Like many people interested in learning about Wall Street, George L. Forbes spent years educating himself about stocks and bonds. Forbes, head of the Cleveland NAACP and former president of the Cleveland City Council, even sat on a powerful state commission that helped investment firms win contracts to manage hundreds of millions of dollars in assets for the Ohio Bureau of Worker’s Compensation.
Despite his financial prowess, Forbes fell victim to a scam that bilked dozens of investors out of as much as $300 million.
The scam, securities industry officials say, was committed by Frank Gruttadauria, a former manager of a Cleveland office of Lehman Brothers. For more than a decade, Gruttadauria courted wealthy clients and encouraged them to invest millions of dollars with him, according to the Securities and Exchange Commission. When the investments didn’t pan out, Gruttadauria began an elaborate shell game, using money from new clients to replace the failed investments of established clients.
When the scheme finally spun out of control, 44-year-old Gruttadauria disappeared, according to the Federal Bureau of Investigation. That was Jan. 11, 2002. Four weeks later, Gruttadauria turned himself in and pleaded guilty to bank fraud, mail fraud, securities fraud, and identity theft. He’s now serving a jail sentence after he admitted taking $54 million from client accounts without authorization and misappropriating more than $115 million in investor funds over a 15-year period.
Forbes, now 75, put his actual losses “in the area of the low six-figure range.” He is certainly not alone in being duped by an unethical stockbroker. In fiscal year 2005, the SEC received nearly 20,000 complaints against rogue stockbrokers; 700 complaints involved theft of funds or securities.
In another high-profile case, stockbroker Calvin Darden pleaded guilty in August 2005 to defrauding several prominent African American investors, including rapper Nelly and NBA star Latrell Sprewell. New York Assistant District Attorney Elson Ho says Darden defrauded 11 victims out of about $7 million. Darden was sentenced in November to four to 12 years in prison and was ordered to repay approximately $6 million to investors and securities firms.So what should you do if your broker — or your hard-earned money — is suddenly missing? And how can you reduce your chances of getting involved with an unscrupulous stockbroker in the first place? Experts say the key to avoiding both dilemmas is being proactive.
“There is a standard assumption that most people don’t want to get involved,” says Leland Hevner, president of the National Association of Online Investors. “But it is our firm belief that risk is mitigated by knowledge and involvement.”
Start by thoroughly researching any broker, financial planner, or adviser you are considering hiring. Explore the North American Securities Administrators Association Website, www.nasaa.org, or call 888-84-NASAA for a regulator in your state.
State regulators, along with the National Association of Securities Dealers, jointly maintain a database of more than 650,000 stockbrokers and 5,000 securities firms. Known as the CRD, or the Central Registration Depository, the database contains critical information, such as whether a broker has ever been sanctioned or fined for investor wrongdoing. To check CRD records, contact the NASD’s consumer hotline at 800-289-9999, or visit the regulatory arm of the NASD online at www.nasdr.com and use NASD’s “Broker Check” system.
Moreover, anyone identifying himself as an investment adviser or as someone who sells securities
must be licensed and registered to do so — no matter how small or large the firm. Companies with less than $25 million in assets under management must register with the state. Firms with more than $25 million in assets must register at the federal level with the SEC. So any legitimate securities salesperson or investment adviser is going to be registered somewhere.“If you find out that they’re not registered, or if they’re hesitant to give you their CRD or investment adviser number, that should set off alarm bells,” says Bob Webster, a spokesperson for NASAA. “One simple phone call really can save people a whole lot of time, grief, and money.”
A Word To The Wise
It can sometimes be hard to know whether you’re choosing the right investment professional. The CFA Institute (www.cfainsti tute.org) has two helpful online documents that offer solid guidance: “Choosing a Financial Advisor,” and “Managing the Relationship Between You & Your Advisor.”
When it comes to selecting a financial adviser, experts say African Americans may be at particular risk, especially for “affinity fraud.” Affinity fraud involves con artists preying on people who belong to a group or association based on a shared cultural heritage, religious beliefs, or professional and social interests.
Other common scams that investors should be aware of include: advance fee rip-offs (commonly known as Nigerian money scams), pyramid frauds, and Internet investment swindles. In addition, NASD officials encourage investors to follow three basic rules: understand what you’re buying and with whom you’re dealing; invest based only on education and information — not on emotion; and, says Elisse Walter, senior executive vice president for regulatory policy and programs at NASD, “Remember, if it sounds too good to be true, it is too good to be true.”
Many investors, however, shy away from asking potential advisers detailed questions, which is a big mistake. “The relationship between a client and an investment manager is very much built on trust,” says Jon Stokes, senior policy analyst at the CFA Centre for Financial Market Integrity. “You’re turning over all kinds of personal information,” Stokes adds, so if an adviser won’t reciprocate “then that’s a big red flag.”
According to NASAA’s Investors’ Bill of Rights, you have the right to ask for and receive information from a firm about the work history and background of the person handling your account, as well as information about the firm itself. If something goes awry, you also have the right to discuss account problems with the branch manager or compliance department of the firm and receive prompt attention to, and fair consideration of, your concerns.
Should you find yourself a victim of unethical practices or shady dealings, immediately contact authorities at the SEC and officials at the NASD to get an investigation going. The CFA has an enforcement division that monitors the professional conduct of individuals who carry the CFA designation. That division will also investigate complaints and impose disciplinary action against any wrongdoers, according to Stokes.
Forbes took part in a lawsuit against Lehman and subsequently recovered some of his money. Forbes, normally a very conservative investor, says that he didn’t always know which stocks Gruttadauria was buying though he knew Gruttadauria was investing in the high-technology arena. “Would I do it again? Absolutely not,” he says. “But we were in the midst of the dot-com revolution, and I took a gamble. I don’t like to lose $10. But I took a chance.”
The lesson for other investors, he suggests, is to “stick with the companies that made America great. And make sure you go with reputable companies — companies that have been around, that have longevity, and that you think will be here for years to come.”
Even savvy investors like forbes can sometimes get scammed. Follow this advice when choosing a financial adviser:
Always interview at least three prospects.
Get referrals from friends, family members, colleagues, or others you trust. Obtain referrals from the Financial Planning Association by calling 800-647-6340 or visiting ww
w.fpanet.org. The National Association of Personal Financial Advisors (www.napfa.org; 800-366-2732) can give you the names of local fee-only planners in your area.
Ask each individual for Parts I and II of their ADV Form — also known as an Advisor Form. These documents disclose data about the person, such as education, professional certifications, work experience, and regulatory and disciplinary history.
Beware of individuals who constantly name-drop about high-profile people with whom they allegedly do business. Scam artists often try to gain your confidence and lure you into a false sense of security by offering testimonials or telling you about other well-known community members who’ve invested profitably with them.
Always obtain a prospectus or written information about the risks inherent in any investment you’re considering.
Get a clear understanding about how you can exit an investment that goes sour.
Get outside opinions. Seek input from a competent professional outside your group and check whether the individual and his or her company are registered with local and federal securities agencies.