CW 388: Investment Fraud on Wall Street with John Lawrence Allen Former LA Deputy District Attorney & Author of 'Make Wall Street Pay You Back'

Introduction:

John Lawrence Allen is a securities litigation attorney helping investors recover funds lost through investment fraud or incompetence. He’s a former Los Angeles Deputy District Attorney and author of the new book, “Make Wall Street Pay You Back.” Allen talks about the dirty tricks Wall Street plays and how average people can protect themselves from Wall Street.

Allen also gives some tips for investors before they invest a large sum of money with an advisor or hedge fund. He also shares how financial advisors can mitigate their risk of fraud.

Key Takeaways & Time Stamps:

• (2:20) John Lawrence Allen: background and history of latest book
• (3:06) How Wall Street and the investment landscape have changed over the last 20 years
• (4:06) On the arbitration process
• (7:34) On the laws not being in favor of the consumer
• (11:34) A brief message from Bill Clinton
• (12:13) Causes of action: fraud, incompetence, etc.
• (17:00) The extraordinarily high commissions on life insurance sales
• (19:11) How does the investor know what fees are being assessed by financial advisors?
• (22:08) The length of the FINRA arbitration process
• (22:55) On “simplified arbitration” for small claims
• (24:58) Discussion of other types of fraud, beyond incompetence and excessive commission
• (30:20) Discussion of a managed future deal Jason was pitched on
• (33:30) Some tips on buying gold: always invest in bullion, never numismatic coins
• (38:12) Who claims are usually made against
• (39:42) Jon Corzine, MF Global, & the Insider’s Game
• (44:19) Bad monetary policy forces people to take inappropriate risks
• (45:03) Closing statements

Links:

www.MakeWallStreetPayYouBack.com.

www.Amazon.com to purchase the book: Make Wall Street Pay You Back

Find out more about John Lawrence Allen at www.myinvestorfraud.com.

Bio:

Former Los Angeles Deputy District Attorney John Lawrence Allen represents investors nationwide in securities arbitration. Mr. Allen spent seven years working for two major Wall Street firms and was chief investment officer for two hedge funds. Mr. Allen pens a blog on impactful subjects that affect all of us and is a respected legal expert who provides insightful commentary on national TV, radio and print.

Audio Transcription:

ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.

JASON HARTMAN: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, and thank you so much for joining me today. We’ll be back with today’s guest or segment, in just a moment.

[MUSIC]

JASON HARTMAN: It’s my pleasure to welcome John Lawrence Allen to the show! He is a securities litigation attorney, helping investors recover funds lost through investment fraud or incompetence. He’s a former Los Angeles Deputy District Attorney, and the author of a new book, entitled, Make Wall Street Pay You Back. And of course you know over the years I’ve said with some degree of sarcasm, that Wall Street is the modern version of organized crime, and my Commandment #3 for successful investing is, maintain control, because when you don’t maintain control, you leave yourself susceptible to three major problems. Number one, and we’re gonna address that during the interview with John today, you might be investing with a crook. Number two, you might be investing with an idiot. And so we’ll address those two. And number three, even if they’re honest, even if they’re competent, they take a huge management fee off the top for managing the deal. So, we’ll kind of dive into this. John, welcome. How are you?

JOHN LAWRENCE ALLEN: I’m good. How are you today?

JASON HARTMAN: Good, good. Well, it’s great to have you. And just to give our listeners a sense of geography, where are you located?

JOHN LAWRENCE ALLEN: My office is in White Plains, New York. I used to have an office in California and midtown Manhattan, and I’ve now moved out to the Connecticut countryside to work in White Plains.

John Lawrence Allen: background and history of latest book

JASON HARTMAN: Fantastic. Well, tell us about your background, and how you came to write the book.

