Unsuitable Investment Recommendations By Wachovia Advisors
In making an investment recommendation to a client, a Wachovia broker must make
recommendations that are consistent with the customer's risk tolerance, needs and investment objectives. These transactions
must be suitable. A Wachovia broker has a duty to know his client and only recommend investments and trading strategies
that are suitable for that client. An investment may be unsuitable, for example, if a Wachovia customer does not have the
financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor's
financial needs or if the customer did not know or understand risks associated with certain investments.
Different states define unsuitable investment recommendations differently.
For example, Illinois defines suitability in view of the “financial resources of the customer.” Indiana,
Wisconsin, Florida and California, just to name a few, have very different definitions and standards for an unsuitable investment
recommendation.
Why would a Wachovia stockbroker make an unsuitable investment recommendation?
One reason deals with extra compensation that may be received by the advisor. Wachovia brokers make varying amounts
of compensation depending on the type of security sold to the investor. For example, a Wachovia broker can make considerably
more in commissions by selling lower priced stocks, unit investment trusts, limited partnerships, options, new issues and
certain mutual funds than by purchasing conservative certificate of deposits, T-bills or money market funds. The Wachovia
financial consultant therefore has a built in incentive to sell speculative investments, regardless of suitability considerations,
than more conservative (and often more suitable) securities. The mentality of some Wachovia advisers (and those at other firms
as well) is to try to fit a square peg in a round hole rather than making an individualized determination based off of the
facts and circumstances of that individual investor. Often, brokers use compensation as the primary means for determining
suitability.
At a minimum, Wachovia brokers have a duty to gather essential information in order to understand
the risk tolerance of an investor, the tax considerations for the client and actual appetite for risk, and the level of return
desired. It is the duty of a Wachovia financial consultant to make recommendations that are appropriate and suitable for his
client. If a Wachovia broker breaches those duties and makes unsuitable recommendations for a client, the broker, and
Wachovia may be liable to that client for the resulting investment losses.
Bond Fraud Engaged In By Wachovia Stockbrokers
FINRA securities arbitration claims and lawsuits involving recovery of losses
related to bond losses and bond fraud are not uncommon. Wachovia arbitration's involving recovering bond losses
range from fraud claims to simple negligence claims. Bonds and bond mutual funds are often one of the most frequently
misunderstood investment products Wachovia stockbrokers and financial planners sell to investors. Fraud in the offer and sale
of bonds to individual investors cost billions each year at full service brokerage firms like Wachovia, Merrill Lynch
and Morgan Stanley. As interest rates continue to fluctuate the value of investors' bonds and bond mutual funds
have plummeted. This was made clearer than ever after the subprime bond meltdown starting in August of 2007. The
subprime implosion has sheared billions off of what were supposed to be safe fixed income bonds and bond funds. Typically,
these risks were simply never disclosed and the result were billions in investment losses.
Stockbrokers and financial advisors at firms like Wachovia Securities were pitching these
bonds as rock solid, safe investments that would not lose money. Unfortunately, many times these representations were not
true. The true risks of these bonds were not disclosed. Even the safest bonds sold to Wachovia investors can have lurking,
undisclosed risks that may have gone undisclosed to clients.
There are a number of bond related arbitration claims Wachovia investors may have when they've suffered losses. These
claims are discussed below…
A) THE FAILURE
TO DISCLOSE RISKS ASSOCIATED WITH BONDS BY A WACHOVIA ADVISOR
Under both federal and state law, and FINRA Conduct Rules, Wachovia financial advisors and brokers have
an obligation to disclose all material risks associated with bonds purchased. Unfortunately, many brokers and advisors failed
to disclose the bonds and bond funds solicited had subprime related, high risk toxic waste. In recent months, the most common
FINRA bond claims relate to the failure of an advisor or stockbroker to disclose all material risks related to the bond or
bond mutual fund purchased.
