You need to ask tough questions, and you don’t have to be afraid of doing so.
That’s the message Arthur Levitt, chairman of the U.S. Securities and Exchange Commission, has been delivering at “town meetings” for investors across the nation.
Levitt, the nation’s top securities regulator, has been barnstorming the country for the past six years talking to investors and impressing upon them the need to ask questions. He spoke recently in Ft. Lauderdale.
“If there is a motivation that brings me to Ft. Lauderdale and other cities around the country it is the fact there are too many gullible investors who will buy from people they have never seen products that are unbelievable and illusory,” Levitt said, including many fraudulent investments touted by strangers over the Internet.
But even when dealing with traditionally “safe” investments such as certificates of deposit, investors need to know what they’re buying.
Many apparently do not. Through Sept. 11, the SEC had received 156 complaints, mostly from elderly investors, about “callable” certificates of deposit, compared to 125 for the previous three full years combined.
These CDs, issued by banks and backed by the Federal Deposit Insurance Corp. but sold by brokerage firms, offer higher yields than regular CDs for a limited time, often one year. After that time, the bank has the right to “call” or redeem the CD, which you can bet it will if interest rates have fallen and the bank can issue a new certificate at a lower rate.
But the investor has no such right and is not allowed to redeem or cash in the CD for many years, often 15 or more. As a last resort, the investor may be able to sell the CD through the broker but may be forced to accept far less than the amount invested, as many people who have complained to the SEC have realized.
“There are investors in their 70s and 80s who buy high-yield, long-term CDs, and they are so enamored with the high yields they don’t focus on other features,” Levitt said. “Investors should not be dazzled by high interest rates but should ask to see the maturity for the CD in writing and not just from some salesman telling them over the phone, and understand the `call’ features,” or how and when the bank can redeem the certificate.
Variable annuities are another area of concern for regulators who worry that investors are not always told about surrender charges and high annual expenses of these tax-deferred investments.
Last month, in what SEC assistant regional director Glenn Stuart Gordon called “a really significant case,” the commission brought its first action against a financial adviser over the “switching” of variable annuities, that is, recommending to clients they liquidate their annuities and use the proceeds to buy new ones.
The complaint, filed against Raymond A. Parkins, Jr. of Orlando, alleges his clients incurred unnecessary surrender charges of more than $168,000 while Parkins pocketed commissions of more than $210,000. Parkins, who could not be reached for comment, will have the opportunity to present his side of the case at a hearing.
Regulators also worry about the seemingly never-ending “pump and dump” scams on the Internet.
In a recent highly publicized case, Jonathan G. Lebed, a 15-year-old from New Jersey, reaped gains of $272,826 by buying shares of thinly traded stocks, then touting them on anonymous e-mail messages and selling them when the stocks rose in price. Without admitting or denying wrongdoing, the boy, a high school junior, agreed to turn over his profits plus interest for a total of $285,000.
“He was 14 when he started doing it, and we caught him at 15,” Levitt sai.
That a 14-year-old could tap the power of the Internet to make more than a quarter-million-dollars in trading profits is amazing. But even more so is that presumably intelligent adults keep buying stocks just because somebody they don’t even know touts them online.
“I want investors to understand the importance of using their heads rather than their emotions,” Levitt said. “I think that with more sources of information, some of which are more reliable than others, the temptations for investors are vastly greater than ever before.” They must be, because since 1998 the commission has instituted 180 major actions against online fraud.
Levitt also has been speaking out on two other issues of importance to investors: the objectivity of analysts who follow stocks and issue “buy” or “sell” ratings, and the independence of auditors who review and certify a company’s financial reports.
“A lot of analysts work for firms that have business relationships with the same companies these analysts cover,” Levitt said. “Some analysts’ paychecks are tied to the performance of their employers. You can imagine how unpopular an analyst would be who downgrades his firm’s best client.”
As to auditors’ independence, the SEC requires that independent auditors certify annual reports filed by companies. Yet, “we’re seeing ever more complicated audit engagements and interwoven business relationships. If people don’t believe the numbers they read, we lose credibility in our markets.”