JOHN LAWRENCE ALLEN: Well, I wrote my first book, Investor Beware, 20 years ago. And that was—actually, more than 20 years, I guess it’s been now. Almost 25 years ago. And that was the result of having been in the industry. I spent 7 years on Wall Street, and I invented an arbitraged [unintelligible] program. That’s how I went into Wall Street. And I got very, very dissatisfied with the [unintelligible], and the outright unethical activity I saw around me. And it got so bad that I quit, and I wrote my first book, Investor Beware, to help people protect themselves from the way Wall Street operates. But over the last 20 years, the entire investment landscape has radically, radically changed. And the entire way brokers do business has changed. And if investors aren’t aware of these changes, they may very well end up becoming victims of the Wall Street community.

How Wall Street and the investment landscape have changed over the last 20 years

JASON HARTMAN: You know, when you say those changes, I don’t know what you’re referring to, so I’ll have you tell me. but is one of them—one way that I think large corporations really oppress people, is through the commercial arbitration act. And I know so many years ago in the 90s, when there was a lot of securities fraud in the news—of course, that seems to be an ongoing issue, of course. And, you know, a lot of people have lost money in the stock market. They made some new rules—I don’t know, you know, exactly which agency that came out of. Maybe it was the FCC, or FINRA, I didn’t mean to say FCC, did I say that? The SEC, the Scoundrels Encouragement Commission, as it’s been called. But it is—is that arbitration? Because arbitration, really I think takes away people’s rights quite a bit.

On the arbitration process

JOHN LAWRENCE ALLEN: Well, that’s an interesting—there’s two sides to that coin. Yes, they take away people’s rights. And people don’t know it, but if you have a problem with a broker dealer—that’s, you know, any licensed firm that buys and sells securities for you—if you have a problem with the representative who works at a broker dealer, when you sign your contract with them, you waive your right to a court trial or jury trial. That means, you don’t get to be in front of a group of your peers, you don’t get to have any of the help that you would get in a court room, or in a civil or jury trial. That’s the negative side. But there’s a positive side to it. The positive side is, you’re gonna go into arbitration, which is significantly less expensive, significantly less time-consuming, and far swifter justice than you could ever get in a court. Let’s say you win a court case, and what’s gonna happen? Well, the arbitration—not the arbitration. Securities firm is going to appeal that matter, and you’re gonna get stuck in court for another couple of years. On the other hand, if you go to FINRA—Financial Industry Regulatory Authority arbitration—you’re gonna be in front in a case of $100,000 or more, three arbitration judges, who are gonna rule very quickly, and you’re gonna have a result very quickly. And if you win, they have to pay within 30 days. You don’t have any of the problems of collecting, or appeal, or the lengthy process that’s involved in the court proceeding. And there’s one more positive, I find, in arbitration. That is, if you get into a complex securities case, there are complex issues and facts that the average juror really can’t grasp that well. But these arbitrators are usually business people, and they have a business background, and they understand wrongdoing when they see it, and they’re not afraid to make an award. The one thing that is difficult is to try to get punitive damages. That’s very difficult arbitration. I’ve attained it more than once, I’ve gotten it, but it’s a difficult road to go, to try to get punitive damages. And lastly, you don’t have to get bogged down in a motion practice where a wealthy brokerage company with an unlimited pocket can paper you to death with motions and motions to compel and sanctions and hearings and depositions and request remissions and all the discovery stuff that goes on. None of that’s allowed in arbitration.

JASON HARTMAN: I mean, I’ve been in arbitrations. They have depositions though.

JOHN LAWRENCE ALLEN: Not in federal arbitration. For securities cases. Yes, in civil arbitration, but if you go into a FINRA arbitration, there are no depositions, there are no request remissions, there are no interrogatories. You can do a document request, but it’s very limited, which means that you’re gonna save a great amount of time and a great amount of expense, and a great amount of heartache. So, all in all, oddly enough I actually—when I started, I didn’t like, or I perceived not to like, the arbitration process. But now that I’ve done it for so many years, I think that it’s a good methodology to get swift justice.

JASON HARTMAN: Okay. Well, I don’t want to belabor that one, because it’ll take away from sort of the crux of our discussion, but it’s good to hear your point of view on that. So, the thing you were saying, in terms of the laws not being in favor of the consumer, in this case the investor, is no jury trial, and what was the other one?

