401(k) Mismanagement

In recent years, employees have been filing an increasing number of meritorious lawsuits against employers for 401(k) mismanagement.  These claims are in the tens of millions of dollars and range from disloyalty to imprudence to disregarding conflicts of interest.  Some of the more egregious claims come when employers populate 401(k) plans with their own expensive and poorly performing proprietary investment funds, creating a kind of “buy from the company store” arrangement in which they profit at the expense of their employees.  The Employee Retirement Income Security Act of 1974, also known as ERISA, is designed to protect employees from this abuse. A recent case in California –  Munro vs. University of Southern California – illustrates the alarming lengths to which employers will go to stop their employees from enforcing ERISA.  In this case, the University’s employees brought a class action lawsuit demanding the University make restitution to the retirement plans for losses due to imprudent investments and unreasonable plan expenses.  Instead of trying to determine whether the employees’ position had any merit, the University tried to prohibit employees from bringing the lawsuit because, as a condition of their employment, each had signed an agreement to arbitrate all claims, which also did not […]

The average person seeking financial advice for their retirement is unaware that the persons giving them advice are under no obligation to be loyal to their needs, to make prudent investment recommendations for them, or overall to act in their best interest. As a result, over the years many financial advisers motivated by their own self-interest have taken advantage of unsuspecting customers. The Department of Labor sought to address the problem with the enactment of its Fiduciary Duty Rule, which was intended to represent a common-sense approach by requiring financial professionals to act in the best interests of their retirement-planning customers. Withstanding withering attacks by the United States Chamber of Commerce and 21 industry groups to kill the initiative, the DOL enacted the Fiduciary Duty Rule in 2016. But the attacks continued. One by one, the lawsuits filed by the industry were dismissed until, finally, the 5th Circuit Court of Appeals ruled, in a split 2-1 decision and over a strident dissent by the Chief Judge, to vacate the Rule. The Department of Labor declined to appeal the ruling to the Supreme Court. The 5th Circuit rejected efforts by the American Association of Retired Persons (AARP) and several states to […]

is currently investigating the way E* Trade recently handled the assignment of a naked in-the-money put on the S&P 500 ETF (symbol SPY). A volatile price drop in SPY on the Friday of expiration triggered a likely assignment of 5,000 SPY shares. Rather than closing out the put contract before the close of options trading on Friday, or waiting until Monday to resolve the trade, E* Trade apparently took control of the investor’s account after the market’s close and unwound the position in a manner that greatly benefitted them at the expense of the investor. Without the investor’s knowledge, E* Trade allegedly loaned 5,000 SPY shares to the investor’s account. It then sold those shares short in the “after-market” at an unfavorable price. Using the proceeds from the short sale, it then seemingly purchased the 5,000 SPY shares assigned by the put contract at a higher price and returned those shares to themselves to cover the short SPY position it had initiated. The prices at which these trades were done were approved by E* Trade. believes E* Trade’s handling of the assignment was both commercially unreasonable and fraudulent. Had E* Trade closed out the contract before Friday’s close, or let […]

In an effort to enhance investor protections, the Securities and Exchange Commission (SEC) is proposing a new rule – Regulation Best Interest – that may come as a surprise to some investors. The SEC’s proposed rule requires your stockbroker to act in your best interest at the time he or she recommends an investment to you, something that the average investor believed to be the case to begin with. But it’s not the case. Prevailing law does not obligate stockbrokers to act in your best interest when making recommendations. The recommendations need only be suitable for your particular situation. This allows stockbrokers to recommend investments that pay them or their firms extra revenue regardless of whether there are cheaper or better alternatives. Investors are then stuck with expensive, poorly-performing investments in their portfolios. In 2008, Congress, through the Dodd-Frank Act, directed the SEC to consider rulemaking to establish a fiduciary duty standard for stockbrokers. Then, as now, significant confusion abounded about the relationship between a stockbroker and a customer. Stockbrokers are given impressive titles – financial advisor, wealth manager, portfolio consultant – that impart a sense of credibility and expertise to the average investor. Then, expensive advertising campaigns convey the […]

