HOW AND WHY THEY ABUSE YOUR CLIENTS
AND WHAT YOU CAN DO ABOUT IT

According to the United States Securities and Exchange Commission (the "SEC"), the government agency in charge of regulating the United States investment markets, "nearly one-third of all U.S. investors are between 50 and 64 years of age and approximately 5 million senior citizens succumb to financial abuse each year." (See attached SEC webpage printout.)

According to the National Association of Securities Dealers ("NASD") the self-regulatory organization of securities broker/dealers (to become the Securities Industry Regulatory Authority, or SIRA):

"Even if you have never been subjected to an investment fraud or sales pitch, you probably know someone who has. Following the legendary Willie Sutton principle, fraudsters tend to go 'where the money is' - and that means targeting older Americans who are nearing or already in retirement. Fraudsters also have in their sights on the millions of baby boomers who have been accumulating sizeable retirement nest eggs through company 401ks and personal accounts."

See attached NASD webpage printout.

According to the North American Securities Administrators Association ("NASAA") the organization of the securities commissioners of the fifty United States and the Provinces of Canada:

"With the first 'baby boomers turning 60 this year, state securities regulators warn today that investment fraud among seniors, which already accounts for nearly half of all investor complaints received by state securities regulators, could grow significantly in coming years.

. . . . .

The survey of state securities regulators shows that an estimated 44% of all investor complaints received by state securities regulators are made by seniors. In addition, the survey found that about one-third or 31% of all enforcement actions taken by state securities regulators involve senior investment fraud.'" See NASAA webpage attached.

According to Investment News, which advertises itself as the "homepage for today's leading financial advisers," "Regulators are turning the spotlight on companies that specialize in using high pressure marketing tactics to sell financial products and services to older Americans." See Investment News article attached hereto.

The bottom line is that your clients, seniors who have worked a lifetime to accumulate a nest egg for retirement, are the prime targets for both outright fraudsters and for the participants in the supposedly reputable financial services industry who put their own financial interest ahead of the interest of their senior clients.

I.    Who Wants Your Clients' Money and How They Are Regulated.

1.1    National banks, federal savings banks and state banks.

Banks are, of course, primarily known for deposit products such as checking accounts, savings accounts, money market accounts and certificates of deposit. All of these deposit products are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per customer.

In addition to deposit products, most banks now, sometimes directly and sometimes through registered securities broker/dealer affiliates, sell all manner of stocks, bonds and other investment products. These products are not insured. Customers, particularly the elderly, are often confused about this. Bank and brokerage affiliate employees, both from lack of knowledge and training and deliberately, often exacerbate this confusion. The result, which is sometimes the intended result, is that your senior clients have bought an investment from their bank that has market risk or even greater risk and they have no understanding that they can lose money.

A third mechanism that the banks use to get your client's money is the Trust Department. Most bank trust departments are no longer interested in small (under $10M) trust accounts. There are, however, still a lot of wills that were written and trusts that were created decades ago which have much smaller amounts of money than that. The banks do not like these small pools of money, because it costs as much to manage one of them as it does a much larger pool. The bank fees are based on a percentage of assets under management, so small accounts are money losers. This means that smaller trust accounts are very likely to be neglected if not abused. Banks have also, from time to time, used the funds that they manage in their trust departments to support their big borrowers, particularly those that are in distress. We saw that happen in the real estate industry collapse in the 1970s. I expect we will see some of that around the collapse of the sub-prime mortgage market in 2007 and 2008.

All FDIC insured banks are regulated and examined by the FDIC. National banks are additionally examined and regulated by the Federal Reserve. Federal savings banks are additionally regulated and inspected by the Federal Office of Thrift Supervision. State banks are regulated by state banking departments. The purpose of all of this regulation is to ensure the financial soundness of banks and the banking system. Protecting investors, particularly investors in other than deposit products, is a very low priority for these regulatory agencies. Except in situations of bank insolvency, little or no help should be expected from bank regulators when a bank has abused your elderly client.

1.2    Life Insurance Companies.

Historically, life insurance companies have sold straightforward insurance products such as whole life and term life. Things began to get somewhat more complicated in the 1970s with the introduction of universal life. In recent times, a plethora of highly complex mixed insurance and investment products have been developed by the insurance industry. These products go under names such as variable universal life (VULs), variable annuities (VAs) and equity index annuities (EIAs). These products (other than EIAs perhaps) can be sold legally only by registered securities brokers and their individual registered representatives who are dually registered in the insurance industry and the securities industry.

