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Like thousands of other Florida retirees, Rau King and her late husband, Rex, became victims of an investment scam during the 1990s. Unlike most of the others, she is getting all of their money back.
The reason? Securities arbitrators have begun to hold brokerage firms responsible when their brokers sell bogus investments. Investors in bankrupt pay phone deals, phony viatical settlements and high-yield notes stand an increasingly good chance of recovering their cash through the arbitration process. However, they must have been smart or lucky enough to have dealt with a broker who worked for a licensed brokerage firm, and the firm must have enough assets to pay the claims.
Most purveyors of investment scams are independent insurance agents or freelance sales agents not affiliated with a brokerage firm. By the time the scam collapses, the agent often is broke and the investor is left with no one to sue.
The Kings were luckier with the $45,800 they invested in Evergreen Security Ltd., an Orlando-based scam that raised $200-million before filing for bankruptcy. They dealt with a Tampa broker who worked for IFG Network Securities Inc., a subsidiary of the giant Dutch financial company ING.
An arbitration panel for the National Association of Securities Dealers ordered IFG to give Mrs. King the couple's money back with interest, $59,227, plus costs and attorney's fees to be determined in court. They won even though they never opened an IFG account and IFG never touched their money.
"The law is that brokerage firms are responsible to police their brokers," said Joel Goodman, the Clearwater lawyer who represented the Kings.
But prevailing in arbitration is not easy. Often brokerage firms can claim quite truthfully that they were not aware that their broker was selling an unapproved investment and that they had no direct relationship with the client. The practice of selling unauthorized investments, called "selling away," is grounds for disciplinary action even if the investment is legitimate. In the Kings' case, the broker admitted guilt and is serving a 15-month prison sentence for selling unregistered securities.
IFG denied responsibility and sought a federal court injunction to stop arbitration proceedings. However the U.S. District Court in Orlando said IFG was required to arbitrate because the Kings dealt with "an associated person" of the company even though they had not dealt directly with IFG. Arbitration is a substitute for court proceedings, and the parties must agree in advance to accept the result.
Goodman also represented a group of New York investors who won a $729,000 arbitration award this month against another ING subsidiary, Financial Network Investment Corp. That case revolved around investments in ETS Payphones Inc., which went bankrupt. The arbitration panel ruled Financial Network had failed to supervise its brokers and awarded the investors their losses plus 9 percent interest, attorney's fees and other costs.
ING declined to comment.
Investors who think they might have a claim against a brokerage firm should discuss the situation with a lawyer who is experienced in securities arbitration.
Q. I owned stock as joint tenants with my husband, who died recently. Does the tax basis on the stock change?Yes, but only half of it. Your half retains its original basis. Your husband's half is stepped up to the market value at the date of his death. For example, if you and your husband acquired stock for $1,000 that was worth $5,000 at the time of your husband's death, your new basis would be $500 for your half (half of $1,000) plus $2,500 for his half (half of $5,000), for a total of $3,000. This formula applies in most states, including Florida, but not in community property states. IRS Publication 559 covers tax issues for survivors.
Baseball offers some lessons for investors, according to Ron Kelemen, a financial planner in Salem, Oregon: "If the first three batters hit into left field, would the coach move all the players over to left field? Of course not. He would keep them spread out among the other positions because nobody knows for sure where the next batter will hit." The moral of the story: Don't put all your money on last year's best investment.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.