Articles Posted in elder fraud

Yesterday, a Financial Industry Regulatory Authority (FINRA) arbitration panel in Boca Raton, Florida awarded Malecki Law attorneys $397,823.00 for principal investment losses against Morgan Stanley & Co., LLC.  Malecki Law brought the case on behalf of an elderly and retired couple with conservative investment objectives on claims that Morgan Stanley failed to supervise their accounts and unsuitably over-concentrated their portfolio in risky oil and gas master limited partnerships (MLPs).  In addition to the compensatory damages, the panel also ordered Morgan Stanley to pay the claimants in this case 9% in interest, $15,000.00 in costs, attorneys’ fees, $11,812.50 in forum fees, and a $20,000.00 penalty for the firm’s late production of relevant documents at and just prior to hearing.

Malecki Law regularly brings claims on behalf of investors against unscrupulous conduct by brokers and brokerage firms, and holds them accountable for mismanaging investor retirement accounts.  Elderly investors such as these find themselves especially at risk from poor investment recommendations made by brokers and securities firms because senior citizens are typically out of the workforce and have much less time and ability to recoup their losses than younger investors.  This is pertinent to yesterday’s win because, in setting the damages figure, the arbitration panel rightfully did not deduct investment income (i.e., dividends), which the claimants earned while they had their accounts open with Morgan Stanley.

This is also a notable win for Malecki Law because the case involved the purchase of MLPs, which is a “hot investment” on Wall Street these days.  MLPs offer high yields, but are generally recognized as risky and volatile investments, typically within the oil and energy sector, and are not suitable for most retirement accounts or conservative investors looking to preserve their capital.  In May of last year, the Securities and Exchange Commission (SEC) issued an investor alert on MLPs to warn investors of the significant risks in these products, including unexpected tax consequences, fluctuations in distributions, and concentration exposure in the energy sector with acute sensitivity to shifts in the prices of oil and gas.

This is Part 2 of an article we posted last week on former NBA-great, Tim Duncan, where we introduced the investing lessons that could be gleaned from Duncan’s relationship with his former financial adviser, Charles A. Banks, who was permanently barred from the securities industry and is now serving a four-year prison term after pleading guilty to wire fraud.

For background on this story, it is a good idea to read Part 1 of this series, where we revealed our first lesson, which was to be wary of the financial adviser who constantly brings you deals.  While this might create the impression that your adviser is knowledgeable and has the inside scoop, it is frequently a sign of an adviser who is exposing you to unnecessary risk and trying to earn commissions or undisclosed fees that will eat away at your principal.

A second lesson from this sad story is to recognize a common fraud tactic, which may seem innocent, but should set off alarm bells and have you looking for a new financial adviser.  This is when an adviser asks a customer to sign a blank form or just a signature page, as Banks did with Duncan.  The adviser will often justify the practice as a time-saver and present it to the customer as a convenience, such as dropping blank forms in the mail with affixed post-it-notes that simply point the investor where to sign.  This request often sounds benign or reasonable to an investor, but it is in fact illegal and happens more often than many people realize.  Though this practice may seem harmless, signing forms in the absence of one’s adviser deprives the investor of an in-person interaction to ask useful questions and to have the adviser explain all the investment risks and hidden fees that may be associated with the investment.

Last month we learned that Tim Duncan’s financial adviser was sentenced by a federal court to four years in prison for defrauding the NBA legend of $7.5 million.  Duncan earned over $220 million during his playing career, so he is by no means financially ruined, but there are some good lessons to learn about investing and placing too much trust in the person who manages your money.

Tim Duncan is an accomplished, 15-time NBA All-Star and future Hall of Famer.  He retired in July 2016 after playing nineteen seasons of professional basketball with the San Antonio Spurs.  In today’s age of free agency and mega-million-dollar commercial endorsements, it is a rarity for a player to play his entire career with a single franchise.  As one of the greatest to ever play the game, Duncan could have sought greener pastures and taken his talents to the highest bidder in any city of his choosing.  Instead, he was noted for having taken yearly pay cuts to stay in San Antonio to allow the Spurs to remain under the league salary cap while paying for talent at other positions.  Duncan was generally known for his loyalty and being the consummate teammate and role model for fans and younger players.  His loyalty on the court perhaps says a lot about how he conducted himself off the court, where he showed similar trust and loyalty to the people in his daily life, including his financial adviser.