False statements in
the purchase and sale of fixed income products often include guaranties, price predictions, or purported "special information"
regarding merits and safety of the underlying company. Fraud at Wachovia, however, may also take the form of omission by failing
to disclose, among other things, the actual quality of the bond, the underlying risks inherent in the bond purchase or other
material, relevant information that the client is entitled to before purchasing the bond. Some bond mutual funds sold
to Wachovia clients were exposed to subprime holdings and these risks may not have been made clear Wachovia investors.
Over the next 12-18 months, the surge of arbitration claim filings at FINRA will be related to these sorts of claims.
B) BOND SUITABILITY
The FINRA
NASD Conduct Rules require that in recommending to a customer any security, a Wachovia Securities broker shall have reasonable
grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed
by such customer as to their other security holdings and as to their financial situation and needs. All securities, not just
stocks, must be suitable for an investor. For example, if an investor wanted rock solid, safe returns, and a Wachovia stockbroker
recommended lower quality bonds, (also known as junk bonds), then the advisor may have made an unsuitable investment recommendations.
If a Wachovia broker has willfully disregarded his clients stated investment objectives by recommending low priced or speculative
bonds, Wachovia, and the broker, could be found to have made an unsuitable investment recommendation.
C)
EXCESSIVE TRADING OR BOND CHURNING
Most Wachovia
brokers are compensated by transaction based commissions or markups charged to the client. Sometimes Wachovia financial advisors
(and brokers at all firms) effect transactions not for the purpose of reasonably fulfilling the clients stated investment
objectives, but instead in an effort to generate excessive commissions or markups for themselves and their firm. Under no
conditions are bonds to be utilized as a trading vehicle in a Wachovia account. Bonds are intended to be long term investments.
Bond don't have commissions but rather have markups embedded in the price of the securities. In other words, a bond may
be held in the inventory of a brokerage firm like Wachovia at a cost of $950 per bond. Wachovia, prior to selling the bond
to a client, imposes a markup on the bond. Generally, the lower the quality of bond, the higher the markup. Also, the longer
it takes the bond to mature, the larger the markup. So a junk quality bond maturing in 20 years may have a $80 markup at Wachovia.
A short term government security, on the other hand, may have a markup of only $5. Guess what gets recommended to the
client?
D) BOND PURCHASES ON MARGIN
Stockbrokers at firms like Wachovia may recommend to a client that he or she buys lower quality bonds on margin. The purported
logic is that if a broker can get his or her client 10%-12% on a lower quality bond purchased on margin and the client pays
margin interest of 8%, then the client is in effect receiving free money. This logic is tragically flawed and often leads
to massive losses for the investor.
Many investors
do not understand margin accounts. When you purchase securities on margin, your brokerage firm is lending you money to pay
for these securities. Initially, you may use cash equal to half the securities purchased, or pledge certain fully paid securities.
Either way, you owe the brokerage firm, or most likely its clearing agent, the debit balance, or the amount borrowed to pay
for these securities. In general, unless you purchase more securities or pay down the balance, the debit or the amount borrowed
does not change. Bond prices, however, change and if the market value of the securities (bonds or stocks) in your account
declines in value, you will be required to meet margin calls and will be called upon to deposit additional cash, or fully-paid
securities, into your account. If you fail to meet a margin call, or if your account falls below minimum maintenance levels,
even in the absence of notice of a margin call, by contract, your broker is able to liquidate your investments.
However, a unscrupulous broker at Wachovia may have used margin to increase
the purchasing power in the client's account in order to facilitate excessive activity or churning. Aside from this
practice, unless you are able to make and meet margin calls, and have the financial ability to satisfy the debit balance in
your account, based on your overall financial condition, you may be unsuited for a margin account. If your Wachovia broker
has placed your account on margin, and you do not understand, or are unwilling to trade on margin, you should have your account
evaluated by a professional. Such practices are usually the warning sign of other inappropriate activity in your account.
E) UNAUTHORIZED TRADING
Unless
you have signed discretionary papers giving your Wachovia broker permission to trade your account without your authorization,
a Wachovia broker is required to obtain his clients permission before buying or selling bonds (or any other securities) in
the account. It is not uncommon for unscrupulous brokers both at Wachovia and at other brokerage firms to buy and sell bonds
in a clients account without authorization. If the client calls to complain, the broker might blame it on a "computer
error" or some other excuse.
