It is important to begin this post on brokerage fraud with just a touch of education. “Variable Annuity Products” offer investors a cross between annuities from insurance and security investments.
As the stock market goes up and down, the returns of the variable annuity product goes up and down. Over the long term, these products should pay a much higher yield than a regular annuity. Most of these products are tax deferred. Variable Annuity Products have higher annual fees.
In short, these are good investments for people who have lots of time, don’t mind the higher fees and who may not have IRA’s. They are terrible investments for those who might need money in the short term. They make little sense for people with IRA’s (already tax deferred) and are not all that simple to understand.
The SEC has charged four stock brokers with committing fraud on retirement age investors. The investors may have lost up to $40 million.
Brokerage Fraud – Reading the Small Print
The four brokers decided to intentionally mislead investors by persuading them to roll over their retirement accounts into high-fee, long-term variable annuity products. Not only is this the worst possible product for a retirement age individual, they make no sense. Before we go further into the mechanics of the scam, let me just say that stockbrokers adhere to a strict code of ethics along with their firms. The ethical standards are, when followed, supposed to prohibit brokerage fraud.
The SEC makes certain that in the daily practice of brokerage firms, in the curriculum of brokerage training and in every area of enforcement, the commitment to ethics is uppermost in expected practice. It is why insider trading is so very serious a violation. I must admit that I have known unethical brokers; they always feel as though they’re the brightest bulbs in the room. They are not. They are “flimflam men (and women).”
Invariably, an unethical broker chooses to take that route because he or she sees an opportunity to take advantage of a vulnerable, unsuspecting investor. The “opportunity” might also be interpreted as greed. The need of a crooked stockbroker may be money, that is true, but it may also be a need for power; to take advantage of someone and to secretly feel good about hurting someone.
In this case, there were four brokers based in Atlanta who were broker employed by an official sounding company: Federal Employee Benefits Counselors. Whether, they conspired as a group (most probably) or saw the opportunity to individually commit brokerage fraud (unlikely) they decided to go after federal employees who were nearing 60 years of age.
Thrift Savings Plans
There is a contribution plan for U.S. civil service employees called the Thrift Saving Plan. It is a nest egg that of course is vital to a more comfortable retirement. There are a host of short term investments a civil service employee can potentially make to increase earnings, a bit. Most of these investments a low-fee. However, the stock brokers saw those nest eggs as the “Golden Goose” for their own pockets.
The brokers did a hard sales job on the civil service employees with the Thrift Saving Plan. They lied about the fees and they lied about the returns. To make matters worse, they convinced the investors that the variable annuity products were approved by the government. In other words, they obscured important details. The SEC even alleged that when the brokers sent out information on the investment, sometimes they excluded the words “variable annuity.”
The civil service employees, believing that the brokers were being honest and ethical, “gave over” their money to the brokers, up to $40 million worth. Until the entire mess gets straightened out, the civil service employees have their money tied up in various investment plans, and they are actually earning less because of the high fees.
The brokers will undoubtedly lose their licenses and will be subjected to fines and other penalties.
There remains one key component we need to explore: “Rationalization.” The four stockbrokers knew what they were doing. In their twisted and unethical world, they probably rationalized their behavior on the basis that the civil servants had plenty of money, that they wouldn’t miss it, and some day, perhaps when they were very old and feeble, the investors would get their investments back.
This again underscores the need for all of us to do our due-diligence. Be extremely wary of any broker who “cold calls.” Hang up the telephone once the hard sell begins! The federal government does not authorize or endorse investments. It should have been a red flag.
However, the biggest red flag of all is that the current type of ethics training is not working. The ethics training for the brokerage community has become way too rote and predictable. I can imagine the four brokers who committed this scam laughing in the back of the room during a normal ethics training. They will not be laughing as the bars of the jail cells slam in their faces.
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