On the laws not being in favor of the consumer

JOHN LAWRENCE ALLEN: No court trial. No judge—

JASON HARTMAN: Okay, no court trial at all. So, arbitration. But, were there any other things you wanted to mention there, before I got you on this tangent of arbitration?

JOHN LAWRENCE ALLEN: Well, I just—I think that the cost effectiveness is so overwhelmingly in the—you know what it does? It puts you on an even footing with someone who has an unlimited budget, which you can’t do in litigation unless you’re willing to spend the money to ante up. But in arbitration, you’re on an equal footing with your opponent. And if you have a competent, skilled, highly qualified and knowledgeable attorney who knows the ins and outs of FINRA arbitration, you’ve got a long way towards getting your money back.

JASON HARTMAN: So, that may be different—and again, I don’t want to belabor this arbitration point too much, because there’s other issues, of course. But, it sounds like it’s better, with a FINRA situation, for people that have been defrauded, just lost money because of incompetence on Wall Street. But in a typical arbitration, those arbitrators—I think, I’m pretty sure, they really lean toward the person who put the arbitration clause into the contract, because they view them as repeat customers, and we’ll call it part of the vast Wall—the vast arbitration conspiracy. It blows my mind that AAA, the American Arbitration Association, is actually a nonprofit organization. The fees are enormous. And we all pay taxes to have a public court system. And listen, I’m no fan of prolonged litigation, or litigation at all, but gosh, why do you have to pay for a private court, which in the typical arbitration, probably not FINRA, with what you explained, acts, in my opinion, as a bit of a kangaroo court—especially the fact that these things are confidential. And you get these real estate developers that develop these condo properties and so forth, and you know, they all put arbitration clauses in their contracts. And you can’t do a litigation search on them before you, say, buy a property, to see if they’re a bad apple, if they’ve been sued by hundreds of investors! It’s all hidden from public view. And that just makes me think of a Third World, Banana Republic country where they’ve got these kangaroo courts, and you know, our whole system is based on transparency. At least that was the original idea of it. So, that’s my bone to pick with arbitration.

JOHN LAWRENCE ALLEN: Well, you raise a good point. And I would tend to agree with you. Up until a couple years ago, arbitration had two panel members that were public, and one who actually came from the industry, and it was in many cases biased in favor of the arbitration people, meaning the broker dealers. And I think the statistics, not from me personally, but the statistics generally bear out your concerns. People don’t do all that well in arbitration. They win about half their cases, and of the cases they win, they win about half the money they got back. So, I don’t put that as good odds. That’s not been my experience, but I am very selective in the cases I take, and I put in a great deal of time to win these cases. I understand that you’re not gonna get money from three business people unless you can find a way to emotionally connect your client with them. if you can’t find a way for them to care about your client, they’re not gonna give you anything back. But if you can find a way to develop the cast to find an emotional connection—something that touches them, they’re gonna be far more willing to knock the arbitration—when I say, to go after the broker dealer for fraud.

JASON HARTMAN: Let me take a brief pause; we’ll be back in just a minute.

A brief message from Bill Clinton

BILL CLINTON: Hi. This is Bill Clinton, and I want to invite you to hang out with my friend, Jason Hartman, in my hometown of Little Rock. Jason and his interns, you know I like interns, are having his famous Creating Wealth Seminar and Property Tour here! So drop everything, including Hillary, and go register at www.jasonhartman.com, right now. This event is coming up soon, but, as I like to say, it depends on what the meaning of the word ‘is’ is. See ya there.

[MUSIC]

Causes of action: fraud, incompetence, etc.