F) FAILURE TO EXECUTE
Brokers at Wachovia Securities are obligated to follow their client's instructions when selling
or buying bonds. Actions may exist based on your broker's failure to execute certain orders. Actions may also be based
upon your broker's dissuading you from selling particular bonds.
G) FAILURE TO SUPERVISE BOND TRANSACTIONS
Wachovia has a duty to supervise its brokers and
the sales practices of their brokers, and to review customer statements for, among other things, evidence of bond suitability,
unauthorized trading, unsuitable investments, excessive bond trading activity or big losses in subprime bonds. FINRA/NASD
Conduct Rules require this obligation. But for the performance of these duties, most cases of bond fraud at Wachovia
may have been reasonably prevented. The failure to supervise by Wachovia is a violation of self-regulatory rules. Courts have
recognized a cause of action for the negligent failure to supervise, and brokerage firms like Wachovia are liable for the
acts of their registered representatives under the common law doctrine of respondeat superior, and as control persons under
Section 20(a) of the Exchange Act
Overconcentration
by Wachovia Advisors
One of the most
important rules of investing is diversification. If a Wachovia broker concentrates your portfolio in any individual investment
or type of investment, then the risk of losses with that portfolio is dramatically increased. It’s the old adage that
it is unwise to place all of your "investment" eggs in one basket. A Wachovia broker who does not diversify his
client's portfolio is potentially liable if that investment declines in value. A Wachovia financial consultant who
puts a substantial part of his client’s portfolio in one investment is potentially liable if losses are sustained.
Failure to Supervise by Wachovia Supervisors
Wachovia has an iron clad responsibility to its clients, and the public, to supervise
the activity of their financial advisors. Wachovia is obligated to “design and implement written procedures”
in order to properly and effectively supervise the activities of each of its brokers and other employees. When a Wachovia
broker engages in negligence or wrongdoing that causes damages to a client the supervisor is also subject to liability for
allowing the act(s) to occur.
Every
brokerage firm, including Wachovia, must supervise every broker licensed at the firm. Even brokers who are “independent
contractors”, including those who operate out of their homes must be supervised. Every Wachovia broker must complete
training and pass an exam administered by FINRA/NASD and, as well, pass a multi-state exam to sell securities in the state(s)
where his clients are located. In addition to these licenses, supervisors of brokers must train to pass an even more
difficult examination in to be licensed by the NASD as a supervisor.
Firms like Wachovia often claim they can not be liable for a failure to supervise unless the broker is found
liable for wrongful acts. However, it is quite possible for a supervisor or firm to be liable to the client for damages
without the broker being liable. For example, if the broker was improperly trained, given false information by the firm,
not properly licensed, et cetera, the firm may be liable to the client for damages even if the broker is not.
Ponzi Scheme or Ponzi Fraud
Engaged in By Wachovia Financial Advisors
At Stoltmann Law Offices we have represented multiple clients who invested in a ponzi scheme run by a Wachovia stockbroker.
Ponzi schemes (or Ponzi fraud, also sometimes referred to as pyramid schemes) are unfortunately a fairly common scam utilized
by rogue brokers at full service brokerage firms. A Ponzi scheme is nothing more than a fraudulent investment operation
where abnormally high returns/profits are paid to investors out of the money paid in by subsequent investors, as opposed to
net revenues generated by any real business.
A Ponzi
scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme
advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The
system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However,
the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because
the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to
the attention of authorities increases.
The scheme is named
after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903.
Ponzi was not the first to invent such a scheme, but his operation took in so much money that it was the first to become known
throughout the United States. Today's schemes by rogue advisors at firms like Wachovia are often considerably more
sophisticated than Ponzi's, although the underlying formula is quite similar.
The reality of the scheme is that the "return" to the initial investors is being paid out of the
new, incoming investment money, not out of profits. There is no "global currency arbitrage", "hedge futures
trading", or "high yield investment program" actually taking place. Instead, when investor D puts in money,
that money becomes available to pay out "profits" to investors A, B, and C. When investors X, Y, and Z put in money,
that money is available to pay "profits" to investors A through W.
