We Shouldn’t Have To Kill Bad Brokers
One of the best-kept secrets in America is that the average American is in graver peril of being swindled than of being assaulted, murdered, carjacked or kidnapped.
Another well-kept secret is that even as it was announced this week that the United States has built the most extensive prison system ever known, with a population probably exceeding that of Stalin’s gulags, state and federal manpower and resources available for detection and prosecution of investment scams and other frauds is chronically unequal to the potential caseload.
Depending on how broad your definition - some people would include companies that entice people into installment credit at unconscionable but perfectly legal rates of interest - swindling ranks somewhere near technology as one of the most vibrant industries in the private sector.
Criminal indictments were brought last week against 11 stockbrokers in 10 states as the government declared civil penalties are no longer adequate to deter stock crooks. Some of the most famous names on Wall Street are currently in civil court, defending sales of derivatives that brought loss and ruin to several companies and one California county.
The U.S. Labor Department discovered a lot of employers have had their hand in the 401(k) money that was supposed to provide a secure old age for their employees.
Scandal has even spread to the municipal bond market. In the last five years, even after the securities scandals that traumatized Wall Street in the 1980s, a disturbing number of blue-chip investment houses have had their names blackened by some of the smelly selling practices of their employees.
And if anybody thinks insider trading went out when Ivan Boesky and Mike Milken went up the river, they will be disabused by Gene Marcial’s splendid book, “Secrets of the Street.” He finds insiders still thrive in a Wall Street that remains “a perfect breeding ground for incestuous and illicit dealings among its daring and incorrigible cast of characters.”
Yet I didn’t catch anything in the “Contract With America” to make the investment jungle any safer. Even as stagnant real estate values drive more unsophisticated households into paper securities, pushing the stock market into the ionosphere, the mood in Congress is for less, not more, protection of their interests.
Under the reform-minded stewardship of Arthur Levitt, chairman of the Securities and Exchange Commission, this could have been a golden age of securities enforcement. But many Republicans want to butcher his budget, and if the SEC survives this session with enough money to buy a new desk it’ll be a miracle.
About the only thing that seems to interest Congress on the securities front is a bill making it harder for shareholders to sue companies that get loose with truth in public disclosures.
There is an alternative to government vigilance. A client in Minneapolis found out his stockbroker, who had worked in good standing for several major Wall Street firms, had taken him to the cleaners by flagrantly churning his account. The client didn’t wait for the SEC. He chopped up the broker and threw the pieces of him in the town dump. It’s a perfect example of the self-correcting, buyer-beware free market at work. If enough brokers get dismembered, fraud will stop. But it’s hardly the way a civilized nation should police its marketplace.
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