Wall Street's Year of the Bull prompts us to watch for the Pig
Last year was a great one for the stock market, an excellent time for international mutual funds, and a wonderful period for the lawyers and accountants who get paid to figure out new tax laws. It was also a busy year for crooks, con artists, swindlers, and embezzlers. They reminded us again that while most financial-service professionals are honest and government officials steadfast in their pursuit of the nefarious, enough fraud slips through, especially in a bull market where more people want a piece of the action, to require continued vigilance by all investors.
Some of the newest members of the rogues' gallery were profiled recently in an issue of Personal Investing, a newsletter published by Fidelity Investments in Boston. The list, called the Investment Hall of Shame, gives four examples of the need for consumers to open their eyes before opening their checkbooks.
The first and most spectacular member of the group is Ivan Boesky, who was awarded the Grand Scam Award of 1986. While his insider-trading scheme may not have taken money directly out of the pockets of consumers or most investors, his actions lowered the faith many investors have in the soundness of the markets and the financial system.
In the scheme, Mr. Boesky acquired inside information about takeovers and mergers before buying or selling stocks in the companies involved. The day after this was disclosed, the market dropped more than 50 points and prices of some ``junk'' bonds also fell drastically, though both had recovered within a few days.
Boesky turned informer, and Wall Street has been waiting for other important financiers to be implicated. In recent days, rumors have swept Wall Street that a slew of indictments - by some accounts up to 50 - are forthcoming.
Other scams have been less publicized, but they have this advantage: They are easier for the the average consumer or investor to keep away from - if they don't get greedy, ask the right questions, and remember that anything that sounds too good to be true probably is.
The second member of the Hall of Shame was a company called Money Tree Investments Inc., a Phoenix, Ariz., financial planning firm. According to the North American Securities Administration Association, Money Tree promoted a tax shelter called Rex Rabbit, a breed of ``super'' rabbits whose pelts would be sold to major department stores while the meat (supposedly worth $16 a pound) would be shipped to South Korean mercenaries guarding Saudi Arabian oil fields.
Before the Arizona Corporation Commission could stop this scheme, more than $1 million had been invested. The planner was able to return only $50,000 to investors.
The third prize has several recipients: all those mutual fund companies that touted funds of mortgage-backed securities issued by the Government National Mortgage Association. These ``Ginnie Mae'' funds, the promoters claimed, provided high yields - sometimes as much as 16 or 17 percent - and a guarantee by the United States government. Armed with this misinformation, these funds pulled in more than $25 billion in sales last year.
What they didn't tell people was that high yields would tumble when homeowners refinanced high-interest mortgages - which is exactly what happened - and that the government guarantee only protected the bonds against default; neither investors' principal nor interest was guaranteed.
By the end of the year, there was some good news on this front. Massive refinancing had wrung most of the expensive mortgages out of the Ginnie Mae portfolios, so there were no inflated yields for promoters to advertise. Also, investor awareness made it more difficult to advertise Ginnie Mae funds without mentioning some of the risks more prominently.
The fourth prize may help make a case for some sort of broad regulation of the financial planning business, that burgeoning profession that now takes in insurance salespeople, stockbrokers, and bankers, as well as those who offer broad-based financial plans.
Last November, the New York attorney general shut down First Meridian Financial Planning, an Albany firm that allegedly recommended investments in Florida condominiums, rare coins, and artwork - without disclosing that it stood to earn high commissions from these investments.
In addition, the attorney general said, the firm did not impose strict net-worth requirements before accepting clients' money for these fairly risky investments.
Finally, while one of the principals of First Meridian claimed to have financial expertise, his main work experience had been as a toll supervisor on the Massachusetts Turnpike.
Another case involving a financial planner was not mentioned in the Fidelity newsletter, but it also points up the need to look into a financial planner's background very carefully, including a close check of any investments being recommended. In December, the Securities and Exchange Commission suspended a Waltham, Mass., planner. The SEC charged that the owner of Harmon Financial Services sold his clients about $200,000 worth of securities in his own firm at a time when the company was insolvent. The owner, Charles R. Harmon, ``consented'' to the allegations without admitting or denying the charges, while agreeing to abide by SEC regulations in the future.
One troubling aspect of this case is the fact that Mr. Harmon was a member of the Registry of Financial Planning Practitioners, a highly screened group of planners who are also members of the International Association for Financial Planning. Registry members must have several years of planning experience in a wide variety of planning situations. In addition, they must be approved by a panel of planners already in the registry.
The Harmon case, however, should not exclude the registry as a source of qualified planners. But, like all of these fraud and abuse cases, it does illustrate the need to check out investments thoroughly, and the people selling them, before parting with any of your money.
If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.