Monthly Archive for December, 2009 on Investor Watchdog

Legal Investment Scams

By: Jack Waymire | December 7, 2009

You have read hundreds of stories describing Ponzi schemes and other illegal investment scams. But, investor losses from those scams are a drop in the bucket compared to legal investment scams.

Legal scams are perpetrated by unscrupulous, licensed advisors who deliberately sell bad investment products that benefit them or their companies. An example of a bad product is a mutual fund with a really bad track record. Why did the advisor sell this fund? Because it is owned by the company that holds his licenses. This is a common strategy of banks, insurance companies and others that produce inferior investment products, but require their representatives to sell them. Companies make more money at your expense.

The other scam occurs when advisors make more money. The crummier the product the higher the commission that is paid to sell the product. Unethical advisors sell the products that pay the highest commissions. For example, most annuities pay 5-7% commissions with a seven year penalty for early withdrawal. However, there are annuities that pay 15% commissions and have 15 year penalty periods. A very, very bad deal for consumers.

You are in real trouble if you are unlucky enough to like or trust an unethical advisor. That’s because your returns will be eroded by excess fees and your performance will be lackluster. You should always interview multiple advisors and compare their recommendations to each other. Then hope one of them is ethical and puts your financial interests first. You should also select an advisor who gives you freedom of choice and does not limit your choices to company products.

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401K Participants Beware

By: Jack Waymire | November 20, 2009

The Department of Labor recently withdrew a new rule that would have allowed financial advisors, who acknowledge they are fiduciaries and work for fees, to give advice to 401k participants.

As Jason Roberts, an attorney at Reish and Reicher, said, “It seems like someone in Congress gave the DOL an order to stand down.” In my opinion, Wall Street lobbyists lined the pockets of key politicians on the right committees to get the rule withdrawn. Billions of dollars of fees and commissions were at stake if Wall Street’s legions of commission sales reps did not have had access to the trillions of dollars that are owned by 401k participants.

Wall Street sales reps already have access to plan trustees who are supposed to be smarter than plan participants. But, the trustees’ lack of knowledge makes them easy targets for sales reps from broker/dealers and insurance companies. The fiduciary advisor rule created a major risk for Wall Street because the advisors would be in a position to influence the investment decisions of plan participants and critique the decisions of the trustees. Billions of dollars of fees and commissions were at stake. There is no question plan participants need help allocating assets, managing risk, selecting funds, and making strategic changes over time. They do not have the knowledge to do this work themselves. How important is this rule? It will determine the standard of living for millions of participants during retirement and their financial security late in life.

So what is the solution? Computer programs? Cookie cutter solutions based on participant ages? The solution is the fiduciary advisor who is compensated to advise participants with large and small account balances.

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Hot Company, Hot Industry Scams

By: Jack Waymire | November 17, 2009

The SEC charged two companies, including a financial planning firm, with conning senior citizens out of their retirement money when they made extraordinary claims about investing in a biotech startup.

According to the SEC complaint, advisory firm Speed of Wealth convinced more than 300 investors, many of them seniors, to liquidate their pension plans and invest all of the money in Mantria, a biotech start-up. The complaint also alleges Speed of Wealth principals, Wayde and Donna McKelvey boasted about Mantria’s eco-friendly products and the opportunity to invest in a “carbon negative” housing community in Tennessee.

Sophisticated scam artists need something that is “sexier” than just returns to convince investors to liquidate their assets and turn the proceeds over to them. Almost all scams promise exceptional returns. This scam promised returns in the hundreds of percent. But, that may not have been enough to convince people to part with their savings. So they added the sizzle of a “unique investment opportunity” in a green company that they said was a world leading producer of an environmentally friendly product. The appeal of this alleged scam went way up when the principals combined high returns with a green product company. Plus, getting in early on a new, unique green product investment opportunity made the scam even more marketable.

The high returns should have warned investors that this investment may be a scam. Then there was the company they had never heard of and the product they didn’t understand. This was a sophisticated scam because it had a lot of manufactured appeal.

When your money is involved, if it sounds too good to be true it is not true. Contact FINRA, the SEC, and your state’s securities commissioner. Do not invest until they have confirmed the legitimacy of the investment and the company that is marketing the investment to you.

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AAA Rated Junk Bonds?

By: Jack Waymire | November 9, 2009

How can investments be rated AAA one day and junk the next? When investment bankers pay substantial fees to rating agencies to obtain high quality ratings for garbage products. Moody’s, one of the biggest rating agencies in the U.S., has been accused of providing AAA ratings for subprime mortgage pools that were assembled and marketed by Goldman Sachs and other investment bankers. By definition, subprime mortgages are close to junk so how could Moodys give them a highest quality AAA rating? The answer is money, a lot of money.