Did you know that, except in a few unusual circumstances, lenders and bank loan officers do NOT owe you a duty to act in your best interest?  Did you know that it is legal for them to offer you, and even recommend, a loan that you are not equipped to payback? Oftentimes, when people decide to take out a loan, they make the fatal mistake of assuming that a banker or loan officer’s job is to help them choose the best option.  Not so!  The banker’s job is to sell you a product, and since they work for the lender—not for you—they have incentives to sell you the product that provides the most benefit to the lender and to themselves. What is Predatory Lending? Just because a loan unfairly benefits the lender or has a negative result for the borrower does not make the loan illegal.  Here are some common harmful practices that lenders use to sell home equity loans: Equity Stripping: The lender makes a loan based on the borrower’s home equity, regardless of the borrower’s ability to repay the loan. When the borrower inevitably defaults, the lender forecloses and the borrower loses their home. Loan Flipping: The lender offers unnecessary […]

We want to share with you a disturbing tale we heard recently from an investor in a private investment fund. We share this to alert you to “red flags” that signal the high likelihood of investor fraud. If you can spot them, you can better protect yourself from financial predators. The enactment of the Dodd-Frank Act ushered in a new era of investment adviser regulation. Depending on size, investment advisers now come under the oversight of either the Securities and Exchange Commission or the securities regulator of the state where they have a place of business. To protect investors from Ponzi schemes, federal and state securities laws now impose strict audit requirements and rules for maintaining custody of client assets. Our investor entrusted their money to scammers who blatantly ignored these laws. The investment adviser orchestrated a fraudulent scheme not only to fool investors as to the true value of their investments, but to inflate the valuations of securities held in the fund. The investment adviser then collected, and concealed its receipt of, excessive fees based on the fund’s falsely inflated net asset value. Here is a description of the “red flags” that occurred and those that you should be […]

As the U.S. population ages, senior investors increasingly have become more vulnerable to securities fraud.  Too often, caregivers ingratiate themselves with vulnerable seniors, only to secure powers of attorney and then use their new powers to drain the senior’s investment account. The so-called trusted caregiver then vanishes never to be seen or heard from again.  The victim soon learns they are left with little or no means of support and little hope of recovering their lifetime savings. To better protect seniors from this type of investor fraud, the Financial Industry Regulatory Authority (FINRA) has implemented new industry conduct rules specifically aimed at curbing financial elder abuse. First, brokers now must seek to get the name of, and contact information for, a person who the senior customer trusts to be contacted should the broker suspect foul play. This person could be a spouse, a son or daughter, a guardian or a trusted friend.  The purpose of the rule is to establish a line of communication between the broker and a responsible party who can come to the aid of a senior when the broker suspects a senior customer is being scammed. Second, brokers may place a temporary hold on a disbursement […]

America’s population is aging. As people age, their mental faculties can diminish. They can become isolated, dependent, and frightened.  Seniors who accumulated wealth over their lifetimes become attractive targets for unscrupulous people who prey on their vulnerabilities. It generally begins rather simply. A senior citizen with limited investment knowledge and/or limited English skills opens a brokerage account and deposits some fixed-income securities. The senior is looking for honest investment advice and hoping to live off the securities’ income for the rest of his or her life.  However, within a few months of opening the account, the brokerage firm changes the account profile to aggressive and approves it for margin and options trading. What follows is high-velocity, day-trading in highly risky stocks and other unsuitable investments.   They include penny stocks, option contracts, and leveraged exchange-traded funds whose values are linked to commodity interests and precious metals.  The account, with about $500,000 in equity, has a dollar trading volume that exceeds $20 million. Given the senior’s limited investment knowledge and English skills, it is apparent that he or she could not have been directing these trades.  All too often, the stockbroker has taken control of the account and is excessively trading to […]

Financial matters can be bewildering. Stockbrokers are supposed to help simplify the complexities and steer us in the right direction. But sometimes, stockbrokers care more about earning commissions than they do your well-being. It results in customers being stuck with dismal investments. Customers who complain are met with vigorous denials often supported by reams of “gotcha” paperwork that bear your signature or some other type of tacit approval. Most investors are caught completely unaware. Our purpose here is to alert you to the traps and provide information that can help protect you against investor fraud and financial abuse. 1. Account Application. This form can appear overwhelming, but it is the most important document and can mean all the differences in a FINRA arbitration proceeding (described below). Here are a few things to consider when completing the form: Financial information related to your income, net worth, liquid net worth. Do not exaggerate. The more wealth you appear to have, the more the stockbroker will try to label you as a sophisticated, knowledgeable investor who is more open to risk. Information about the length of your investment experience. The more experience you appear to have, the more the stockbroker will try to label […]