JASON HARTMAN: Let’s talk about what are some of the causes of action. I mean, of course fraud is one of them. But you also mentioned incompetence, and when someone has a securities claim, whom is the claim directed at? You know, you’ve got the advisor who works at Merrill Lynch, which in my opinion, or whatever firm, I’m just saying Merrill Lynch because they’re big. But they can work at any firm; Ameriprise, Merrill Lynch, whatever, okay, and I tend to find those advisors are usually just slick salespeople who wear nice suits, okay? Nothing more than salespeople. They have cursory knowledge. Very little real depth of knowledge, usually. Of course I’m making a generalization here, and I apologize to those smart, great, ethical good brokers out there, because there are some. But you’ve got the broker, you’ve got the investment banker, you’ve got the firm. Who are you really—you’ve got the company. There are so many layers to this.

JOHN LAWRENCE ALLEN: Well, let’s talk about that for a second. People don’t know that you can hold a brokerage firm and its registered representative—that’s the stock broker who provides you with a recommendation—for giving bad advice. People think, well, that doesn’t sound right! If he gave me bad advice? I mean, if I get advice, and the stock doesn’t do what he thought, how can he be responsible? And the corollary, or the answer to that, is this. Under the FINRA guidelines, and the Securities and Exchange Commission guidelines, brokers are required to know your risk tolerance, time horizon, financial goals, and anything that can affect your capacity to invest. That means if you’re employed, unemployed, medical problems, but mostly, what they have to do is they have to match the correct product with your goals, objectives, risk tolerance, and time horizon, so that they make a recommendation that’s suitable for you. So, if you’re 35, and have a good job, and you want to take some risk with having 70, 60, 75% of your money in the stock market, probably not bad. The opposite of that is, what if you’re 65 or 70, and you’re retired, and living on your retirement assets, it would not be appropriate for a broker to recommend that you buy a highly speculative stock, or that you have 70 or 80% of your investments in equities, and stocks!

JASON HARTMAN: They seem like they do a pretty—I mean, I’m sure there are brokers out there that do that kind of stuff, but it seems like they do a pretty good job of making all the appropriate disclaimers, and you gotta sign a mountain of paperwork that of course is all written in their favor, and has a zillion disclaimers, and a lot of legalese—I mean, don’t they pretty much cover themselves on that type of stuff usually?

JOHN LAWRENCE ALLEN: The paperwork covers them perfectly fine. But that doesn’t relieve them from their obligation. A broker that makes a recommendation to a customer has a fiduciary duty to that customer to put the customer ahead of the broker. So, let’s say I have a client who wants to make an investment of a couple hundred thousand dollars, and I want to put them in what quote is a suitable investment, based on what they’ve told me about themselves. Unless they put it in a suitable investment, I can make, let’s say, $200,000 investment, maybe I can make $100, $150 in fees. However, if I put them in something that the brokerage company is promoting, or pays a double commission, or is highly speculative, I might be able to charge them significantly more. Let’s say $1000. So, if I can make $1000 on a improper or unsuitable investment, and $100 or $200 on one that’s suitable, that puts in kind of a trap for the broker to say to themselves well you know, I’m really gonna forgo that extra 800 bucks I’m gonna make on this transaction and do what’s right for my client. How many people have the ethical and moral heart to do that?

The extraordinarily high commissions on life insurance sales

JASON HARTMAN: Not a lot of people, certainly on Wall Street. Not a lot. And you know, when you say that, it reminds me of two investments that are really just laden with heavy commissions, from what I understand. One of them is oil and gas, and another is life insurance. The fact that life insurance is even kind of promoted as an investment bugs me in some ways, although the needle might be moving a little bit, for me, on that. But still, I just think it’s insurance. You know? But those—I mean, some of these things have extraordinarily high commissions. I mean, I’ll give you an example of one. One time a life insurance guy came into my office, and he wanted to market his life insurance products as an investment to my investors in my real estate firm. And he slapped down literally a copy of some checks that he earned on some policies that he sold. And one of them was like a $7 million life insurance policy. And I’m not gonna get this exactly right, because I don’t remember, but the check was for like $250,000. I mean, it was insane, how—he says, look, I could split this with you. I’m like, well don’t I have to have a license or something? And he says, well, there’s a way around that. We’ll reclassify the fee. And obviously I didn’t do any deal with him, but I mean, some of these commissions on these things are just extraordinary. On these oil and gas deals? I hear that some of them are like half of the investment amount! You know, if they get an investor to put $100,000 into some oil and gas deal, the salesmen will make 50 grand! Whoa! That’s crazy!