These new insurance investment products are investment pools that are similar to mutual funds that are wrapped in an insurance cloak. Historically, most of these insurance products have very high fees and expenses, very long required holding periods and very high redemption fees. To induce investment professionals to sell these undesirable products, the insurance companies pay very high commissions. To justify these undesirable investment characteristics, the financial professionals selling these investments have to promise high returns. That means these products are almost invariably invested in high-risk securities. These products are usually unsuitable investments for senior citizens.

State Insurance Commissioners as well as securities regulators regulate these insurance investments. State insurance laws and regulations are primarily concerned with maintaining the financial soundness of insurance companies. The State Securities Commissioner (usually an elected official) is often deeply in bed with the insurance industry that provides most of his or her campaign contributions. State insurance laws typically provide little or no legal recourse for defrauded investors in these products.

1.3    Mutual Funds.

Mutual funds (also known as investment companies) are corporations that buy investments and manage them for the benefit of their shareholders. According to the Investment Company Institute, the trade association of the mutual fund industry, the total amount of assets held by all U.S. mutual funds is $10.4 Trillion Dollars. This accounts for 48% of the $21.8 Trillion in mutual fund assets worldwide. At the end of 2006, there were 15,638 investment companies.

Among these 15,638 companies, there are mutual funds that invest in any kind of investment that anyone might want (or not want) to invest in. Mutual fund portfolios range from extremely conservative to extremely risky. They vary from extremely broad to extremely narrow and specialized. To have any understanding of what your client is invested in with a mutual fund, you must know what investments that mutual fund is buying. The accepted authority on that question is Morningstar (www.morningstar.com). Mutual funds must publish all of their holdings at least semi-annually.

Not only are the investment portfolios of mutual funds widely variable, their costs and expense also vary widely. The first basic watershed on fees and expenses is the difference between a "load" and a "no-load" fund. Load funds are usually sold by securities broker/dealers who charge commissions that can range from one or two percent up to 5% or 6%. The commissions are set by the funds. Thus, the least desirable funds typically pay the highest commissions to induce brokers to sell their securities. No-load funds are generally sold to investors directly by mail, telephone or Internet or through investment advisers. There is no initial charge for investing in a no-load fund, except that many of the most reputable funds have instituted charges to discourage frequent trading of their shares.

In addition to the loads charged by some funds, all funds charge fees. Incredibly, the fees vary from 0.08% to 3% or 4% of the fund's assets per year. Fees matter greatly. They dampen the gain in up years and severely exacerbate the losses in down years. Over the long term, a point or two differences in fees can result in a 100% difference in the value of an investment. There is a fundamental watershed in the area of fees between managed funds in which a manager picks the investments versus index funds where the fund simply invests in a pre-determined set of securities, such as the S&P 500 index. Index funds tend to have fees below 0.5%. Managed funds tend to have fees above, and sometimes much above, 0.5%.

All mutual funds are regulated as an initial matter by the Federal Investment Company Act of 1940. This act sets down requirements for how mutual funds are to be governed and empowers the SEC to regulate mutual funds. The Investment Company Act of 1940 provides no meaningful private right of action to an individual investor who is unhappy with his mutual fund.

A sub-category of mutual funds that is much in the news today is hedge funds. Hedge funds come in many flavors today, but they all have one thing in common. They are completely unregulated. They do not have to and usually do not disclose what they invest in. They have no regulatory oversight by the SEC or any other governmental agency. They have no self-regulatory organization like the NASD/SIRA. They are the wild west of investing. Only those with the financial clout to demand, and the financial acumen to conduct, a thorough due diligence investigation should even think about investing in a hedge fund.

1.4    Pension Plans.

There are two fundamentally different types of pension plans in the United States, Defined Benefit Plans and Defined Contribution Plans. The difference between the two is that a Defined Benefit Plan guarantees certain pension benefits and the retirement plan and its sponsor take the investment risk. In a Defined Contribution Plan, nothing is guaranteed, and the participant/retiree has the investment risk. The trend is very strongly away from Defined Benefit Plans toward Defined Contribution Plans. Within that overall trend, there is an equally strong trend in Defined Contribution Plans toward giving the participant/retiree more and more discretion and authority about what to do with his investments. Many Defined Contribution Plan participants are ill advised or not advised at all about their investment choices.

All pension plans are subject to regulation by the U.S. Department of Labor. This is one of the few regulators in the financial services industry who will really go to bat for the abused investor. If you run into a pension plan problem, you should immediately contact the nearest office of the U.S. Department of Labor. There also are often securities law remedies for pension plan participants who have been abused.