Last month, Duncan’s financial adviser, Charles A. Banks, IV, made headlines when a federal court in Texas issued a judgment against Banks, convicting him of wire fraud, and sentencing him to 48 months in prison followed by three years of supervised release.  The court also ordered Banks to pay $7.5 million in restitution.

Financial exploitation of the elderly by a financial advisor can take many shapes and forms, and it is indeed possible to recover one’s financial losses from the broker or financial institution who carried out and supervised the misconduct.  Wrongdoing by a financial professional can be difficult to expose because it often arises out of relationships built on trust, and can go undetected for many years by the affected senior and family members.

Some types of broker misconduct are easier to identify than others.  Cases of outright fraud, for instance, could include the broker forging an elderly customer’s signature, falsely representing the worth or activity in an account, omitting the risks of a particular investment, recommending and selling unnecessary investment products (e.g., certain annuities), or trading excessively in a customer account solely to generate commissions (otherwise known as “churning”).  Regardless of motive or intent, an investor’s financial losses from the misconduct can be no less catastrophic.  If anything, this should point to the incidence rate of financial abuse amongst the elderly to be more prevalent than many people realize.  Indeed, research has shown that American senior citizens lose over $36 billion per year from financial exploitation.  That number is only expected to rise with increasing life expectancy and the expanding demographic of senior citizens within the United States.

Financial elder abuse is also greatly underreported.  According to the National Adult Protective Services Association, only 1 in 44 cases of financial abuse is reported.  The National Center for Elder Abuse points to studies that have identified feelings of shame as being one reason for the underreporting, in part related to the embarrassment of having fallen victim to financial fraud, but also to the embarrassment of having to disclose that one is suffering from age-related memory loss or cognitive decline.  On this latter point, memory impairment of an elderly investor only adds to the underreporting of broker misconduct.

istock88023523small-crop-600x338-300x169According to the Consumer Financial Protection Bureau, 17 percent of Americans 65 and older, have already been the victims of financial exploitation.

A new study by the AARP Fraud Watch Network reveals that Americans who lose money to fraud typically exhibit a higher degree of confidence investing in unregulated investments and tend to trade more aggressively than other investors. The fraud watch network interviewed 200 victims of investment fraud and conducted 800 interviews with regular investors for this study that was commissioned a year earlier.

There has been a change in the way investors save for retirement. People are now more used to taking charge of their retirement since traditional pension plans have declined and technology has made it easier for average investors to enroll in trading and retirement accounts. The AARP study quotes Shadel, their lead researcher as saying “decline in traditional pensions has prompted millions of relatively inexperienced Americans to take on the job of investing their own money.” Technology has also made it easier for scammers to reach investors.

Recently the Government Accountability Office (GAO) published a report about the extent of elder abuse by guardians and measures that exist to protect older adults. This has become an issue of utmost importance as the number of older adults, over the age of 65, are expected to nearly double to 88 million by 2050 (GAO Report 2016). A “guardian” is a legal relationship created by a state court by granting one person the authority and responsibility to make decisions on behalf of an incapacitated individual, like an older adult. The appointed guardian could be a family member, a professional guardian, or a public guardian. According to the GAO report the most common type of elder abuse inflicted by guardians appear to be financial exploitation. This GAO report attempted to identify red flags of abuse, study reported complaint data about guardianship abuse in 6 states- California, Minnesota, Florida, Ohio, Texas and Washington- and evaluate measures that are in place to help protect older adults.

The federal government does not regulate or directly support guardianship but they may provide indirect support through federal agencies, by sharing information and providing funding for state and local courts who oversee the guardianship process. There are limitations on the data available to study cases of elder abuse because states do not have adequate data on number of guardians serving seniors and not all cases of elder abuse are reported.  A close look at reported elder abuse cases since 2010, identified using public-record searches reveal instances of misappropriation of funds, falsified payments, mistreatment of the elderly, diversion of payments, overcharging accounts, excessive spending and inflated personal expenses, and neglect.

FINRA ’s Role in Fighting Elder Financial Exploitation

FINRA newThe Financial Industry Regulatory Authority (FINRA) announced today a complaint filed against Hank Marker Werner for allegations including securities fraud for churning the account of a senior-aged blind widow customer and for making excessive and unsuitable trading recommendations in a News Release.

