Ignorance Defense Works on Wall Street

Ignorance of the law is never an acceptable defense on Main Street; regrettably, the same does not seem to hold true on Wall Street. How so?

A recent auction-rate securities arbitration case involving an investor who purchased ARS from a Raymond James financial representative acknowledges the ignorance of the sales rep, but effectively absolves the firm in the process. The implications of this decision should not be underestimated.  The Wall Street Journal sheds further light on this case in a recent review, GETTING PERSONAL: Investor Loses Out In Auction-Rate Case:

A complaint brought by an auction-rate securities investor offers insight into the plight of those stranded in the instruments as well as the arbitration process some investors dread.

Like many investors, Gene McCutchin, a real-estate entrepreneur, was holding auction-rate securities when the $330 billion market froze up in early 2008. He filed a complaint against his broker, Raymond James Financial Services Inc., in September 2008 asserting negligence, fraud and breach of fiduciary duty, among other things. He said the brokerage failed to warn him about the risks before his purchase, and he asked for compensation and punitive damages.

A Financial Industry Regulatory Authority arbitration panel, in an Oct. 26 resolution, didn’t award damages or order that the share sale be rescinded. It supported some of McCutchin’s assertions, finding that a Raymond James broker, Rick Woolfolk, “was poorly trained with respect to the ARS product,” and it did order the brokerage to pay forum costs.

But the panel also said that McCutchin identified himself as “a sophisticated investor.” While McCutchin wasn’t informed about the extent of risk before the transaction, it was clear that his personal adviser, Dan Chilton, understood that he was buying ARS bonds, and that the higher returns they offered came with higher risk, the panel’s resolution said.

Let’s zero in on the phrase, “wasn’t informed about the extent of the risk before the transaction.” The fact that the FINRA arbitration panel is absolving Raymond James in this transaction, despite the fact that the customer was not informed of all the risks, should send chills down the spine of every investor in our public markets. With that statement, the arbitration panel is sending a message, loud and clear: “Buyer Beware!!” You are on your own.

To mitigate the enormous risk of purchasing an investment that a sales representative may not understand, I would strongly encourage individual investors to do the following:

1. Make sure your conversations with your sales reps are on taped lines.

2. Ask the sales rep if he fully understands ALL of the risks in the dog meat, I mean the investment, he is trying to sell you.

3. Ask the sales rep to put his understanding of the risks in writing and have him sign it. Have his sales manager sign it as well.

4. To the sales reps in the audience, compel your product and sales managers to provide a fully written explanation of ALL the risks which you can share with your customers. While individually sales reps may think that may be a tough request, if the entire salesforce makes the request, management will have to listen.

If the financial industry is going to send incompetent and uninformed sales reps out to lay garbage investments on the American public, and FINRA is not going to hold the firms and individuals accountable, then American investors only have one choice: play offense.

I strongly encourage each and every investor to put the burden back on Wall Street and utilize the above approach. If the firms, reps, and managers are not willing to accomodate you, then take your business elsewhere.

Caveat Emptor . . . Buyer Beware?? No, I don’t think so.

Caveat Venditor . . . Seller Beware!!

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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