1.5    Investment Advisers.

Investment advisers are defined as persons who, for compensation, are engaged in the business of advising others regarding the investment of securities. They are regulated under the Investment Advisers Act of 1940 if they have $25M or more under management. They are regulated by state securities commissioners if they have less than $25M under management. Assets under management with registered investment advisers increased from $23.4 Trillion Dollars in 2004 to $26.8 Trillion Dollars in 2005, according to the Investment Advisor Association. On April 5, 2005, a total of 8614 investment advisers were registered with the SEC.

From the standpoint of the investor, the difference between an investment advisor and a mutual fund is that an investment adviser presumably tailors his advice or asset management for the needs of a specific client. A mutual fund, on the other hand, is managing its portfolio with the objective of meeting its stated investment goals. Investment advisers vary in size from huge to one-person shops.

Investment advisers have a fiduciary duty to their clients, just like a trustee. Though the Investment Adviser Act of 1940 provides certain limited remedies to clients who are abused by their investment advisers, reliance on state laws concerning fiduciary duties is usually a better legal basis for recovery.

1.6    Stockbrokers.

The U.S. securities brokerage industry includes fewer than 4000 companies with combined annual revenues over 100 Billion Dollars, according to Hoover's, a Dun and Bradstreet subsidiary. There are large full service financial brokers such as Merrill Lynch, Citigroup Global Markets (formerly Salomon Smith Barney), A. G. Edwards, Wachovia (formerly Prudential Securities and many other companies) and UBS (formerly Paine Weber). There are also big on-line and limited service brokers such as Schwab, T.D. Waterhouse, and E-Trade. There also remain a few regional and even smaller broker/dealer firms. There is additionally a large cadre of "independent" brokers. Independent brokers are typically also registered investment advisers and tend to operate small operations that provide individualized attention and clear their securities transactions through a larger broker/dealer such as Pershing or Fidelity's National Financial Services.

All securities brokers have access to the same stocks on the same markets. They are all regulated by the SEC and are members of and subject to regulation by NASD/SIRA. They are also registered by various state securities commissioners. The purpose of this elaborate regulation is to create an honest brokerage industry. This effort at regulation often fails miserably in meeting this goal.

Many investors' first instinct when they come to accept the fact that they have been financially abused is to contact one of these industry regulators. All of the regulators have elaborate systems for receiving, evaluating, investigating, and sometimes prosecuting the subjects of such complaints. The bad news is that such regulatory activity hardly ever returns any money to the aggrieved investor. Even worse, the regulators almost never tell the complaining investor or his attorney what they have learned in their investigation or what their intentions are.

1.7    Scam Artists.

The world is full of scam artists. They are typically bright, articulate, persuasive and very charming people. If they do not have those personality characteristics, they do not succeed in the scam artist business, and they gravitate to another criminal enterprise. The bottom tier of this category of the financial services industry just takes your client's money and spends it. The next slightly more elaborate method of theft is the Ponzi scheme. Here, the scamster takes money from later investors to pay off early investors and thus develops a reputation for being able to perform his outrageous and impossible promises. The SEC and state regulators shut down hundreds of Ponzi schemes every year.

1.8    The Current Favorite Scams.

According to NASAA, the top ten current scams are:

1) Affinity Fraud. Con artists target religious, ethnic, cultural and professional groups. The scam artist is often a member of the group. The affinity provides an opening level of trust that scam artists are expert at exploiting.

2) Foreign Exchange Trading. This is risky business at best, and is often a Ponzi scheme or other scam when offered to an individual investor.

3) Internet Pump and Dump Schemes. The scamster buys up a bunch of unknown stock, publishes a mountain of false information about how great it is, and sells his stock into this overheated market that he created.

4) Investment Seminars. These will be discussed in detail below.

5) Oil and Gas Scams. These are old standbys that never go away. They always surface more prominently when gas and oil are in the news.

6) Prime Bank Schemes. These promise high yield, risk-free and tax-free returns. Promoters of these schemes offer to let the "little guy" in on what they claim are the financial instruments of the elite that are offered by overseas banks only to the wealthiest investors. Prime banks do not exist. The scam artist has no intention of creating a profit for anyone other than himself.

7) Private (unregistered) Securities Offerings. There are certainly legitimate unregistered securities offerings, but only the financially sophisticated should be playing in this arena.

8) Real Estate Scams. The real estate scam de jour seems to be buying property at foreclosure and tax sales. Get-rich-quick-in-real-estate seminars and rallies are also proliferating.

