the securities business-from registering and educating all
industry participants to examining securities firms; writing and enforcing
rules and the federal securities laws; informing and educating the investing
public; providing trade reporting and other industry utilities; and
administering the largest dispute resolution forum for investors and
registered firms. For more information, please visit our Web site at
www.finra.org.

We exclusively represent individual investors in claims against brokerage firms for stockbroker fraud, securities fraud and investment fraud in FINRA (NASD) Securities Arbitrations, or NYSE Securities Arbitrations, nationwide. We handle all cases on a contingency fee basis meaning that there is no cost or obligation, unless we are able to make a recovery for you, and there is never any charge for a free consultation. Contact Us.

There is no charge for us to evaluate any claim you may have, and should we undertake your representation in this matter, our legal fees are in the form of a contingent fee of thirty-three percent (33%) of the total amount of any settlement, award, or recovery in this matter, with the remainder to be distributed to you, less out of pocket costs, if any.

Securities Fraud Investigation Against Wall Street Firms

NJGESQ — Fri, 31 Oct 2008 19:00:34 +0000

The Guiliano Law Firm Launches Securities Fraud Investigation Against Wall Street Firms

Philadelphia, PA (MarketWire) November 6, 2008 – The Guiliano Law Firm, P.C., a leading securities lawyer firm in Philadelphia, Pennsylvania announced today it is actively investigating and pursuing securities fraud claims against certain securities broker-dealers resulting from the risky or unsuitable recommendation of securities.

Investment trusts, labor unions, pension funds, local municipalities, school boards and charitable foundations, required by law in most states to only invest in prudent, and otherwise conservative fixed income securities and preferred shares, have collectively lost tens of billions in the securities of Wachovia, Fannie Mae, Freddie Mac, Bear Stearns, and Lehman Brothers.

Despite ample evidence of the deterioration of assets connected to the sub-prime market, and global credit crisis, contained in regulatory filings, rating reports, and the comments of independent analysts, as early as February 2007, Wall Street continued to recommend the purchase of these securities, and in pursuit of their own self interests continued to raise billions of dollars for these otherwise troubled financial institutions.

It was widely known and widely reported, certainly by December 2007, that the widespread dispersion of credit risk related to mortgage delinquencies and defaults was expected to have a very significant adverse impact on the performance of large banks, financial institutions, and the owners or originators of mortgage-backed securities.

Broker-dealers and their agents may have liability for the recommendation and sale of the securities of certain financial institutions based upon adverse information in the marketplace as early as spring of 2007.

The viability of these securities fraud claims depends upon, among other things, the timing of any such purchases, and to what extent any particular investment portfolio may have been over-concentrated in the securities, including the preferred securities, of issuers.

Because these securities fraud claims are against the brokerage firms, all such claims are subject to arbitration before the Financial Industry Regulatory Authority (“FINRA”), Office of Dispute Resolution. The Board of Directors or Investment Committees of any Trust, Union, Pension Fund, Municipality, School Board, or Charitable Foundations, may have a fiduciary duty to pursue these securities fraud claims.

For more information on pursuing a securities fraud claim or speak with a securities lawyer, call the Guiliano Law Firm at (877) SEC-ATTY (877-732-2889) or visit www.StockbrokerFraud.com.

About The Guiliano Law Firm:

Nicholas J. Guiliano is nationally known and has extensive experience in the litigation of securities related matters investment fraud, NASD or FINRA securities arbitration, and stockbroker fraud, misconduct and negligence. Mr. Guiliano has been featured in numerous publications including Smart Money Magazine, Cranes Business Daily, and the Wall Street Journal. Mr. Guiliano has appeared as a guest on CNBC Business Center. Mr. Guiliano is also a member of the Public Investors Arbitration Bar Association.

# # #

Contact:

The Guiliano Law Firm

877-SEC-ATTY

215-413-8223

Morgan Stanley Bond Fraud

Nicholas J. Guiliano — Sat, 24 May 2008 15:47:57 +0000

Last August, Wall Street firm Morgan Stanley and one of its senior
traders agreed to pay $6.1 million in fines and restitution to settle
allegations that the investment bank overcharged brokerage customers on
2,800 purchases of $59 million of bonds.

Regulators investigating the case had a crucial inside source: Dana de
Windt, a broker at the aquamarine, glass Morgan Stanley branch nestled
among back-pain and varicose-vein-removal clinics in this small city on
Florida’s east coast.

