REPRESENTING ELDERS AND ATHLETES

It wouldn’t seem likely that elders and athletes would have much, if anything, in common.  But they do.  They are frequently blessed with substantial semi-liquid assets, and are therefore the targets of fraudulent or reckless investment schemes.

Much has been written about why professional athletes are frequent victims.  And the last professional athlete I represented possessed many of the following common attributes:

·         Young and inexperienced with finances;

·         Rapidly accumulating substantial wealth;

·         Easily identified as a person with substantial wealth subject to potential investment;

·         Highly focused on meeting the demands of a career requiring singular attention, frequent travel, and unplanned relocations.

As a result, the media is littered with accounts of massive investment losses suffered by current and former athletes.  Some of the statistics are shocking.  For example, from 1999-2002 78 NFL players lost over $40 million to fraud.  According to a Sports Illustrated article, approximately 60% of NBA players are “broke” within five years of their retirement from the league.  And in 2014 former Yankee star Jose Pasada sued two financial advisers that allegedly bilked him of $11 million through real estate and hedge-fund investments.

The National Football League Players’ Association took action in 2002 and created a Financial Advisors Program. The Program required advisers to apply and be screened for approval for inclusion in the program.  But it was not sufficiently robust.  For example, just a few years after the program was initiated, an approved financial adviser lured several active players in to a hedge fund.  The players lost almost $20 million and the adviser was convicted of securities fraud and money laundering.  Moreover, some approved advisers use their NFLPA registration as a marketing tool.  One even suggests that their athlete clients can be free of financial distractions while the adviser constructs a “bulletproof” financial retirement plan.  That type of pitch seems to encourage the very characteristics that lead to the financial victimization of athletes.  Laurence Landsman wrote an excellent article that was published in the National Sports Law Institute’s Journal in 2010.  He called for reforms to the NFLPA program.  And the NFLPA made them in 2012.  Now when will the NBA, NHL, and MLB get on board?

There are strong parallels between the methodology and prevalence of financial exploitation of athletes and elders.  Our firm has represented several elder investors over the years.  And all of us are former securities regulators that witnessed the pace and pattern of financial elder abuse.  Elders frequently have a large accumulation of wealth available for investments, and they are prone to over-trust and over-rely on their financial advisers.

In 2012 Stephen Dunn published in Forbes a list of do’s and don’ts for professional athletes.  They are, however, equally applicable to our elders.  Just a few of them are:

·         An adviser’s trustworthiness is paramount;

·         Invest with advisers associated with a well-established firm;

·         Don’t pretend you are a business mogul.  Kurt Schilling’s saga may be a good tale of caution, and;

·         Avoid complex investment schemes.

And I have one final self-serving but sound piece of advice:  retain an attorney that is independent of your financial adviser and who is also sophisticated in investment matters.  That attorney should be called upon to interface with your adviser and help you evaluate the wisdom and risk of your adviser’s proposals, background, etc.  Food for thought.

1.  https://www.sec.gov/news/pressrelease/2016-83.html
2.  ESPN's "Broke" : https://www.youtube.com/watch?v=Elfw0ESih-A

A SHOT ACROSS THE BOW OF ROBO-ADVISERS

The Massachusetts Securities Division – one of the most active and sophisticated in the nation – recently issued a Policy Statement “to provide its state-registered investment advisers who establish concurrent or sub-advisory relationships with third-party robo-advisers with guidelines on how to best comply with the Massachusetts Uniform Securities act and meet the fiduciary duties owed to their clients.” That may be the longest sentence I have ever written.

So let’s start with the basics: what is a robo-adviser? Generally speaking, a robo-adviser is an online wealth management service that provides automated algorithm-based portfolio advice. Of course, a traditional adviser may also utilize software based data but they typically employ that data in the context of more personalized advice and wealth management or retirement planning. A few examples of robo-advisers in the marketplace today are Covestor, Market Riders, Asset Builder and Flex Score.

The problem, at least as I see it, is robo-advisers dressed up as fiduciaries. Some, and in particular one ubiquitous SEC registered RIA, actually promotes itself as a premium fiduciary with unparalleled individualized portfolio construction. In my opinion, it is not. Not even close. Unfortunately, the SEC has failed to take action against such cynical charades, but the Massachusetts Securities Division is doing what it can do within its jurisdictional constraints.

According to the new Massachusetts policy, any investment adviser registered pursuant to the Massachusetts Uniform Securities act must:

• Must clearly identify any third-party robo-advisers with which it contracts; must use phraseology that clearly indicates that the third party is a robo-adviser or otherwise utilizes algorithms or equivalent methods in the course of providing automated portfolio management services; and must detail the services provided by each third-party robo-adivser;
• If applicable, must inform clients that investment advisory services could be obtained directly from the third-party robo-adviser;
• Must detail the ways in which it provides value to the client for its fees, in light of the fiduciary duty it owes to the client;
• Must detail the services that it cannot provide to the client, in light of the fiduciary duty it owes to the client;
• If applicable, must clarify that the third-party robo-adviser may limit the investment products available to the client (such as exchange-traded funds, for example); and
• Must use unique, distinguishable, and plain-English language to describe its and the third-party robo-adviser’s services, whether drafted by the state-registered investment adviser or by a compliance consultant.