9) Unlicensed Individuals and Unregistered Products.

10) Sales of "Legitimate" Securities to Person for Whom They Are Not Suitable.

1.9    Credentials.

Everyone in the financial services industry has credentials. Every stockbroker and every banker who has advanced beyond the level of intern is at least a vice president. There is also an alphabet soup of credentials that are designed to look like degrees. Many of these can be purchased over the Internet for a few hundred dollars.

Credentials relating to seniors are particularly proliferating. According to the New York Times, July 8, 2007, "Tens of thousands of financial advisers, working hand in hand with insurance companies to market themselves to older Americans, use impressive sounding credentials like 'Certified Elder Planning Specialists,' 'Registered Financial Gerontologist,' 'Certified Retirement Financial Adviser' and Certified Senior Adviser.'" Many of these titles can be earned in just a few days or a few hours on the Internet from for-profit businesses. They are designed to sound similar to established and widely respected credentials like "Certified Financial Planner" (CFP) that require years of study and difficult examinations and extensive background checks. See New York Times article which is attached.

II.    The Economics of the Financial Services Industry.

The fundamental truth of the financial services industry is that the only way that sellers of, and advisers concerning, investments make money is to take money out of their customers' pockets. There are two basic ways that the financial services industry gets paid. The first is by commissions. The second is by fees. Stockbrokers have traditionally charged commissions on every transaction that they effect for their customers. Commission rates used to be set by a legalized cartel. Since commission rates were freed in the 1980s, they have come to vary widely from hundreds or even thousands of dollars per transaction to pennies per share.

As previously mentioned, load mutual funds charge commissions that they then pay to the brokers who sell their funds. If there is a 6% commission charged for a $1,000 mutual fund purchase, only $940.00 actually gets invested. This is not a loss of $60.00. This is a loss of $60.00 compounded over the life of the investment. The mutual funds' answer to this problem is the "B" Share that, unscrupulous brokers will tell their customers, is a mutual fund that charges no commission. This is literally true, but an economic lie. The fund more than makes up for the commission with the excessive fees that it charges and with redemption charges if the investment does not stay long enough to have the commission recouped by the excessive fees.

Insurance-based products typically have a disclosed commission. Unfortunately, that disclosed commission is only the beginning point for the money they take out of the investor's account. The only way to find out what these hugely complex insurance industry investment products really cost is to do a detailed line-by-line analysis of the 50+ page prospectus. Better yet, have that analysis done by someone who knows how to read the incomprehensible insurance industry gobbledygook. These investments often wind up charging the economic equivalent of 10% or 12% upfront commissions and 3% or 4% per year going forward. They have huge penalties if you try to get your money out before they have sucked out all of their fees.

Another mechanism that the securities industry has developed, with the blessing of the SEC, to suck money out of customers' accounts is the 12b-1 fee. These are monthly fees that are charged, in addition to the operating expenses, the adviser's fee and the initial commission. These 12b-1 fees can be charged by mutual funds and insurance industry investments. To find out about the 12b-1 fee, you must root deeply into the bowels of the prospectus.

The perverse incentives that commissions give to the financial services industry are obvious. Every time there is a transaction, they get to take some of their clients' money. Frequent transactions are almost never a good investment strategy - if for no other reason than the commission costs. The results of the perverse financial incentive provided by commission compensate is brokerage account churning and mutual fund and insurance product switching.

In lieu of or in addition to commissions, much of the financial services industry charges fees. The most straightforward of these are per hour or per project fees charged by investment advisers. More commonly, fees are a percentage of assets under management. Fees are charged by mutual funds, by insurance companies and by investment advisers.

The stockbrokers, not wanting to miss out on this fee bonanza, have created the "wrap fee." For a single monthly fee, typically a percentage of assets in the account, they will allow unlimited transactions. Since a stockbroker (who is not also a registered investment advisor) cannot legally charge a fee for investment advice, they will tell you that they owe no responsibility to the investor because of this fee.

Finally, in addition to fees and commissions, major amounts of money are made in the stockbrokerage industry simply by selling securities at a higher price than when they were bought. This is one thing if you take some investment risk. What the brokerage industry does, however, is buy at a lower price and sell at a higher price virtually simultaneously. This is not possible on an exchange market and is getting more and more difficult on the NASDAQ. This practice has been notorious in the bond market where there is not nearly so much visibility on prices, though there are regulatory efforts under way to make bond prices more transparent. This practice is, and always has been, rampant in the "pink sheet" markets and other markets for very thinly traded securities where there is no instantaneous reporting and publishing of transaction prices.

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