According to his publicly available BrokerCheck report records maintained by FINRA, Mr. Werner was employed and licensed by Legend Securities, Inc. from December 2012 to March 2016.  Prior to working at Legend Securities, Inc., he was employed by Liberty Partners Financial Services, LLC from July to December 2012, Brookstone Securities, Inc. from March 2011 to June 2012, and Alexander Capital, LP from November 2009 to March 2011, per Mr. Werner’s BrokerCheck report.

FINRA’s News Release detailed that Mr. Werner allegedly engaged in a deceptive and fraudulent scheme by churning the elderly client’s over the course of three years “to maximize his compensation by charging more than $243,000 in commissions, while causing the customer approximately $184,000 in net losses.”  The News Release also stated:

hammer-legal-300x123We are pleased to announce that after a six-day long arbitration, our client was awarded his full net out-of-pocket damages of $142,168.00 by a Financial Industry Regulatory Authority (FINRA) Arbitration Panel.  The story was recently reported by InvestmentNews.  The arbitration panel also assessed all forum fees in the amount of $14,400 against the Respondent Garden State Securities, Inc.

The case was brought against Garden State alleging unsuitable investment recommendations, including over-concentration in Chinese stocks, penny stocks and low-priced securities, as well as leveraged exchange traded funds (ETFs). The claims also centered around allegations of churning and excessive trading. In the end, the Panel found Garden State liable.  Ultimately, broker-dealers must be held responsible for the recommendations their brokers make.

Our client’s case exemplifies many of the issues facing senior-aged investors today. Many seniors find themselves in situations where they have saved their entire lives for retirement and are seeking a financial professional to help guide them and preserve their nest egg. There is usually a lot of trust in the financial advisor-client relationship. But that trust can be easily and quickly abused. As they grow older, people generally became more conservative, downsizing and limiting expenses. Yet, all-too-frequently brokers recommend more speculative investments to their aging customers – for the broker’s own purposes (commonly higher commissions and fees). Such a situation is not appropriate nor permissible.

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A recent study by Stanford University psychologists with participation of FINRA and AARP, concluded that financial fraudsters trigger and evoke strong emotions in elderly people to try and get them to hand over money. According to the study, inducing strong emotions in older adults (ages 65-86), whether positive or negative, increased their susceptibility to falsely advertised messages and fraud. The findings suggest that older adults are likely to spend or give away their money based on the emotional state they were experiencing rather than perceived credibility of the messages they are receiving. According to FINRA, this study is a major advance on understanding how elder fraud works and since money and investing is an emotional decision, it is critical to manage emotional states to avoid becoming a victim of fraud.

Malecki Law continues to champion the rights of vulnerable elderly people who have been victimized by financial fraudsters. Last week, Jenice Malecki spoke about elder financial fraud with David Lesch on BronxNet TV’s segment Today’s Verdict. Watch Ms. Malecki speaking about instances of how elder fraud works and can be avoided here: http://www.bronxnet.org/index.php?option=com_hwdvideoshare&task=viewvideo&Itemid=59&video_id=7353

Recently Ms. Malecki was also seen speaking about Elder Financial Exploitation on Wealth Management’s segment Case In Point with Bill Singer http://wealthmanagement.com/estate-planning/elder-financial-exploitation 

Trust Funds are an especially susceptible vehicle for fraud committed by FINRA registered stock brokers and financial advisors.  Two of the primary issues in such cases are “conflict of interest” and “breach of fiduciary duty.”

Trust funds can be created for a wide variety of reasons.  Frequently, though, they are used as a means to afford an orderly transfer of wealth to a younger generation.  They can offer a whole host of benefits that would make a trust fund the preferred choice over an outright gift.  For example, the recipient/beneficiary may be very young, and the trust could afford some level of control or stability to prevent the beneficiary from squandering the money.   Another reason may be certain tax advantages offered by the trust structure that would not be available in an outright give.

Regardless of the reason or reasons for its creation, a trust is going to need a trustee.  The trustee is the party responsible for overseeing the trust and managing its assets.  While trusts can hold different types of assets, they frequently contain securities, like as stocks and bonds. Therefore, such trusts would, by necessity, involve brokerage accounts.  In that case, clients will oftentimes look to their stockbroker/financial advisor to put on a “second hat” and serve as trustee.  The logic being “I already trust him/her with my money so why not let them be the trustee.”  However, this is where significant problems can be created.