In recent years the NASD has fined and censored a considerable number of firms for improperly recommending the purchase of Class B shares of mutual funds. The NASD has disciplined and suspended many brokers and advisers for the same reason. Table Of Contents LET’S DISCUSS THE PROBLEM WITH CLASS B-SHARES CLASS B SHARES SMALL VERSUS LARGE INVESTMENTS BROKERS RECEIVE HIGHER COMMISSIONS FROM CLASS B SHARES SUITABILITY AND CLASS B RECOMMENDATIONS EXAMPLES OF CASES LET’S DISCUSS THE PROBLEM WITH CLASS B-SHARES Frequently, Class A shares of mutual funds are more cost-effective than Class B shares. This is especially the case when the amount of the customer’s investment is in the millions. Unscrupulous and negligent brokers often fail to inform the investor on issues pertaining to breakpoints, expense ratios, commissions, and the contingent deferred sales charge. Improperly, and by virtue of fraud, the broker will place an investor’s assets in Class B shares of a mutual fund, when the...

Last month an arbitration panel ordered the investment firm USB financial to pay over $80 million in consequential investments to Kajeet, Inc., a company that markets cell phones for kids. Kajeet’s award fell short of the $110 million requested but was more than ten times the company’s initial $8 million investment. "This case sends a shot across the bow for Wall Street firms that if they violate securities laws, they can be held liable for consequential damages. According to a recent WSJ article, Kajeet was forced to cut their 60-employee staff by more than half and cost the company a key distribution deal with a well-known retail chain when the action rate securities market froze in February of 2008. Auction rate securities were sold to investors as safe investments that were similar to cash or money market funds that offered higher return rates than long-term debt investments, but when the market froze investors no longer had access to their funds causing a liquidity crisis for...

Yesterday, the New York Times ran an article on its online page questioning the fairness of securities arbitration.  Understanding Conflicts of Interest Among Arbitrators The author of the article, Gretchen Morgenson, was particularly concerned with the process used in selecting the members of the arbitration panel. According to Morgenson, "The problem is that the potential arbitrators are trusted to volunteer their own possible conflicts of interest." (Gretchen Morgenson, When Arbitrators Are Their Own Judges, nytimes.online, August 12, 2007). Wall Street Firms require their clients to sign contracts with mandatory arbitration clauses. This means that if a conflict arises between the customer and the brokerage house, the dispute will be resolved in arbitration, and not a court of law. The Financial Industry Regulatory Authority (FINRA) is the organization that oversees almost all securities arbitration disputes involving customers. FINRA requires a three-member arbitration panel to...

 "Affinity Fraud" occurs when a stock broker or financial adviser gains the trust of the customer by using his status as a member of a group with which the customer is also affiliated. The NASAA (North American Securities Administrators Association) has identified "affinity fraud" as a serious threat to investors. Affinity Fraud Explained During her March 29, 2006 testimony before the Senate, NASAA President, Patricia Struck outlined several cases of senior investment fraud handled by NASAA members, including one case in which a trusted church official operated a Ponzi scheme that victimized a total of 117 friends, relatives and parishioners (mostly seniors) of over $6 million. Affinity Fraud often arises in a church setting or a community group. Two of the fraud victims committed suicide from being so financially devastated by the fraud, testified Struck. The case resulted in a conviction and a 10-year prison sentence. Struck said the case is illustrative of the dangers seniors face...

People who retire early need to tap into their retirement savings at an earlier date. As such they are susceptible to pitches from broker-dealers that guarantee comfortable early retirements. Fleecing of early retirees explained Table Of Contents Ten Percent Tax On Early IRA Withdrawals 72(T) Exception To Tax On Early Withdrawals Depletion Of Principal Substantially Equal Periodic Payments Penalty For Excess Withdrawals Timing During such pitches, the broker or investment adviser may promise high levels of withdrawals and high rates of return. The investor should be wary, as early retirement pitches almost always promise too much. They are frequently laden with fraud and deception. In order to guard against the early retirement ruse, the investor should be informed of the applicable rules. That is the purpose of this article. The following article explains early withdrawals, tax consequences, and the 72(T) exception. Ten Percent Tax On Early IRA Withdrawals As a policy matter, the...

Fidelity Investments, the nation's largest retirement plan manager, is currently involved in a lawsuit involving accusations of 401(k) mismanagement. The employees of Deere & Co., a farm equipment manager in Illinois, claim they were charged undisclosed and excessive fees in connection with their 401(k) plan. Fidelity acts as trustee and record-keeper for the plan and manages the funds offered to the participants.  In December 2006 the employees filed in the US District Court Western District of Wisconsin, naming Fidelity Investments and Deere & Co. as co-defendants. The employees complain about the following: Excessive Fees Indirect fees hidden in the plan structure. Undisclosed revenue-sharing. Excessive fees assessed on a flat percentage of the assets. Failure to inform participants of a "long-standing agreement" with Fidelity to only choose Fidelity funds. This lawsuit is important because Fidelity manages 401(k) plans for a voluminous number of companies.  Here is a...

Mutual funds are the most commonly held investment product. If you want to protect yourself from securities fraud you need to acquire a rudimentary knowledge of mutual funds. A mutual fund is a registered investment company whose business is to invest in stocks, bonds, and other financial instruments.  They offer the advantage of professional money management and portfolio diversification. There are three types of mutual fund shares: Class A, B, and C.  In recent years the NASD has fined and censored a considerable number of firms for improperly recommending the purchase of Class B shares of mutual funds. Frequently Class A shares of mutual funds are more cost-effective than Class B shares. Most disciplinary actions occur when a broker places an investor's assets in Class B shares of a mutual fund when the investor should have been in class A. CLASS A SHARES Class A shares impose an initial sales charge or front-end load, which is taken out of the customer’s purchase price before the...

You can’t start and finish the home-buying process overnight. Rushing through the steps isn’t recommended either, since buying a home is one of the biggest investments of your life. Here Are The 6 Ways To Avoid Mortgage And Insurance Broker Fraud One of the keys to buying a home is financing it. You also don’t want to rush through buying insurance, since good insurance can make or break it for you in a tight spot. But to get the mortgage or insurance you want, you’ll need a trustworthy broker. To avoid getting scammed or employing the services of an unethical broker, take a few precautions. Make sure your broker is properly bonded. To legally operate, mortgage and insurance brokers must buy a bond. Brokers who purchase surety bonds guarantee that you cannot lose money in case they mismanage your money or fail to do their job. Confirm that the broker is licensed in your state. If your broker is in New York, they should hold a surety bond in New York. Search thoroughly for a reputable...