It is alleged Goldman Sachs sold billions of dollars of this “toxic” junk to unsuspecting investors. The Goldman name and Moody’s AAA rating made investors feel safe. But, they were not safe. They were being deliberately victimized by two “brand names” that put need for profit and executive bonus ahead of their clients’ need for quality investments.

I’m sure ”trust me I am with Goldman Sachs” or “you can trust this investment, it’s rated AAA by Moodys” caused thousands of investors to make misinformed decisions. This abuse of their trust was a deliberate plan to get these toxic assets off Goldman’s balance sheet and onto the the balance sheets of its customers.

Wall Street is famous for predatory business practices, but this may be a new low. The unsavory practice almost brought down the global economy and for what? So greedy executives could buy bigger boats?

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Can You Tell a Real Financial Advisor From a Fake?

By: Jack Waymire | November 7, 2009

In a fictitious scenario you attended a retirement planning seminar and met a person who reeked of respectability in his pinstripe suit, button down shirt, and wingtips. He was one of the most likeable people you had ever met and he immediately began asking you questions about your personal financial situation and your goals. You interpreted the questions as him taking a real interest in you and your needs.

Once the advisor developed an initial relationship he showed you a brochure and prospectus that described a “once in a lifetime” investment opportunity. This product would help you retire when you want to and live the way you want to. That’s because its unique, sophisticated investment strategy is capable of producing exceptionally high returns for no risk. You had immediate interest because this was exactly what you needed to achieve your financial goals.

This scenario didn’t happen to you, but it has happened to hundreds of thousands of investors who have lost billions of dollars by investing in financial scams. Based on the facts in our scenario, I have two questions for you. First, how did you know the person was a real advisor? Anyone can buy a pinstripe suit and print fake business cards. They can even use the names of real advisors and companies. Also, how did you know the product was real and not an investment scam? Like business cards, it is easy to use a real prospectus to create a fake one.

Following are five valuable tips that will help you protect your assets from fakes advisors and products:

1. Ask the advisor for his CRD (Central Registry Depository) number and use it check his compliance record at www.FINRA.org. All properly licensed sales representatives have CRD numbers.
2. Check the advisor’s licensing and compliance history with your state’s Securities Commissioner.
3. Visit the advisor’s office before you make an investment decision. It is easy to print fake business cards. It is more difficult to fake an entire office.
4. Contact FINRA and your state’s Securities Commissioner to check the registrations of all investment products that are recommended to you.
5. Never make a check out to the advisor or the advisor’s company unless it is a major brand name company. Make your check out to a legitimate, major custodian such as Schwab, Fidelity, Pershing, or TD Ameritrade.

Do not assume! And, do not let yourself be overwhelmed by the advisors’ personalities and sales skills. It ALWAYS pays to check the information you receive from financial advisors BEFORE you invest your assets.

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Did Goldman Sachs Scam Investors?

By: Jack Waymire | November 1, 2009

Goldman Sachs, one of the most visible names on Wall Street, may have scammed investors when it sold $40 billion of securities that were backed by 200,000 high risk home mortgages.

A McClatchy newspaper investigation reported Goldman Sachs passed most of its potential mortgage losses on to unsuspecting investors when it sold them “subprime” mortgage-backed securities before the market was flooded with loan defaults. Not only did Goldman Sachs get these toxic assets off its balance sheet, it also made secret company bets that enabled it to benefit from the collapse of the real estate market.

McClatchy’s investigation found Goldman did not disclose this major conflict of interest to investors, which may have been a violation of securities laws. Laurence Kotlikoff, a Boston University economics professor, said ”The SEC should be very interested in any financial company that secretly decides a financial product is a loser and then markets the product to investors without disclosing its true opinion.” However, a Goldman spokesman said, “the company had no obligation to disclose how it managed its investment risk.”

Don’t be naive. The investment risk was passed on to investors who were lulled into a false sense of security by the Goldman Sachs name. Plus, there was no way Goldman would tell the truth about the securities. The truth would have negatively impacted sales. Goldman also had to keep their bets on the collapse of the real estate market secret. It was proof they knew what was going to happen, but chose not to disclose this information to clients because it also would have damaged revenues and profits.

The sale of the mortgage-backed securities and the secret bets should enable Goldman Sachs to produce more than $50 billion of revenue in 2009 and pay its employees more than $20 billion in bonus money ($700,000 per employee). Big bonuses keep employees happy, content, and quiet. What investors need is a Goldman Sachs’ whisteblower who knows the truth and has enough integrity to talk about it. This is another example of greedy Wall Street executives putting company need for profit ahead of investor need to achieve financial goals. The executives’ eight and nine figure bonuses are not bad either.

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