During the last few years, investors lost an astonishing $10.5 trillion in stock value from the market's top to the recent bottom.
To restore investor confidence, on April 28, the SEC announced the largest fraud settlement in history. Without admitting any wrong-doing, 10 of Wall Street’s largest brokerage firms and two “star” brokers agreed to pay fines totaling $1.4 billion.
Although $1.4 billion sounds like a lot of money, it’s a drop in a veritable ocean of corruption and fraud. This “big penalty” amounts to less than 13 cents for every $1,000 that stockholders lost. $1.4 billion is also tiny in comparison to the crooked Wall Street firms’ revenues, which totaled $363 billion last year. That means “they can pay the entire fine with the revenues from just one business day” (Safe Money Report, April 2003). Meanwhile, investors end up stuck with trillions in losses from brokerage fraud.
Adding insult to injury, only 25 percent of the $1.4 billion fine is even earmarked for investors. The rest is going to the government!
Weiss is fighting this monumental injustice and trying to get brokers to pay back investors for their losses. In this exclusive NewsMax interview, Weiss explains:
NM: Thank you for taking time from your busy schedule for this interview. Let me begin by asking you, what are your specific complaints against brokerage firms? Weren’t they just taken in, like investors, by fraud committed by companies such as WorldCom and Enron?
Weiss: Absolutely not. The managers and analysts at major brokerage firms like Merrill Lynch and Goldman Sachs were willing co-conspirators in the defrauding of investors. In many cases, the firms’ own brokers didn’t even realize what was going on. But as a result, investors lost incredible amounts of money they never would have otherwise invested.
Here’s just one example. At the same time that Merrill Lynch was publicly advising its clients to buy or “accumulate” stocks (which subsequently plummeted), here is what they were saying in private, according the New York Attorney General’s official report based upon Merrill Lynch files and memos (www.oag.state.ny.us/press/2002/apr/MerrillL.pdf.):
Excite@home 6/03/00 “Such a piece of crap” ML51453
InfoSpace 10/20/00 “Piece of junk” ML06578
Lifeminders 12/04/00 “POS” (piece of s***) ML60903
24/7 Media 10/10/00 “Piece of s***” ML64372
NM: Why would brokerage firms deliberately give their customers such horrible advice? It seems self-defeating.
Weiss: To understand their rationale you have to go back to 1974 when securities sales were deregulated. Old-line brokerage firms were forced to cut their fees again and again just to stay competitive. Then, in the 1990s, online brokers provided even more competition, and again fees plummeted. So the established major brokers were forced to look elsewhere for revenue.
The solution was more “investment banking” deals. “Investment banking” covers a broad range of deals, but in essence it means the brokers got big fees from companies like Enron and Global Crossing for selling their stock. Some of these fees were in the tens of millions of dollars.
Although investment banking was always a part of their business, in the 1980s and 1990s, it became the best (and most lucrative) game in town, quickly overshadowing other revenue sources.
The new emphasis on investment banking meant that brokerage firms were no longer working for stock purchasers but now were working for stock sellers. By bringing IPOs to market and brokering new stock offerings, the major brokers collected hundreds of billions of dollars in fees.
All of the incentives were to sell stocks, never mind whether they were sound or not. Star brokers like Jack Grubman of Smith Barney made millions of dollars a year touting essentially worthless stocks. Here are some quotes about Grubman from employees of his own company:
“What Grubman has done to our retail clients is criminal.”
“I hope Smith Barney enjoyed the investment banking fees he generated because they come at the expense of retail clients.”
“I would never, ever, ever follow anything he had to say. Integrity is all we have in this business.”
(Source: Alan Mirabella, Bloomberg News, 4-28-03)
There were and still are thousands like Grubman in the ranks of Wall Street’s “top” brokerage firms. He was just more blatant and “successful” than most.
The quickest route to oblivion on Wall Street in the 1990s was to say anything bad about a stock your firm was selling, no matter how shaky it was. Those who did so were quickly denounced and fired.
NM: Will the SEC settlement help this situation?
Weiss: Only on the most superficial level.
$1.4 billion in fines is chicken feed for companies that take in 200, 300 times that much every year. The amount is so pathetically tiny compared to investor losses of trillions of dollars that it’s an insult to our intelligence.
Even the fine Grubman is paying is less than 10 percent of the amount of money he scammed. He still profited to the tune of $20 million at the expense of ordinary middle-class investors who are still out their money, while Grubman gets to retire to his mansions. Is that justice?
NM: What about the SEC’s announced reforms, such as separating brokerage research departments from their investment departments?
Weiss: That will do nothing to change the underlying problem, which is that the SEC, which is supposed to be the industry’s watchdog, is still largely controlled by the industry. That’s like letting wolves regulate how other wolves will raid the henhouse.
Look, the analysts working for a brokerage firm like Smith Barney aren’t idiots. Rules or no rules they know their paychecks are still coming from fees billed to the very companies they are supposedly “objectively” investigating and recommending.
The only way anything will change is if stock buyers look elsewhere for stock recommendations. Brokerage firms should get out of the stock recommendation business and smart investors should ignore their recommendations.
NM: So what is the recourse now for investors defrauded out of trillions of dollars?
WEISS: Unfortunately, under current securities regulation the only recourse against these crooked brokers is to go through the SEC-approved arbitration process.
Under current law, whenever you buy shares of stock from a broker, you also agree that any disputes you have with the broker will be arbitrated by a special industry arbitration panel. That process, like the SEC itself, is also severely flawed.
Most disputes are arbitrated by three arbitrators. One of the three is called an “industry” arbitrator, meaning he’s not neutral but represents the very people you are going against!
Even worse, the other two – called “public” arbitrators – may also be working for a law firm which may get most of its business and money from the broker you are suing or the company which issues the stock you are alleging was misrepresented.
Before you even walk in the door of an arbitration session, the deck may well be totally stacked against you. However, that’s the system we’re now stuck with.
The only positive thing I can say is that recent, intense public scrutiny should help investors a lot. My firm alone has filed hundreds of arbitration requests, and we plan to file hundreds more.
NM: So what can be done to reform this corrupt system?
WEISS: First, arbitration must be taken away from the New York Stock Exchange and other industry players, and made truly independent and fair.
Second, all arbitrators must be screened for bias and eliminated if they have a clear conflict of interest, such as working for a firm that receives revenue from one of the parties you are going against.
Third and most important, the arbitration process must be made open and transparent. Secrecy and sealed proceedings, which presently are virtually universal, must be eliminated.
I am now very hopeful that we will win and eventually get the reforms we need for several reasons. The public airing of this corruption scandal now simply cannot be ignored. No one will trust Wall Street until they adopt transparency.
Also, the investors who were defrauded are the Bush administration's primary backers, and I don’t believe the president will turn his back on them.
In the long run we will win.
NM: How can people contact you if they wish to file an arbitration claim against their broker or support your campaign against Wall Street corruption?
WEISS: Go to our Web site www.stockmarketfraud.com or call one of our offices, or in Florida:
815 N. Garland Ave., Orlando, FL 32801; 407-849-0167
101 E. Kennedy Blvd., Tampa, FL 33602; 813-223-9133
1962 N. John Young Parkway, Kissimmee, FL 34741; 407-569-1028
Also you may contact Levin & Papantonio, who are also assisting victims of stock fraud.
Levin & Papantonio, 316 S. Baylen St., Pensacola, FL 32501; 888-435-7001; www.Levinlaw.com
Or you can contact Robin White at rwhite@levinlaw.com or call her (toll free) at 888-435-7001.
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