If you want to review the flesh on these bones, click here. Now, if only the SEC, California, Missouri, Florida and… would follow Lantagne’s lead.

84 Year Old Takes on Edward Jones for Unauthorized Trading

An elderly St. Louis man has filed a FINRA arbitration claim against Edward Jones and one of its financial advisers. The elderly client alleges that the financial adviser over-rode his objections to liquidating over a thousand shares of Cigna. Those shares were held in the client’s 401(k) before rolling over to an Edward Jones IRA. The financial adviser informed the client that Edward Jones would not permit him to retain such a high concentration of one share in the IRA once the rollover was completed. According to the client, he didn’t give a damn because he had dedicated his life to his employer, which ultimately became Cigna.

As bad luck would have it, the elderly gentleman had a good thing going with his Cigna shares. But the young FA liquidated almost all of them, using the proceeds to purchase favored mediocre-performing mutual funds. The commissions must have been smashing but the retirement account missed out on approximately $900,000 in appreciation in the Cigna shares.

According to the Statement of Claim, which contains allegations that still must be proven, the FA’s murky self-serving account notes do not jive with what the FA admitted to the elderly gentleman’s wife and daughter. Notably, there isn’t a single piece of paper signed or initialed by the client which evidences his consent to the liquidation of his beloved shares. Wouldn’t you think that is something a broker-dealer would want to obtain as a matter of course? Who knows - maybe you can use discretion in a non-discretionary account, as long as you stick a trade confirmation in the mail. But what if you are a broker-dealer that is willing to change trade confirmations after the fact? Food for thought. And once again folks – these are mere allegations until proven to the satisfaction of a Panel.

For more information regarding unauthorized trading, see Douglas Schulz's article "Unauthorized Trading, Time and Price Discretion & the Mismarking of Order Tickets:" http://www.jurispro.com/files/documents/doc-1066206599-article-2051.pdf

The Use of Social Media for Investment Advice. The Struggle Between Employee Privacy Laws and Investor Protection

The landscape of communication has changed drastically in the past decade.  Information has the capability of widespread reach through the use of various sources.  In particular, social media has become an important channel of communication.  As such, the SEC has recently issued new guidance that allows financial firms to disseminate market related news via social media so long as firms alert investors which social media platforms will be used to deliver such information.  Financial firms’ use of social media must be in compliance with Regulation FD which “requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively…to ensure that all investors have the ability to gain access to material information at the same time.” 

Another emerging issue in the height of social media is employee privacy.  Recently, various states have made efforts to curtail employers’ attempts to monitor employees’ personal Facebook and Twitter accounts.  California, Illinois, Maryland, and Michigan adopted social media privacy laws last year while a similar law in Utah takes effect in May.  Variations of social media privacy laws have been introduced in 35 states since the beginning of 2013.

Securities regulators, however, have requested states to carve out exceptions in such state laws so that certain financial firms can maintain a close watch of the social media accounts of its employees in order to monitor whether personal accounts are being used to give investment advice. Regulators such as FINRA worry that social media networks can create new channels for Ponzi schemes and other frauds and ultimately put investors at risk. According to a survey conducted by American Century Investments, approximately one third of financial advisers use some form of social media several times a week to interact with investors.

Before California’s employee-privacy laws took effect at the start of the year, FINRA and other related groups requested that either the law be vetoed or an exception carved out for financial firms.  California rejected this request.  California’s law prohibits employers from requiring or requesting employees’ to: (1) disclose his or her username or password for the purpose of accessing social media; (2) access personal social media in the presence of the employer; or (3) divulge any personal social media.  Employees cannot be disciplined, terminated, or retaliated against for non-compliance if an employer makes such a request.     

Some state laws provide a narrow exception for employers to conduct legitimate checks of an employee’s personal social media accounts during a formal investigation of an employee’s alleged misconduct.  Nevertheless, securities regulators and financial firms would rather get in front of the issue and monitor employee’s conduct before it rises to the level of a formal investigation or before the potential harm to investors has been done. 

Securities regulators believe current employee-privacy laws are at odds with existing rules that require financial firms to monitor any investment advice that is posted or tweeted by employees.  Financial firms have found themselves between a rock and a hard place when it comes to the issue of employee privacy and compliance with regulations and will likely be faced with deciding whether to violate state law or SEC and FINRA regulations.    

Courts have yet to decide whether FINRA rules will supersede state law on this matter.

For further guidance on how financial firms can work within the bounds of state laws while maintaining its obligations to FINRA contact the experienced attorneys at Cosgrove Law Group, LLC.