One reason that the scheme initially works so well is that early investors – those who actually got paid
the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better
than any alternative investment). Thus the Wachovia financial advisor running the scheme does not actually have to pay out
very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping
the money in what looks like a great place to get a high return. They also try to minimize withdrawals by offering news plans
to investors, often where money is frozen for a longer period of time, for example 50% return per month for one year. They
then get new cash flows as investors are told they could not transfer money from the first plan to the second.
Misrepresentation and Omissions By Wachovia Brokers
Wachovia, or the firm’s financial advisors or stockbrokers, can be held
liable if the firm’s agents misrepresent material facts or omits to disclose material facts to the investor regarding
an investment, and that client subsequently loses money on that investment. Often the misrepresentations or omissions disguise
the risk associated with a particular investment. Wachovia brokers have a duty to fairly disclose all of the risks associated
with an investment.
Churning or Excessive Trading By Wachovia Financial Advisors
There are multiple different definitions of churning
depending on what state an investor lives in. Some states define churning in the context of excessive trading (See Illinois
Securities Law of 1953, Regulation 103.850). A common definition of churning, or a churned account, is when a Wachovia advisor
overtrades the securities in his customer’s account for the purpose of generating commissions. Churning is a synonym
for over-trading where the Wachovia stockbroker advances his or her interests over the interests of the client. In 2006,
there were approximately 257 cases filed at the NASD alleging a broker churned an investor’s account.
Another definition states that churning occurs when a Wachovia broker, exercising
control over the volume and frequency of trading, abuses his customer’s confidence for personal gain by initiating transactions
that are excessive in view of the character of the account. Some of the traditional “trademarks” of churning are
high turnover, frequent in and out trading, and large commissions.
Why would a Wachovia stockbroker or advisor churn a client’s account? The simple reason has to do with the Wachovia
broker being able to make more in commissions. Most Wachovia stockbrokers and advisors are still paid on a commission-based
system. What this means is that the Wachovia broker makes a commission for each buy or sell that occurs in a client’s
account. The commission percentage is usually between one half of one percent and three percent of the total transaction size.
Therefore, if a Wachovia broker can trade a client’s account more frequently, that means the broker will make more in
“gross” commissions (Wachovia brokers usually keep approximately one-third to one-half of their gross commissions)
and therefore make more in take home pay.
In many states,
three basic elements usually need to be established to prove the Wachovia client’s account has been churned. First,
it must be established that the Wachovia broker had control over the account. Second, trading in the account must have been
excessive in light of the customer’s investment objectives. Finally, the Wachovia broker must have intended to defraud
the customer or had willful or reckless disregard of the customer’s interests. Most courts will simply imply the third
element if the other two were established.
There are exceptions
to these elements and the specific elements will depend on the state the investor resides in. For example, in Illinois, under
the Illinois Securities Law of 1953, control of the account is not an element. The courts will only look at whether the excessive
element is satisfied (Regulation 103.850 under the Illinois Act reads as follows: “No dealer or salesperson shall effect
transactions for any customer's account which are excessive in size or frequency or unsuitable in view of the financial
resources of the customer.”)
How is excessive activity
determined? One definition of excessive activity is outlined in Hecht v. Harris, Uphan & Co. where the Court defined
it as “whether the volume and frequency of transactions, considered in light of the nature of the account and the situation,
needs and objectives of the customer, have been so ‘excessive’ as to indicate a purpose of the broker to derive
profit for himself while disregarding the interests of the customer.” The three most common real world methods for determining
excessive trading by a Wachovia financial consultant are the turnover rate, the cost equity ratio and an in-and-out trading
analysis.
The turnover rate is the number of times the
average net equity is used to purchase securities. The rate measures volume rather than cost. The formula for determining
the turnover rate is the dollar amount of purchases divided by the average net equity divided by the amount of time.
