Stan Buell knows what it's like to be the victim of a crooked financial professional. Years ago, he lost about $1-million to a broker who made unauthorized trades on his account and engaged in fraud.
In the late 1990s, he founded the non-profit Small Investor Protection Association, which aims to raise awareness about financial fraud and provide guidance to victims seeking restitution.
Mr. Buell contacted me after my recent column on the techniques that unscrupulous advisers use to line their own pockets. What follows is an an edited and condensed version of our conversation, presented in two parts.
In part one, below, Mr. Buell discusses the nature of the abuses and the impact on victims. In part two, which will appear next week, he offers advice on how investors can protect themselves and where they can turn for help.
What are the most common problems that you see?
Most people who have had extreme loss have been leveraged. It is either a mortgage, bank loan, margin account or these terrible leveraged plans that the mutual fund companies sell. They expound on the benefits of using borrowed money, saying that's how the rich people do it, but they don't explain the risks. Most people should just not use leverage to invest. That's our recommendation.
Why do companies push investment loans?
It's very simple. Most companies are valued based on their assets under management (AUM). So if you're a salesperson and you've got a couple of million in AUM and you want more, the easiest thing is to go to your client and say, "You've got $100,000 invested. We can arrange a loan for you for $100,000, then you'll have $200,000 invested." What he doesn't say is he will make twice as much money on his commissions.
Are there any other common types of abuse?
There are so many areas of abuse. Quite often the Know Your Client (KYC) statements don't represent the facts. Most people don't even get the KYC until they have a problem, then they ask for a copy. Some people say it's not their signature on it, the facts aren't right, the risk level is not appropriate, their assets and income are overstated. All this is done because it enables the adviser to sell them more stuff.
Is there a profile of a typical victim?
Widows are particularly prone to being victimized because their husbands may have looked after the family finances and failed to bring their spouses into it.
I spoke to a widow whose husband died of cancer. She sold the family business and the family house and put all of the money with this broker. Within a couple of years, they called her into their office and said, "We're sorry, but all of the money is gone."
It can happen to anyone – doctors, lawyers, professors, ordinary people, anybody with a bit of money.
What emotional impact does it have on the victims?
All you have to do is talk to a few people who have lost their life savings. I know people who have attempted to commit suicide, and a lot of others who have thought about committing suicide. I have victim impact statements on file that I have trouble reading. It took me quite a few years to recover, but I still get upset when I hear about people having this happen to them.