Show v g 5JC :rriM r i i -- ifr ' - toiafc’AVVrAgwre i xtx bLS256d BUSINESS JuiwIS 19S3 Can SEC make sure brokers don’t make you broker?:- Cr rr cxjnOdV s" ? m A't Fines don’t always stop lawbreaking By ROB WELLS The Associated Pres YORK - America’s for penalues has not spread to the bastion of pinstripes: Wall Street When the largest brokerages or their workers are caught cheating they usually pay less in fines than the firms spend to throw the office picnic and softball game An Associated Press study shows a handful of firms and brokers have committed serious violauons over and over again in a system where they are largely responsible for disciplining themselves The study included enforcement records of the 20 biggest brokerage firms from NEW 1981 to 1994 Year after year thousands of investors call the cops on their brokers who may buy stocks without permission or pilfer accounts Despite increased enforcement fines of $1 and some million or more the typical financial penalties are only a few thousand dollars per violation That’s less than a broker spends to park a car for a year in a Wall Street garage The most egregious cases of repeat offenders have been well publicized such as Prudential Securities Inc’s troubles in the late 1980s Yet a review of enforcement records shows five firms had an average two or more serious violations per year: Prudential Securities a total 77 cases Paine Webber Group Inc 48 Merrill Lynch & Co 46 the former Shearson Lehman Brothers 42 and Dean Witter Reynolds Inc high-profi- le 36 Some large firms had less than half as many: the former Kidder Peabody & Co Inc 16 Smith Barney Inc 14 and AG Edwards & Sons Inc 11 These serious violauons range from insider trading and unauthorized trading to excessively trading a customer’s account While regulators defend current enforcement other regulators brokers and consumer advocates say more could be done to deter the recurrent fraud and carelessness that could rum any investor “When you have 3000 brokers and you get a 510000 fine that’s like shooting a pea at Godzilla” said Alan Davidson former member of an industry panel and now president of Zeus Securities a Jericho NY investment firm More Americans are entrusting their savings to brokers hoping that purchases of stocks bonds and mutual funds will provide better returns than simple bank accounts One out of three US families has an investment in the markets - and many new investors could be prey for unscrupulous brokers “A lot of those people are just not as informed as they should be” said Securities and Exchange Commission Chairman Arthur Levitt Jr the nation’s top financial-marklaw enforcer Bettylou Horn is better informed than she used to be The Houston widow said she lost about $13000 when her Dean Witter Reynolds broker Steven E Johnston engaged in unauthorized stock options trading in the early 1980s The broker was fired and banned from the industry “Because I was extremely naive I sat back well OK here’s my money take it and do something for me Major findings Key conclusions of an AP study on brokerage disciplinary history from 1981 to 1994 Fnea and setfemerts ara part of the cost of done business and represent ontv 47 percent of total profits of 20 firms reviewed between 1981 and 1S94 Brokerages paid $137 btffion in 1257 cases During the same period the firms earned $29 billion self-polici- A handful of firms including Prudential Securities Inc and PaineWehher Group Inc darted securities laws they had previously been caught and penalized tor breaking Prudential was the top violator Violation's dropped a! the nation’s largest firm Merrill Lynch & Co due to increased internal enforcement Regulators are getting tougher $137 Niton in fines and settlements against the firms 95 percent were brought since 1990 Superrisers are held accountable more fiequently for wrongdoing by subordinates Newly hatched investment products promoted by brokerages such as stock options in the early 1 980s often ran into regulatory trouble arising in about 8 percent of the cases reviewed by The AP The frequency suggests buyers weren’t informed of the risks et Of the The Associated Press and let me know when I get rich” Horn said “And I should have of course paid more attention to it And of course I am doing that now” Johnston’s attorney said he contested the charges and believes he didn’t violate SEC rules Long-tim- e investors aren’t necessarily insulated from abuse either For Isadore and Bernice Fendel-ma- n owners of a wholesale candy business in St Louis it meant the loss of their $200000 life’s savings following the 1987 stock market crash They blamed the loss on Jer- - ry Stem a broker who their portfolio for 1 3 jean whJe at several brokerage firms Regulators barred Stem and fined turn more ttun $200000 Stem denies wrongdoing and is contesting the penalty The AP study found financial penalues amounted to S137 billion less than 3 percent of the $29 billion these firms made over a pc nod when the number of enforcement cases was rising continuously “I certainly think there’s more money to be gamed by defrauding people than there is to be lost by legal penalues at this time” said Leonard B Simon a San Diego attorney who has represented victimized investors Many professionals and government regulators argue the industry has cleaned itself up One study by the General Accounting Office the invesugauve arm of Congress said only 2 percent of brokers have a disciplinary record Defenders also argue that total financial penalues have risen sharply in recent years evidence that it3 harder for wrongdoers to go unpunished Moreover financial penalties aren’t the only enforcement weapon - suspensions temporary shutdowns of brokerages and the negative publicity are considered a more severe punishment “There are certainly violations that we don’t catch and people we don’t catch” said William McLu-ca- s SEC chief of enforcement “But we probably do a better job the whole system does I think than what you would be led to infer” from the AP study Indeed the SEC National Association of Securities Dealers Inc and New York Stock Exchange receive generally good marks from academics and congressional over-- enforcement erk in recent years Nonetheless records reviewed by the AP show