For example, say an Wachovia client had $100,000 of purchases in a one-year period and the average net equity is $20,000.
We arrive at a turnover rate of 5 by dividing the total purchases of $100,000, by the average net equity of $20,000. We would
then divide that number by the length of time that the investment was held.
What turnover rate establishes excessive trading at Wachovia? Some case law sets forth the following
rules of thumb:
2x Turnover Rate=An inference of
excessiveness
4x Turnover Rate=A presumption of excessiveness
6x Turnover Rate=A conclusion of excessiveness
It seems in the last decade the collective thought has moved to the belief that
an excessive turnover rate is now lower than what it was before. A well-regarded North Carolina Law Review article entitled
“A Model for Determining the Excessive Trading Element in Churning Claims” by David Winslow and Seth Anderson
convincingly argued that point concluding that much lower turnover ratios constitute churning than what has been accepted
in the past. The article argued that using mutual funds as an appropriate proxy would lead to the conclusion that a turnover
rate in excess of three for any account would be evidence of churning. The article explicitly stated that courts should lower
their threshold levels of the optimum turnover rates in investor’s accounts.
The cost equity ratio is used to determine the percentage of return on the Wachovia client’s
average net equity needed in order to pay the broker’s commissions. The cost equity ratio is computed by dividing the
costs of the transactions divided by the average net equity. For instance, say a customer has a $100,000 equity account and
the broker’s commissions off of the account for the year were $35,000. The cost equity ratio would be 35 percent. What
this means is that the Wachovia customer would have to earn a rate of return of 35 percent just to meet the expenses of the
account.
Considering the historical rate of return of the stock market is between 10 percent to 12 percent annually
(according to Ibbotson Associates), it is easy to see why this so clearly would be considered problematic for a Wachovia broker
who recommended such a strategy. Many commentators believe the following analysis should be utilized to evaluate if
churning occurred:
2% Cost Equity Ratio=An inference of
excessiveness
4% Cost Equity Ratio=A presumption of excessiveness
6% Cost Equity Ratio=A conclusion of excessiveness
It is not difficult to understand why even a two percent cost equity ratio in
a Wachovia account would lead to an inference of churning. If one assumes the historical rate of return for the market is
between 10 percent to 12 percent annually, trading that generates commissions of two percent means between 16 percent to 20
percent of an investor’s return (assuming the historical return) is going towards paying a Wachovia stockbroker’s
commissions. That is simply too much.
Please note that
there is a difference between churning and excessive trading engaged in by a Wachovia stockbroker. Arbitrators can find
that a Wachovia account was not churned but excessively traded. For instance, take the Wachovia investor who had $75,000 worth
of purchases in a one-year period and the average net equity was $50,000. We have a turnover ratio of 1.5, which is below
an inference of churning. However, if the investor was 65 years old and told the broker he only wanted to buy and hold municipal
bonds, then the arbitration panel could find that the broker was liable for excessive trading, but not churning, and still
award the investor damages.
Unfortunately (and even more
egregiously) it is not just stocks that are churned or excessive traded by an unethical Wachovia financial advisor.
Advisors will trade (and therefore churn) bonds, mutual funds and other investments that are meant to be held for the long
term. These sorts of churning cases are highly egregious against Wachovia and arbitrators tend to look very disfavorably on
this sort of activity.
Fraud
By Wachovia Advisors
Claims involving
allegations of fraud, fraudulent actions or fraudulent statements against a Wachovia broker do on occassion arise. Fraud
claims or lawsuits against Wachovia through FINRA arbitration can take many forms. Sometimes the fraud may involvea
Wachovia broker creating fake, or bogus, account statements showing an inflated account balance. Sometimes the fraud
may involvea Wachovia broker engaging in a Ponzi scheme or selling away. Other times the fraudulent actions may involve
allegations of the theft, or conversion, of client funds at Wachovia. Many state securities acts define fraudulent practices
in the context of a violation of the act. Certainly, claims like churning, excessive trading, unsuitable investment
recommendations, unauthorized trading, are potentially fraudulent actions that may make Wachovia liable for the damages resulting
from those actions.
