Comments on: Reports of financial crimes growing http://www.sequenceinc.com/fraudfiles/2009/07/21/reports-of-financial-crimes-growing/ Thu, 11 Mar 2010 20:51:49 +0000 http://wordpress.org/?v=2.9.1 hourly 1 By: Hugh Berkson http://www.sequenceinc.com/fraudfiles/2009/07/21/reports-of-financial-crimes-growing/comment-page-1/#comment-183880 Hugh Berkson Sun, 30 Aug 2009 22:41:50 +0000 http://www.sequenceinc.com/fraudfiles/?p=4012#comment-183880 I'm not so sure that the economy doesn't push more brokers and/or investment advisors into fraudulent practices. When revenue from regular security sales (ie, stocks and bonds) is down, many salespeople find the alternative investments, which pay much higher commissions, to be very attractive. Various annuities, collateralized debt obligations and private placements are unbelievably complex, but pay tremendous commissions. Our experience prosecuting claims demonstrates that the brokers tend to ask a lot of questions about the commissions to be paid, but not a lot about how the products work. Accordingly, they don't understand the products they're selling and therefore can't (and don't) explain them to the customers. The brokerage firms rely on the same defense: you knew what you were buying. Yet it is easy to demonstrate that products such as collateralized debt obligations are understood only by PhD economists, not customers. Another problem that will become evident in the next few years is the rampant unsuitable annuity sales that took place in the wake of financial apocalypse. Investors were fleeing to "safety," without understanding what was or wasn't actually safe. Annuities, with high expense ratios and low liquidity, were touted as "no lose" investments. Such products typically charge massive premiums to gain access to the investor's principal - sometimes as much as 20%. The products also tend to underperform the market thanks to high expense ratios. Had full disclosure been made, the sales would not have. Thus - fraud. While I agree that the down market exposes the frauds, the down market also creates more opportunities for unscrupulous brokers and investment advisors. I’m not so sure that the economy doesn’t push more brokers and/or investment advisors into fraudulent practices. When revenue from regular security sales (ie, stocks and bonds) is down, many salespeople find the alternative investments, which pay much higher commissions, to be very attractive. Various annuities, collateralized debt obligations and private placements are unbelievably complex, but pay tremendous commissions. Our experience prosecuting claims demonstrates that the brokers tend to ask a lot of questions about the commissions to be paid, but not a lot about how the products work. Accordingly, they don’t understand the products they’re selling and therefore can’t (and don’t) explain them to the customers. The brokerage firms rely on the same defense: you knew what you were buying. Yet it is easy to demonstrate that products such as collateralized debt obligations are understood only by PhD economists, not customers.

Another problem that will become evident in the next few years is the rampant unsuitable annuity sales that took place in the wake of financial apocalypse. Investors were fleeing to “safety,” without understanding what was or wasn’t actually safe. Annuities, with high expense ratios and low liquidity, were touted as “no lose” investments. Such products typically charge massive premiums to gain access to the investor’s principal – sometimes as much as 20%. The products also tend to underperform the market thanks to high expense ratios. Had full disclosure been made, the sales would not have. Thus – fraud.

While I agree that the down market exposes the frauds, the down market also creates more opportunities for unscrupulous brokers and investment advisors.

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