by Pat Huddleston, Investor's Watchdog
A recent Wall Street Journal article details how the U.S. Securities and Exchange Commission (“SEC”) and the National Association of Securities Dealers, Inc. (“NASD”) allowed a firm operated by an oft-sanctioned registered representative to do business. See WSJ, 11/30/2006, page C1. According to the Wall Street Journal, Ross Mandell had been accused no fewer than five times of misconduct involving unauthorized trading and/or churning in his customer accounts and denied by Ohio regulators the right to sell securities in that state, when the SEC approved the application of the U.S. unit of Mr. Mandell’s Sky Capital Holdings Ltd. (a U.K. company) to act as a registered broker-dealer.
Investor’s Watchdog has investigated further and uncovered a New York Stock Exchange (“NYSE”) Disciplinary decision which sheds further light on Mr. Mandell’s career in the securities industry. In 1995, the NYSE censured Mandell and suspended him for six weeks from association with any NYSE member.
In the order imposing those sanctions, to which Mandell consented without admitting or denying guilt, the Panel detailed Mr. Mandell’s employment history. According to the Panel, from September 1983 to October 1994, Mr. Mandell worked for thirteen different brokerage firms, including D.H. Blair & Co., Inc. (for 13 months) and Prudential-Bache Securities, Inc. (for 3 months). The Panel’s order details five separate allegations of unauthorized trading.
The SEC and NASD declined to comment for the Wall Street Journal story. So, we know very little about why they allowed Mr. Mandell to open his own broker-dealer. What we do know, though, is that two customers of that broker-dealer have lodged complaints against the firm alleging damages of more than $900,000 for, among other things, unauthorized trading.
Stories of brokers with disciplinary problems being allowed to move from firm to firm, collecting allegations of customer abuse at each stop, are not uncommon. Why? The experience of IW’s founder at the SEC suggests at least three reasons.
The T.O. Principle
The securities industry is not a charity. The brokerage firms are in business to make money. Nothing wrong with that. As with any sales-based business, the brokerage industry relies on its sales force to generate fees and commissions. That they call their salespeople “financial advisor,” or “vice president,” or “retirement specialist,” (the correct industry term is “registered representative”) does not mask the fact that they are salespeople.
Top producing registered representatives make salaries approaching those of professional athletes, and, like professional athletes, they are highly coveted by other firms. Other firms recruit them with big signing bonuses and higher salaries. Of course, unlike professional athletes, who sell their ability to help the team win, registered representatives sell their ability to convince investors to buy something or sell something or to sign up for an account that pays the firm a percentage of the value of the account.
Their ability to make that sale is exactly what makes them valuable to the firm. If a top producer crosses some boundaries on his way to making those sales, therefore, the firm may either overlook the offense, or impose a wet noodle punishment, out of fear that a more severe sanction might prompt the registered representative to jump at the big pay package offered by a rival firm. Why are the Cowboys willing to tolerate the antics of Terrell Owens? Because he catches touchdown passes. Why will a brokerage firm tolerate misconduct from a top producer? Because he generates millions of dollars annually for the firm.
Firms Do Not Want the Liability that Might Come with Exposing the Misconduct
When a broker accepts the offer of a big bonus from a competing firm, why doesn’t his former firm bring to light all of the rules infractions they overlooked while he was at the former firm? Because the firm is legally liable for the broker’s bad conduct. To the extent it makes a big deal about violations it once kept quiet, it is making it more likely that it will be held liable for that misconduct.
Disputes with Customers are Often Swearing Contests
Perhaps the most shocking thing to a customer who commences an arbitration action against a broker for misconduct that damaged the customer’s account is the extent to which the broker blames the customer. The customer trusted the broker to look after the customer’s interests. When a dispute arises, though, the broker often argues that he never did any such thing, and that it was always understood that the broker was never doing more than following the customer’s orders.
When the matter comes to an arbitration hearing, the panel deciding the case often hears stories that are polar opposites. Faced with that uncertainty, arbitration panels often reflect the uncertainty in their decision, either finding in favor of the broker or reducing the award to the customer. Such results very rarely result in referrals to disciplinary officials. The industry’s arbitration system, with its limited pretrial discovery, therefore protects the broker from the full consequences of his actions. Arbitration awards that seem to water down the allegations of the complaining customer therefore make it difficult for subsequent employers to judge whether the broker’s conduct at his previous employer was truly improper.
Who to Trust
Whether your broker has worked for only
one firm or a dozen, Investor’s Watchdog
has the knowledge and experience to evaluate
his employment history with an eye on
whether it is safe to trust him with your
retirement account. Investor’s Watchdog
is here to ensure that those who most
need to know the facts know them in time
to protect themselves.