Breach of Promise/Contract By Wachovia Advisors
When promises are made and consideration paid (or if the person promised reasonably relies
on the promise and takes action) a contract is formed. Contracts can be written, oral or even implied by the actions
of the parties. While oral and implied contracts are more difficult to prove, legal action against Wachovia Securities
can be taken when such contracts are breached.
If a Wachovia client opens an account with the firm and is led to believe his or her account will be handled in a certain
manner, a contract therefore exists between Wachovia and its client. When the account is not handled as promised
and losses occur, the investor can consider legal action against Wachovia.
When an investment account is opened with Wachovia, a new account agreement is almost always signed.
This agreement usually exists in addition to promises made to the clients. Most claims against Wachovia brokers involve
breach of both written agreements and oral promises.
Regulation of the securities industry is delegated by the Securities Exchange Commission (SEC) to self-regulatory organizations
(SROs), primarily FINRA. FINRA (NASD) has rules and regulations designed to protect investors at firms like Wachovia.
Brokers and their firms must enter into contracts with FINRA/NASD and other SROs to become registered representatives and
member firms. Investors are the intended third-party beneficiaries of these contracts with the regulators.
Additionally, under the “shingle theory” cases have determined that
when a brokerage firm like Wachovia “hangs its shingle” it has a duty to investors to follow the rules and regulations
of the securities industry.
Breach
of Fiduciary Duty by Wachovia Advisors
A “fiduciary” is defined in law as one who has the legal duty to act in the best interest of another.
A “fiduciary duty” is an affirmative duty of good faith that compels the fiduciary to place the client’s
interest before even the fiduciary. Laws in different jurisdictions determine who is considered a fiduciary and the
duties of fiduciaries.
When broker agrees to execute
an order, the broker and firm have a fiduciary duty of “best execution” – to not place the firm’s
interest before the clients and to execute the order at the best price available in the marketplace.
When brokers agree to manage clients assets and/or obtain permission to place
orders on their behalf the brokers they have fiduciary duties to these clients. Depending on the situation, the jurisdiction
and the law, Wachovia brokers and Wachovia are often considered fiduciaries to their clients in other circumstances as well.
Recently, a Federal appeals court determined that when
brokerage firms like Wachovia handle client accounts in fee-based “warp accounts” they are subject to the Federal
Investment Advisors Act of 1940. This Act places a fiduciary duty on investment advisors. Prior to that decision,
the SEC had granted an exemption from this act for stock brokers and their firms.
A claim for “breach of fiduciary duty” against Wachovia is considered in the nature
of a fraud under laws of most jurisdictions and this claim is afforded certain legal benefits over other claims such as negligence.
The fraud may take the form of churning, excessive trading, unsuitable investment recommendations, the running of a ponzi
scheme, the failure to disclose risks of investments or in variable annuities.
Negligence
By Wachovia Stockbrokers
Some persons
- even some lawyers - are of the mistaken belief that investors must demonstrate that a broker or firm committed securities
fraud in order to seek recovery against firms like Wachovia. This mistake may stem from the narrow requirements
placed on class action securities claims, which must now be filed by demonstrating fraud under Federal securities laws in
Federal Court.
We all owe a duty to others not to
drive recklessly, light a fire too close to a neighbor’s house or otherwise act in a negligent manner. This also
applies to financial firms like Wachovia, Wachovia stock brokers and other advisors who can also be held liable for their
negligent actions or inactions.
Many persons
fail to file claims against firms like Wachovia because they do not what to accuse that person or firm of fraud or to otherwise
reflect on their licenses or character. Yet, few of us would fail to seek recovery of our losses if our neighbor backed
into our automobile or caused our house to burn.
Claims
involving negligence against Wachovia advisors can take many different forms. For example, many times an overconcentration
in equities or in one stock is a negligence based claim. Sometimes mutual fund losses, unsuitable investments or
variable annuity losses against Wachovia based advisors are negligent based.