JOHN LAWRENCE ALLEN: Yep. That’s true. And in fact, if you want to go back a little bit further in time, there was a period in the late 80s and middle 90s where Prudential [unintelligible], which, you know, the rock solid, sold 400,000 of its customers $8 billion in phony partnership deals. And those deals, they were making 30, 35, and 40% off the top before the customer saw a single dime.

JASON HARTMAN: Unbelievable. That’s just—that’s just crazy. So, is—so, okay. So, the broker, or the investment advisor, with a registered rep—I don’t know exactly what to call them—but, they steer the investor into something that’s not as good for them, that obviously pays them a higher fee. Right? So, that’s one form of—that’s one actionable thing. Now, how is the investor ever going to find that out though? How does the investor know what the menu of fees is for the things that that advisor has to steer them into, available to them?

How does the investor know what fees are being assessed by financial advisors?

JOHN LAWRENCE ALLEN: Well, that’s a very tough question. And that’s a very good question. And the reason is because on a lot of these products that they’re selling a product, the commission’s in the product, and the customer will never know. So, on that $200,000 example, if the broker makes $5000, you know, a 2½% fee, and that’s in the cost of the $200,000, that means that really 195 of your money actually ever went into the investment. And there’s no way you can know, unless you read the prospectus, or you ask the broker. They’re certainly not gonna volunteer and tell you, oh yeah I’m gonna make 5 grand on this break. And also, that also happens on principle transactions. If you ever buy a stock or a bond, most bonds are sold on principle transactions.

JASON HARTMAN: What is a principle transaction? What does that mean?

JOHN LAWRENCE ALLEN: A principle transaction is where there’s no commission charge. The fee is in the price of the bond.

JASON HARTMAN: Alright.

JOHN LAWRENCE ALLEN: So, as an example, if I call up my broker and say, you know, I want to get a 10-year bond, and let’s say you can get a 10-year bond for 2.3% return per year over the 10 years. So, you buy the bond with this 2.3%. You don’t know what the brokerage firm picked that up for. Let’s say they picked it up for 2%, and they charge you 2.3. That difference in that spread is an enormous markup. It could be many thousands of dollars. So you just don’t know in a principle transaction, and that’s another way brokerage companies can—in fact, I’ve gotta case right now, I have a lady who had a very, very, very substantial portfolio, many millions of dollars, and she was charged over $3 million in markups and fees on bond transactions, and she never knew it, over the course of a 6-year period.

JASON HARTMAN: Wow. Wow. So, $3 million in fees and markups on what—

JOHN LAWRENCE ALLEN: On municipal bond transactions. The safest most conservative of all transactions.

JASON HARTMAN: Right. Yeah, right. And I’ll tell you something. If you ask me, a lot more municipalities are gonna be filing bankruptcy in the future, because there are so many of them underwater. Of course we’ve seen that with Detroit, Vallejo, California, some others. But very interesting. So, $3 million in fees—that is unbelievable! What was the principle investment though? I’ve gotta have some comparison.

JOHN LAWRENCE ALLEN: She had $30 million in municipal bonds.

JASON HARTMAN: So, 10%.

JOHN LAWRENCE ALLEN: In a laddered portfolio that never should have been touched, that had never been—not that—there should not have been any transactions, and in 6 years they traded $120 million with the bonds in her portfolio.

JASON HARTMAN: Unbelievable. That’s just insane. So, she’s in process, right? Did you recover for her yet?

JOHN LAWRENCE ALLEN: We’re in the arbitration process now.

JASON HARTMAN: How long does that take, when it’s a FINRA arbitration? What’s the length of that process?

The length of the FINRA arbitration process

JOHN LAWRENCE ALLEN: Somewhere between 11 and 14 months, on average.

