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Chapter 1
Road to Recovery
The law does not pretend to punish everything that is dishonest. That would seriously interfere with business.
Clarence Darrow (1857–1938), country lawyer and civil libertarian
A SHARP STICK
From school playgrounds to Wall Street, on every continent, some individuals, without apparent provocation, want to poke you in the eye with a sharp stick. In the financial markets, the attack takes the form of investment misconduct and fraud. The perpetrators are bullies or sociopaths. Perhaps they are strangers, but often they are employees or trusted friends. Through greed, a sense of entitlement, or outright evil, they sharpen the stick, carefully plan the assault, and stalk their prey. Often without any remorse whatsoever, they are joyful in the disfigurement or destruction of innocent victims. This sordid set of facts is the reason I wrote this book.
We are constantly reminded that there is an abundant supply of financial miscreants ever-willing to apply acute focus to a singular purpose (myoptical singularis) and drive that sharp stick of financial misconduct solidly into the eye of their victim.1 In a world where protective measures often fail and an innocent victim suffers monetary damages, recovery is often possible. The process begins with rejecting the status quo. Abandoning a belief in the inevitable is necessary. It is a tedious process and you will be tempted to waffle. Others count on that for their success. But keep in mind, justice can be incredibly satisfying, and monetary relief is a decent outcome as well.
Assuming that being the target of investment misconduct or fraud is distasteful, and an experience that you want to avoid, there are two options: avoid the bullies and sociopaths by staying off the playground, or adopt defensive measures. On occasion, these proactive defensive tactics are effective, but they are not always foolproof. If counterterrorism strategies were altogether successful, then there would be little need for a guide to recovering from investment misconduct. Con artists and schemers are adept at finding a workaround. Financial terrorists are skilled in their craft; therefore, this book is necessary.
As recently as two years ago, recovering from investment misconduct would have been discussed in a very different manner. Even though our society finds value in issuing report cards to first-graders and auto manufacturers, somehow we never held the integrity of our financial markets to the same standard. If we had, the results would have been dismal with failing grades in nearly every area of oversight. However, through a combination of outrage and the recognition that the nation's financial survival was at stake, a benevolent guardian put our failing system on probation with an assignment of remedial work. The opportunity to bring order to consumer advocacy and our financial markets is reflected in part in recent demands for overall fairness. Two years ago, any project related to investment conduct would have focused on a severely flawed industry, under the influence of many individuals lacking any sign of an ethical compass, and regulated by laws and agencies with underwhelming insight and abilities.
DODD-FRANK: THE ENGINE THAT COULD
In the past 24 months, many things have changed, and the next two years, propelled by the engine of Dodd-Frank and uncompromising public sentiment, have the potential to be even more revolutionary. Highly visible individual cases such as Madoff Securities, Marc Drier, and R. Allen Stanford have introduced many consumers, otherwise uninformed, to the red flags related to investment misconduct. Federal and state investigations into product-related investments that were marketed through brokerage firms or agents have intensified and will likely lead to fines, sanctions, and possibly criminal prosecution. And the world of class action suits is no longer confined to medical products and firearms. Large settlements related to securities and investments, launched by experienced legal teams, have been effective.
Even with an undeniable shift in the visibility of investment misconduct, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection legislation is designed to usher in sweeping changes and have a long-lasting impact. The Dodd-Frank moniker, like most congressional efforts, will soon fade from the headlines, but it has the potential to be the catalyst for much-needed change. Along with analyzing the current options for recovery from investment misconduct it is essential to review the impact, and in some cases the absence of impact, of Dodd-Frank.
Much like the benchmark securities acts of the 1930s, there are things in this legislation that financial institutions “can do,” “must do,” and “cannot do.” Through Dodd-Frank, new bureaus, agencies, task forces, advisory groups, and commissioner positions were crafted as watchdog custodians of the process. After a predictably controversial review period, Dodd-Frank has paved the way for much-needed reform.
Along with the new controls, compliance metrics, and consumer advocacy programs, Dodd-Frank has put in motion the mechanism to nullify the clauses in consumer account agreements that limit disputes to arbitration and bar them from civil adjudication. This aspect of Dodd-Frank will be discussed in detail throughout this book. But it must be noted now that this potential development, if ultimately adopted, will be nothing short of revolutionary. As history consistently reminds us, a revolution is often marked by unforeseen challenges. This leads to landmark decisions being made with limited background data, and that disturbs me. Relying on conventional wisdom trumpeted through limited data yields disastrous results.
It is nearly impossible to resist the temptation to jump to the bottom-line conclusion for recovering from investment misconduct. But that temptation, as much as it may abbreviate the process for some, is a disservice to many others. Unfortunately, I often find what I will refer to as the “Hawaiian Muu-Muu Syndrome,” where one size fits all. Just as in the investment advisory process, there is no common denominator that can be applied globally for a one-size-fits-all solution to victimization. Even though you will soon observe that I admittedly have a strong bias related to the best recovery strategy for the majority of victims, I am an avid proponent of full and fair disclosure of all possible options for monetary relief.