For four years, the 60-year-old Mr. de Windt has been fighting a lonely
war against his own firm. Saying he was convinced that Morgan Stanley
cheated clients, Mr. de Windt complained to regulators, helped recruit
customers to file damage claims and repeatedly tried to confront his
bosses with questions tucked inside a thick, three-ring binder.

“These firms are such big bullies that they feel if they stonewall,
you’re eventually going to go away,” he says. Morgan Stanley declined to
comment on Mr. de Windt’s version of events.

What makes Mr. de Windt an unusual adversary is that he fought so openly
and aggressively against Morgan Stanley even while continuing to work
there. His production plunged, and he says his boss in the Stuart office
told him to get over it.

Yet the firm tolerated Mr. de Windt’s rebellion. A Morgan Stanley
spokesman says officials were aware of the broker’s contacts with
regulators but didn’t retaliate. Senior Morgan Stanley executives also
responded to his concerns, the spokesman adds.

“It definitely took a toll,” says Mr. de Windt’s son, Cullen, a tennis
pro at a Palm City, Fla., country club. “It’s tough to do business and
really be fired up when you are fighting the big boys to make sure no
one gets taken.”

Part of Mr. de Windt’s fury was personal. He joined Morgan Stanley in
1992 after working at E.F. Hutton & Co. and Prudential Securities. In
2001, Morgan Stanley sold customers in Florida and elsewhere $59 million
in bonds issued by Lumbermens Mutual Casualty Co., a property and
casualty unit of Kemper Insurance Cos.

But the bonds lost their investment-grade rating in 2002 because of
deterioration in the insurer’s finances. The bonds eventually plunged
90% or more in value. And Mr. de Windt discovered that his 87-year-old
father owned $65,000 of the battered securities.

Other brokers at Morgan Stanley also started raising questions. Michael
Blankenship, another broker in the Stuart office, had bought about
$700,000 of the bonds for seven or eight clients. Then he noticed that
the bonds reflected a market value about 20% lower than the purchase
price once they were put in client accounts.

Mr. Blankenship was told the prices were in error, according to
documents filed in an arbitration case.

In a 2003 meeting about the bonds, according to people familiar with the
meeting, Mr. Blankenship tangled with a Morgan Stanley lawyer over the
phone. Asked by the lawyer what Mr. Blankenship normally did when an
investment fell in price, the broker heatedly replied that there was
“nothing normal” about the Kemper bonds, which had quickly “turned to
dust,” the same people said.

Morgan Stanley fired Mr. Blankenship ten days later, saying he had
improperly covered a customer’s losses after a trading mix-up. Mr.
Blankenship later argued he was fired in retaliation for his complaints
about the bond losses.

Mr. de Windt, the top producer in his branch in 2003, inherited some of
Mr. Blankenship’s clients. They included retired electrician Richard
Mittnacht Jr., who wrote a letter to Mr. de Windt complaining that he
had been “intentionally misled” by the Morgan Stanley bond desk into
believing the bonds were a “safe haven.”

Over the next year, Mr. de Windt pushed for answers from top Morgan
Stanley executives. He buttonholed Bruce Alonso, a former senior
brokerage executive, at a meeting for top producers at a Scottsdale,
Ariz., resort; Mr. Alonso had an aide reply. Morgan Stanley declined to
comment and Mr. Alonso couldn’t be reached. And after an in-house lawyer
said Morgan Stanley intended to fight customer complaints about the
bonds, since the firm had deemed them “suitable,” Mr. de Windt showed up
at her office in New York, he says. She wasn’t there.

In 2004, Mr. Mittnacht filed an arbitration claim to recover his losses
on the Kemper bonds. Mr. de Windt acknowledges encouraging other
brokerage customers to join the arbitration. Five of the six customers
reached a settlement in 2005 that gave them back 50% of their losses. In
a separate claim, one couple got 94% of their original investment.

Mr. de Windt wasn’t satisfied. He went to the National Association of
Securities Dealers with his complaints. After a response he considered
encouraging, he had bright-yellow golf tees printed with the words:
“nasd examination.”

