Investors' complaints against financial brokers soar

As reported in the South Florida Sun Sentinel

By Mc Nelly Torres

You don't have to be a big investor to be spooked by the latest Wall Street scandal.

The alleged fraud scheme run by former Nasdaq chairman Bernard Madoff is significant for its size - $50 billion - and scope. But there also are many small investors who fall victims to unscrupulous financial brokers.

In a volatile economy, there's pressure for brokers to perform, and they may urge clients to invest aggressively, industry experts say. They blame market conditions for a spike in the number of arbitration and complaints filed against financial brokers.

Arbitration cases filed with the Financial Industry Regulatory Authority, an industry self-regulatory organization known as FINRA, have jumped 46 percent to 3,469 in 2008 from 2,382 in 2007.

In Florida, consumer complaints filed with the Florida Office of Financial Regulation have increased fivefold to 260 in 2007 from 52 in 2005.

"Market conditions are causing this," said Bill Reilly, chief of the office's bureau of security regulation, which fields consumer gripes.

To handle the surge in complaints, Reilly said the bureau added four new positions last year and is teaching staff to use a new computer system.

If you think your financial adviser or broker has acted unethically, you can file complaints with state regulators or contact an attorney to file an arbitration claim with FINRA. Advocates advise consumers to contact an accountant if they think they've fallen victim to financial fraud.

Jacob R. Froess, a retired mechanic, said he was devastated when he lost $11,744 of his savings last year after a financial broker working with a regional bank chose a risky investment even though he requested certificates of deposit, as he's done for years.

"I had no idea of what to do. I couldn't sleep or eat," said Froess, a Plantation resident who lives on a fixed income. "I didn't know I had options until I saw an ad in the newspaper about attorneys who help people."

Froess, 57, has hired an attorney and filed an arbitration claim with FINRA.

Securities fraud attorney Mark A. Tepper, who is representing Froess said: "These are hard-working people who can't afford to lose money. It wasn't their fault. They trusted a professional who didn't do the right thing."

How do you know your money manager is not the next Madoff?

Prosecutors accuse Madoff of diverting money from new investors to pay old ones, a fraud known as a Ponzi scheme.

Steve Pomeranz, of Pomeranz Financial Management in Boca Raton, said he advised a client against investing with Madoff seven years ago.

"You can't make a positive return every time," he said, noting that he reviewed Madoff's statements showing daily trading gains, which made him suspicious. "It's just not possible. The market is so unpredictable."

Reilly advises consumers to make notes when talking with their broker about a transaction and always call the brokerage firm if they are not satisfied. "A lot of brokers make notes," Reilly said. "And if something happens in the future, it's always good to have them."

South Floridians have been target of Ponzi schemes before.

In 2005, the Securities and Exchange Commission and FBI investigators shut down KL Financial Group, a West Palm Beach hedge fund accused of defrauding wealthy Palm Beach County investors of tens of millions of dollars. In the late 1990s, three people behind the Premium Sales Corp. took more than $250 million from investors, the largest Ponzi scheme in South Florida at the time.

Pomeranz said financial frauds take the worst toll on investors who are in their 60s and 70s.

"The real tragedy here is that some of these people can't replace their money," he said.

Staff Researcher Barbara Hijek contributed to this report.