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On money

Brokerages won't keep investors safe from crooks

By HELEN HUNTLEY
Published March 20, 2005

One of the most intriguing things about the saga of Dennis Herula is the underlying question: Why would somebody smart enough to trick investors out of $16.5-million be dumb enough to do it?

Herula was a broker for Raymond James Financial Services in Cranston, R.I., in 2000 when he stole the money. Today he's a federal prison inmate in Englewood, Colo. In between, he scammed others, including Joe Coors Jr.

It must have been fun tooling around in the $200,000 Bentley and hanging out in the $3.8-million California house Herula bought with investors' money. But did he think federal prosecutors and the investors he scammed would leave him alone to relax and enjoy his riches? Obviously he made a bad bet.

If Herula's case were unique, we all could rest easy now that he's in prison. Unfortunately, dishonest brokers come along with regularity and usually they don't get caught until after investors have suffered serious harm.

The Securities and Exchange Commission charged Raymond James with civil fraud for taking too long to fire Herula. Raymond James says it had adequate supervisory systems but crooks can be difficult to catch.

"When you run a business the size of ours, you can't be 100 percent effective; we get as close as we can," said Chet Helck, president of the parent company, Raymond James Financial Inc. He notes that Herula got away with as much as he did because he worked in concert with a crooked client and he funneled $190,000 to the branch manager who was supposed to be supervising him.

Regardless of how the case turns out, it's clear that investors can't rely on brokerages to protect them.

Herula's victims could have protected themselves with a few simple steps. You should keep them in mind in your own dealings with brokers and other investment advisers:

1. Avoid investments promising outlandish yields. Herula's Brite Business scheme promised a 120 percent return in three months with guarantees to principal. There's no such thing.

2. Make your investments pass the smell test and be especially wary if foreign connections are involved. The transactions Herula touted were complicated deals to make Brite Business' balance sheet look better than it really was. You might find yourself being "invited" to participate in a money transfer of some sort. Most of us have no business venturing beyond plain vanilla stocks, bond and mutual funds.

3. Maintain control of your money. Investors allowed their money to be deposited in Brite Business accounts instead of in their own names. Then Herula sent them phony statements showing the accounts held more money than they did. I recommend checking your account online in addition to scrutinizing the statements that come in the mail.

In 2004, my 99-year-old mother (now deceased) transferred from one Franklin bond fund to another. A notice was sent to the IRS that she had received proceeds from the sale of the first fund when, in fact, she received nothing. The transfer to the second fund was for the exact amount that was in the first fund: $24,167. She had no other income except Social Security and $560 in dividends. Does she need to file a federal income tax return?

Yes. When you exchange one mutual fund for another, it is treated as though the first fund was sold and then a new purchase made. She needs to file a return with a Schedule D showing her basis in the fund shares and calculating whether she had a capital gain or loss.

If you don't have this information, make a good faith effort to reconstruct her basis, which includes any reinvested dividends. Otherwise, the IRS assumes the basis is zero and she owes tax on the full amount of the sale. After you calculate all this, it may end up that she doesn't owe any taxes. The sad part is that if she had not made the transfer, her basis would have been stepped up to market value at her death and you wouldn't have to mess with this.

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 huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified March 22, 2005, 16:31:36]