Another scandal on Wall Street: how protected is your account?

Another scandal on Wall Street: how protected is your account? – demise of Kidder, Peabody managing director Joseph Jett underscores importance of monitoring brokerage accounts by individual investors

Gracian Mack

On April 1, Joseph Jett was a black man who had “it goin’ on.” As the managing director and head of the government trading desk at Kidder, Peabody & Co., Jett’s bead on success was so accurate that he earned a 1993 year-end bonus of $9 million. By April 27, Jett’s world had come crashing down around him. According to an arbitration complaint filed by Kidder, executives at the firm claimed that Jett’s rising star status was created by “phantom trades” and that he was siphoning funds out of the firm’s capital reserve account. The complaint was filed with the National Association of Securities Dealers’ (NASD) arbitration unit. Whether Jett or any other Kidder executives were involved in the alleged scheme is still to be determined, but the news has more than one investor spooked.

If the Kidder revelations about yet another Wall Street firm gone sour has you hiding your wallet or drawing your purse strings a little tighter instead of investing through your broker, relax. Fiscal finagling by brokerage or investment bank employees does happen at a rate higher than federal authorities would like, but there are preventive safeguards and punitive remedies that are designed to protect the individual investor.

You should also know that except for price fluctuations and normal risks of the market, most accounts are insured up to $500,000 by the Securities Investors Protection Corp. The SIPC provides the same type of government-backed insurance as the Federal Deposit Insurance Corp. (FDIC) does for bank accounts.

In fact, rather than concentrating on the melodramas of Wall Street greed or theft, you should turn a watchful eye toward your own managed accounts. How about your broker? What kind of relationship do you have with the person entrusted with your cash and financial future? In many ways, it’s like letting someone you trust work on your car. A good grease monkey won’t charge exorbitant prices for unnecessary labor or unneeded replacement parts. That mechanic places a value on having your business by acting in your best interest, rather than by taking advantage of you.

Keeping control of your money (and an eye on your broker) begins when you open an account. In most instances, an investment house will require that you sign an agreement to waive litigation and, instead, use arbitration for disputes. Arbitration is a less expensive alternative to litigation. However, if you feel uncomfortable with signing away your right to sue, seek out a firm that does not require such a waiver.

Nonetheless, a broker’s lifeblood rests in commissions. Commissions exist only when there is sales activity. The dollar amount of commissions varies depending on the type of investment, the amount of money invested, the price per unit and the availability of the investment (if actively or inactively traded).

If your broker is earning his or her commission by following your investment instructions, no problem. If your broker is a loose cannon manipulating or “churning” your account for his or her own benefit, however, then you do have a problem. Churning involves excessive trading in an account by a broker to generate fees or commissions at the expense of the investor.

According to NASD, the number of complaints against brokers for account churning has declined to 479 in 1993 from 565 in 1991. However, other complaints, including failure to supervise, negligence, omission of the facts, breach of duty, suitability and misrepresentation, have increased an aggregate 39% since 1991.

Bill Fitzpatrick, a consultant for litigation with the Securities Industry Association, says that computerized monitoring of accounts and account safeguards may be one reason for the decrease in the more obvious offenses.

If you detect any unexplained or unauthorized activities in your account, you can file a complaint with your broker’s supervisor (office manager or compliance officer) or a NASD arbitrator. This may result in NASD’s recommending disciplinary action against the salesperson and recovering of all or part of your invested cash.

One way to check on the reputation of a firm or broker before you invest is to call NASD at 800-289-9999. You can obtain copies of complaints filed against securities industry entities.

COPYRIGHT 1994 Earl G. Graves Publishing Co., Inc.

COPYRIGHT 2004 Gale Group