In 2006, Mr. de Windt testified in Mr. Blankenship’s
wrongful-termination arbitration against Morgan Stanley, saying he
believed Mr. Blankenship had been fired because of the broker’s blast at
the firm lawyer. During the proceeding, a Morgan Stanley lawyer
confronted Mr. de Windt about recruiting investors who complained about
the bonds’ losses. Mr. Blankenship lost the case, but Morgan Stanley’s
effort to recover money from him also was thrown out.

Mr. de Windt eventually became worried that the NASD was dragging its
feet. At a conference in New York last year, the broker says he pressed
a senior NASD official for 10 minutes, before being edged aside by
someone else. A spokeswoman for the agency, Nancy Condon, said the
complex case involved analysis of thousands of transactions and was
being handled by an NASD office in New Orleans when Hurricane Katrina hit.

Last August’s complaint by the Financial Industry Regulatory Authority,
which includes the NASD’s enforcement arm, asserted that Morgan Stanley
charged excessive markups and had an inadequate supervisory system for
monitoring the pricing of bonds sold to customers.

Morgan Stanley notes that it neither admitted nor denied wrongdoing in
settling the charges, adding that regulators didn’t accuse the firm of
improper sales practices.

Mr. de Windt says he still believes the markups helped Morgan Stanley
deceive customers about the risk of the bonds, since their yields were
below the 10% level that can be a red flag for many investors. “If they
had priced them legally, it would have shown they were junk,” he says.

So he is still fighting. Mr. de Windt has filed a new arbitration claim
on behalf of his father and is seeking internal emails about the 2001
bond sale. Last month, though, he retired from Morgan Stanley, saying he
couldn’t in good conscience urge customers to make new investments
through the firm.

References:
Morgan Stanley Bond Fraud

Morgan Stanley - Eastman Kodak Retiree Fraud

Nicholas J. Guiliano — Sun, 20 Jan 2008 19:31:00 +0000

A group of investors filed a class-action lawsuit on January 15, 2008 seeking nearly $500 million dollars in damages from Morgan Stanley, alleging their broker, Michael James Kazacos, gave them fraudulent investment advice and made false promises to Eastman Kodak retirees that never materialized.

The plaintiffs are all former employees of Eastman Kodak Co in Rochester, N.Y. Four are named in the lawsuit, filed in New York state court in Monroe County, but their lawyer estimates that more than 1,000 people may be members of the class.

The plaintiffs say they would not have retired early, had their broker, Michael James Kazacos, not told them they had enough money to do so and live comfortably. At least one said Kazacos, who has since retired, told her she’d have even more money to spend once she was retired than she did when she was working.

The lawsuit alleges Kazacos assured the Kodak employees that they could expect to withdraw about 10 percent of their savings each year for the rest of their lives without depleting their principal.

Three of the plaintiffs retired in 1998 and the fourth retired in 2000. The amounts the four plaintiffs say they lost after they cashed out of their employer-sponsored retirement plans and put their money with Morgan Stanley range from $120,000 to $320,000.

In addition to the class-action lawsuit, an arbitration claim making similar allegations on behalf of another 16 former Kodak employees was filed at the Financial Industry Regulatory Authority’s arbitration forum Wednesday.

Morgan Stanley and Kazacos’ lawyer dispute both claims, saying the losses were the result of a crashing market, not misconduct. They say Kazacos explained the risks of investing. Most surprisingly, these complaints have not been reported on Kazacos’ FINRA Public Disclosure Reports, arguably as part of an on-going effort to conceal Kazacos’ wrongful conduct from the investing public.

The lawsuit and arbitration claim are riding a wave of regulatory concern about early-retirement pitches. FINRA is investigating Morgan Stanley about the Kodak situation.

The National Association of Securities Dealers _ one of FINRA’s predecessors _ fined Securities America, a unit of Ameriprise Financial Inc., and Citigroup Inc. in 2006 and 2007 for pitches made by brokers to large groups of employees encouraging them to retire early.

Those firms neither admitted nor denied the charges.

Securities America was hit hard in arbitration for its broker’s early-retirement pitches to longtime Exxon Mobil Corp. employees: In 2006, an arbitration panel awarded $22 million to 32 former Exxon employees. It remains one of the largest arbitration awards ever handed down.

Other Morgan Stanley Regulatory Actions:

Wronged Investors Have Options

Nicholas J. Guiliano — Sun, 20 Jan 2008 17:03:52 +0000

Protect Yourself From Investment Fraud

Nicholas J. Guiliano — Sun, 20 Jan 2008 17:03:10 +0000