Failure to Execute Trades By Wachovia Agents
There is little incentive for a broker not to place an order. However, millions
of transactions occur each day and mistakes are made, including failures to place orders. As well, although technology
has reduced the possibility, orders do get lost. Investment clients can take action for such negligence by Wachovia brokers
or financial advisors.
At times, a Wachovia broker may not want to place an order that the client desires.
The client may wish to sell a stock but the Wachovia broker is opposed. The issue is whether, at the end of the conversation,
the client believes the transaction will take place. If the Wachovia broker refuses to place an order the client may
have a valid FINRA arbitration complaint. If the order is an “opening” order - a purchase order or short
sale - the Wachovia broker can refuse to take the order (except under certain circumstances). However, if the
order is a “closing” order – liquidating a position or covering a short position – the Wachovia broker
should not refuse the order. Of course, the failure to place the order must result in damages. Example:
The Wachovia broker does not sell and the price drops.
Selling Away By Wachovia Stockbrokers
Stockbrokers and financial
advisors, including those at Wachovia, “sells away” when they sell an investment product (ranging from
a stock, bond, private placement, mutual fund, oil and gas partnership or even a CD) that is not approved for sale by the
firm. In other words, selling away describes instances where a Wachovia advisor sells securities (or other investments)
outside of the firm with which he or she is associated. As described by the NASD (now called FINRA), “[these] transactions
present serious regulatory concerns because securities may be sold to public investors without the benefits of any supervision
or oversight by a member firm and perhaps without adequate attention to various regulatory protections such as due diligence
investigations and suitability determinations.”
In
many cases, the investment is either a highly risky stock, bond, limited partnership (or some other investment) that the Wachovia
financial advisor may be being paid under the table to sell by the promoter, or it is an entirely fictional investment.
In some cases, the Wachovia investor may be misled into believing that Wachovia has analyzed the security being offered and
“stands behind” the product and transaction when in fact Wachovia may be totally unaware of their advisor’s
participation in the transaction.
The regulatory basis
for selling away cases is found in FINRA (formerly called NASD) Rule 3030 and NASD 3040. Rule 3030 provides that a brokerage
firm adviser may not engage in any outside business activity unless he has provided prompt written notice to his or her brokerage
firm. Rule 3040 provides that a brokerage firm adviser must not engage in private securities transactions (that is, selling
away) and states the procedures that a brokerage firm must follow to approve of such investments.
Wachovia in defending these sorts of claims typically argue it reasonably supervised their
financial advisor and Wachovia had no idea of the fraudulent conduct. Many times these cases come down to supervision.
Fortunately, losses sustained in selling away cases by Wachovia advisors are often recoverable against Wachovia and/or the
advisor who sold the investment.
Mutual
Fund Losses at Wachovia
Mutual
funds must be suitable for clients just like any other security. It is not uncommon for financial advisors at firms
like Wachovia to make unsuitable recommendations in mutual funds. When this occurs, a Wachovia client might have an
actionable FINRA arbitration claim against the firm. Sometimes mutual fund fraud involves placing a large percent of
a Wachovia client’s net worth, or account, in only one or two mutual funds. Sometimes mutual fund fraud involves a Wachovia
financial advisor failing to disclose an undisclosed incentive, or financial compensation, in the selling of a mutual fund.
Sometimes mutual fund fraud involves the active trading of mutual funds at Wachovia. Mutual fund losses at Wachovia
are potentially actionable claims in FINRA arbitration claims.
Variable
Annuity Losses at Wachovia
Varialbe annuity losses at firms like Wachovia are often recoverable.
Annuity purchases in general, and specifically in IRAs, are inappropriate and unsuitable for most Wachovia clients.
Varialbe annuities are the highest commission produced that most stockbrokers, including those at Wachovia, can sell.
Importantly, there are no breakpoints (reduced sales discounts for large purchases) with annuities. The Wachovia investors’
funds are typically tied up for years with high surrender charges. The annuities have extraordinarily high fees.