JASON HARTMAN: Okay, alright. And, what is the amount of money—I mean, obviously that’s a large client with some big money you’re talking about, in terms of the investment size, and the investment losses. But, how much does someone need to lose in order to make going to a FINRA arbitration worth it?

JOHN LAWRENCE ALLEN: Well, that’s a good question. I would answer that in twofold. First of all, anybody that wants to seek help should only hire an attorney that would be willing to work on a contingent fee so they don’t end up spending a lot of money trying to get back their losses. That’s item one. Two, there are different levels of arbitration. FINRA, within the last year and a half, has established a new type of arbitration called small claims. They call it simplified arbitration.

On “simplified arbitration” for small claims

JASON HARTMAN: Oh, that’s great. Like small claims court kind of idea.

JOHN LAWRENCE ALLEN: Kind of, but a little different. And that would—for FINRA, small claim is any loss below $50,000. And if you have a loss below $50,000, you don’t—and you go into this simplified arbitration, you don’t even have to appear at a hearing. You submit the entire claim, on paperwork; the respondents, the broker dealer, file an answer, and one arbitrator makes a ruling without you ever having to appear. So it saves you testimony, litigation cost, travel expense, hearing fees, expert testimony. It’s all done in the pleas. Now, you don’t have to do it that way. If the case is $50,000 or smaller, you have a one party, one arbitration chairperson, that’s it. You don’t have a panel of three. You have a panel of three above $100,000. So really, I would say anybody that loses $10,000 or more, even $5000 or more, it’s certainly worth it to pursue it. I don’t think you’d probably get many attorneys to handle a $5000 case. But I’ve developed a methodology to help people with cases between $10 and $50,000, which is on my website, and I take them into the small claims arbitration process, and the whole thing can be done for very, very little money, and the best part is, unlike regular arbitration, small claims are usually resolved in 7 months or less.

JASON HARTMAN: Excellent. So give out your website if you would. That’s a great resource, thank you.

JOHN LAWRENCE ALLEN: Well, my website is the same as my book; the book is Make Wall Street Pay You Back, and the website iswww.MakeWallStreetPayYouBack.com.

JASON HARTMAN: www.MakeWallStreetPayYouBack.com. And you’ve got the small claims information on there, which is fantastic. But then also, for larger losses, they can hire you, or another attorney?

JOHN LAWRENCE ALLEN: Correct.

Discussion of other types of fraud, beyond incompetence and excessive commission

JASON HARTMAN: Okay, good. So, talk to us more about some of the other types of fraud out there. there’s incompetence, there’s, I guess I’ll call it steering to the product that pays the highest commission. What else is there?

JOHN LAWRENCE ALLEN: Well, beyond the suitability issues, which are very numerous, and that expands a lot of things that brokers might do. They might put you in—there’s an example, as I said before, if you’re 70 years of age, you probably shouldn’t be in a 75% stock portfolio. On the other hand, if you’re 75 and they put you on 100% in one investment, and over-concentrate you, that’s not correct, that’s not suitable either. So, it really doesn’t matter what age you are. if a brokerage company takes all your money and puts it in one investment, that’s clearly unsuitable, because if that investment goes down—even Apple, as an example. People do fabulous in Apple, but Apple also had, about six months ago, a 300-point drawdown. And if you had all your money in Apple, you’re hurting! So, that’s another thing they do. Also churning. Churning is where a broker makes excessive buys and sells in your account, without an interest in making you profits, the broker’s interest is in getting as many commissions as they can from your account. And what’s interesting is in a churning case, you could actually—I’ve had cases in churning where the client never knew the account was churned, because they didn’t lose any money! The account was churned for a couple years, they ended up—you know, the stock market was up 30% over a two-year period and their account was flat. They couldn’t understand why. And when I dived into it, I found out, well, it was flat because $200,000 in commissions were paid over that period, and if you hadn’t had the $200,000 in commissions, you would have been up 200 grand, and you would have been up pretty much where the stock market was. So, if a broker