Metaphorically, think of recovering from victimization as a duel. You get to choose your weapon. I may have a preference, but I am not the person in the duel, so you need to make the choice. Granted, I know a lot about the weapons and have even employed several, but that does not necessarily mean that I have a monopoly on clarity. It is your neck on the line.
For informed decisions, complicated issues demand a robust examination. Even though the thrust of this book will focus on the most prevalent form of financial dispute resolution, in the spirit of building a firm foundation for all victims, other options will be briefly reviewed.
In approximately 10 hours you will have completed a journey through the odd kingdom of investment misconduct. If the plot unfolds as planned, you will be much better prepared to respond, recover, resist, or possibly retaliate. But first you must take a pledge, the oath of non-acceptance.
REJECTING ACCEPTANCE
Even though estimates are notoriously inexact, the monetary and emotional damages of securities fraud are massive. The aftermath of the deception is more than a minor nuisance. On even the smaller of monetary scales, investment misconduct can destroy businesses and families. And on the level of destruction that we have become all too familiar with, by any reasonable measure, there is a global pandemic of economic terrorism—bullying at its finest. It is a zero-sum game of losers and winners. Indeed for every gain through fraud, there is a realized loss. There is no so-called self-insurance. Every loss related to securities fraud is passed along to someone as a higher cost of goods or services, reduced benefits, or an attack on the financial markets. No individual, country, or community is spared. It is a widespread and costly disease.
As a defining premise, I refuse to accept the notion that anyone “had it coming,” or in some cases, “they should have known better.” During my career as a consulting and testifying expert, I have been engaged by both Claimants (typically investors or employees of brokerage firms) and Respondents (often a brokerage firm or employee).2 I firmly believe that the only universal truth is that there are no universal conclusions inherently associated with all claims. I have had personal experience with frivolous and unreasonable allegations and responses from both sides of the dispute. Thankfully, most advisers, firms, and clients are sincere and honest participants in the all-important process of shared interests.
But in a financial system with tempting access to vast amounts of assets, things do get off track. And in a global society where hundreds of millions of individuals are only a phone call away from banks, securities exchanges, and the potential for unearned riches, for some, investment misconduct is an irresistible temptation. Often lacking any apparent reason other than an overwhelming sense of entitlement, companies and individuals victimize others.
Regardless of motives or naïveté, I have yet to meet someone who proclaims, “Take that sharp stick and poke me in the eye.” If you ignored the red flags associated with investment misconduct and mistakenly made an appointment with financial disaster, this book is the next step in shaking off the disorienting numbness and getting reorganized.3 This reorganization may include monetary damages and even much-deserved justice. Or perhaps it will define the recovery process in a manner that will help you forever avoid making the same investment mistakes again.
In a much more sinister scenario, if you were the unwitting target of blatant fraud and someone made that appointment with disaster for you, you have even more options. But passing time is an enemy of justice. In this circumstance of indecision, recovery is problematic. Memories become less precise. Documents are misplaced. Costs rise as the litigation process drags on.
Without question, the emotional toll of a crisis has a cumulative effect. As a victim, it is critical to shake off the disorientation, reject the inevitability of “bad things happen to good people,” and commit to recovery.
Regardless of the catalyst, reorganization begins with a rejection of the inevitability of victimization. There is nothing fair or inevitable about loss by intentional theft or deception. Through investments connected with some form of security such as common stock, a bond, or a futures contract, if you feel that you have been deceived or manipulated, I hope to provide you with a blueprint for recovery. If there is a financial demon in the room, this book was written for those who are interested in an exorcism.
THE INCALCULABLE THRESHOLD
There is a monetary damages threshold for the practical application of this guide, but it is not altogether quantitative or rigid. In the Association of Certified Fraud Examiners 2010 report on global fraud, the fuzzy nature of fraud metrics is evident:
Measuring the cost of occupational fraud is an important yet incredibly challenging endeavor. Arguably, the true cost is incalculable. The inherently clandestine nature of fraud means that many cases will never be revealed… . Consequently, any measurement of occupational fraud costs will be, at best, an estimate.4
In terms of losses related to U.S. securities fraud, there is a range of estimates from respected organizations such as the North American Securities Administrators to university studies such as Stanford's Class Action Clearinghouse. These sources suggest that annual damages from securities fraud are from $40 billion to $600 billion. But once again those are estimates based on a number or variables and assumptions.
Nevertheless, if a study conducted in 2007 by the Canadian Securities Administrators/Auterité canadienes en valeurs mobi...