There are big upfront sales charges and back-end surrender charges, which linger around 7% if you withdraw
the money
too soon. In addition, there's mortality and expense charges to cover the risk the insurance company takes on to pay you
lifetime income. There are also administrative and annual records maintenance fees. The average annuity has an expense
ratio of 2.35% annually, according to Morningstar. The average mutual fund, on the other hand, charges just 1.44% annually.
Finally, any withdrawals from the annuity are taxed at ordinary income rates (which could be as high as 35%) instead of the
much lower long term capital gains tax of 15%). Variable annuity losses are many times recoverable through FINRA arbitration
claims or in lawsuits.
The unsuitable and egregious nature of any broker, including
Wachovia stockbroker’s buying variable annuities for retired clients, is well documented by NASD Enforcement and
NASAA, the national group of state securities commissioners. According to the national organization of state securities
regulators, NASAA (the North American Securities Administrators Association), variable annuities have made their top ten list
of investment “scams” each of the last six years. NASAA recently disclosed its 2007 forecast of the 13 most
common ways “investors are likely to be trapped in 2007.” According to NASAA, on its list were variable
annuities. NASAA states:
"Variable annuities are tax-deferred investments that typically
place mutual funds inside of an insurance wrapper for tax deferred potential investment growth. While these products are legitimate
investments, regulators are concerned about their popularity in the sales community. Commissions to those who sell variable
annuities are very high, which provides incentive for sellers to engage in inappropriate sales. Variable annuities are only
suitable for a very small percentage of the investing public and generally are not appropriate for most seniors. The steep
penalties for early withdrawals also make variable annuities unsuitable for short-term investors. Be especially wary of any
broker who wants to sell you a variable annuity to hold inside a 401(k) or IRA. You are already getting tax-deferred
growth in an IRA or a 401(k), and the variable annuity simply adds a layer of cost with no additional tax benefit."
NASAA released its 2006 “Top 10 Threats to Investors.” The list identifies “the most
common ploys being used to cheat investors out of hundreds of millions of dollars." According to NASAA:
"NASAA members are concerned that variable annuities are being sold to senior investors despite the fact that these
products are not suitable investments for most seniors who may need quick access to their money for medical or other emergencies.
Regulators also are concerned that investors aren’t being told about high surrender charges and the steep sales commissions
agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed
returns when variable annuity returns actually are vulnerable to the volatility of the stock market. Securities regulators
in Massachusetts filed a complaint against a unit of Citizens Financial Group, accusing the firms of 'systematically targeting
customers, including many senior citizens' to put their money in variable annuities.'
The press has
also cast light on the inappropriate and unsuitable nature of variable annuities, especially ones bought in an IRA.
As noted by the Sun Times’ Terry Savage in an article entitled “Tax-Deferred Annuities Often A Big Mistake”
on August 22, 2005:
“It's becoming a national financial epidemic: tax-deferred annuities sold to
people who don't understand them, don't need them, and might even be harmed by their high fees and surrender charges.
The people who fall for this trap tend to be seniors, widows and others who have a sum of cash to invest and are seeking security.
Instead, they get locked into expensive and ongoing management fees. And what do the salespeople get? Huge commissions. As
much as 10 percent of the initial investment, and ongoing commissions for years after that! It's a huge violation of trust
because a great number of these tax-deferred annuities are sold inside banks, where the trusting clients don't realize
they aren't dealing with a banker. They're dealing with a securities broker licensed by the bank, and paid on commission.”
Jane Bryant Quinn in an article entitled “One Faulty Investment” states the following about variable annuities:
“You rarely find me so deeply angry at a common investment product that I dream of blowing it to smithereens. Especially
one that's sold by America's leading financial institutions, commands $393 billion in assets and sounds like a winner
for retirees. But stand back, I'm going to light the fuse. My target: tax-deferred, variable annuities—a name that
hints of probity, with a soupcon of tax savings on the side. What a laugh. It will cost you more in taxes and possibly risk
your security, too. ‘I cannot imagine a personal financial situation where I'd recommend a VA as a good idea,’
says actuary John Biggs, former chair of TIAA-CREF pension funds.”
If a Wachovia client
suffered investment losses in a varialbe annuity, some, or all, of these losses may be recoverable.