some firms flouted’ laws they previously bad been for breaking “Do the fines and suspensions serve their desired purpose of future abuses? I think Jfle answer to that is clearly no” said Barbara Roper a securities industry expert for the Consumer Federation of America a Washington advocacy group Both Prudential and Paine Webber say they’ve strengthened oversight of brokers by hiring new compliance staff and scrapping financial incentives that tend to put a broker’s own financial interest ahead of a client’s The most common violatiorf” found was failure of brokerage bosses to superv ise subordinates a central element of some serious financial debacles like the Baruigs bank collapse and bankruptcy of Orange County Calif Even where penalties have beer strengthened violations haven’t necessarily dropped Consider insi er trading or illegal use of secret formauon to profit in the stock m ket a crime made famous by the Ivan Boesky scandal of the 1980s The number of insider trading cases has remained high - the SE1 brought a record number of insid trading cases last year - even though Congress gave the SEC e panded powers to levy fines in 1 Critics of the system incluF some regulators themselves say penalties must rise drastically “Unless you really levy a ma fine the hundreds of millions f V jsSfcSSK lars) type of fine you really ma r ’£!&' be having an impact upon the f said John Perkins a former M ri state securities commissione seen for improve w ed fie-venu- ng j - £gE2p fl3 Bosses found asleep at the wheel 'i and its brokers led in many catego- By ROB WELLS The Associated Press name 372 If "eo" jiao 113 ”45” EDJO ' GOLD Edward D Jones & Fidelity Brokerage Service Goldman Sachs Co & wm&m Inc " matua j5mVf 20 m "”$173 Morgan Securities Inc Kidder Peabody & Co Incorporated J-- KIDR 59 $86354 $106330249 Co $1 944065" $3268296812 $6M8V3 Lehman Brothers Inc1 Ml 62 jiC r :r jo” ’i’705' TSI" mm 73S J095 13 NMRA 213 8692 0 $ 66 M70 ‘j 6076 "Includes criminal sentences Number of brokers is an average per firm from 1981 to 1994 "Lehman Brothers Inc and Shearson Lehman Brothers were under the same parent company American Express Co until 1 993 when Shearson's retail business was sold Lehman became an independent company in 1994 The two companies engaged in disparate lines ol business and so records were separated The Associated Press Prudential Securities Inc’s disciplinary dossier is littered with episodes of lax supervision giving it the worst behavioral record of 20 major US brokerages an Associated Press study has found The supervisory neglect that’s plagued Prudential also has surfaced frequently at Paine Webber Group Inc another major brokerage checked in the AP study of Wall Street regulatory violations and settlements dating to 1981 Both companies say they’ve ex- punged errant brokers installed more vigilant overseers and strengthened compliance staff Still the study offers useful insights into one of the weakest links of the US securities industry’s system: failure to properly supervise self-polici- the troops William R McLucas enforcement director at the Securities and Exchange Commission said the agency’s policing role is compromised when brokers feel their bosses don’t care if they’re cheating or don’t want to know is wheth“The bigger problem er the culture and ethic within the firm is the right one” he said “and whether there is the environment where if you break the rules you’re dealt with relatively severely” The AP study found Prudential ries of wrongdoing cited in 213 cases They paid $943 million in fines and settlements Regulators barred 21 Prudential brokers from the industry and suspended or jailed others for a total of 24 years’ worth of time In 36 cases Prudential was cited for failure to supervise more more frequently than any other brokerage Prudential spokesman Charles Perkins admitted the brokerage has suffered from inadequate supervision in the 1980s Much of the problem which the firm says was resolved resulted from aggressive peddling of risky investments known as limited partnerships to innocent customers who didn’t know what they were buying t More than $8 billion of these investments were sold to 320000 investors during the 1980s in many cases improperly pitched as safe “I think we recognized the mis- takes and have dramatically changed the way we do business as a result” Perkins said Prudential now spends $10 million a year on compliance a tenfold increase over 1986 levels “This is a radically different place” Perkins said At Paine Webber 165 cases were lodged against the firm and brokers during the period and it paid $43 million in fines and settlemer its size Paine Webber was the most frequent violators practice and suitability viojj when brokers mislead cuf about the riskiness of theirg ments Paine Webber says changed substantially trip! compliance department sin! and hiring veteran SEC attorg oversee the effort It develc intricate computer system tj broker behavior The system j for example when a switches a customer from a sa fo? tual fund to risky bets in stc tions r “It sends the message thf firm holds people accountabl what they do” said Herb JaniV nior vice president and gel counsel is the first! fense against fraud on Wall St and central to the regulation American financial markets whj there’s about one regulatory cop every 80 brokers The system is signed so the industry disciplines self with oversight from federal ai state authorities But this model has severe limn j PVFWOUP V-’- O Special Rate Through APR APR 123195 1 Non-Promotion- Rate al Home Equity RatesTbo GoodTo Riss Up So come into your nearest West One branch today and apply or call us at 1 “800-578-77- to apply for a home equity line 78 of credit over the phone Once you apply you'll get an answer quickly Other terms and rates are available id BANK Off MApms £ turn' til t ' 5 Ail uunhown mrifivuiiif 5Vl5 Khomtiii ut iltor 12HI1'' Maximum on term and wr ol loan C u'tomrr pay' normal Jvimiimoo AITt tor mu'lving line i l((XY Al'Rx with fixed rate loan options range from 9(l to 1061 Ivuthnmimutmof InRl to 52'00 Annual fee is $'? per year Fixed rate loan option fee u $50 after the first option v Iiuh may range from SI3n to Mtmher ID1C Widpendini UNUt J - An 'N DAMAGED COPY tm J r? S |