Consider Investment Decisions Carefully

In 2002, investment brokerage giant Merrill Lynch paid $100 million to the State of New York to settle a case alleging that it had defrauded its retail brokerage customers. The state showed that while the firm’s analysts were making misleading “buy” recommendations to retail customers, the same analysts were sneering at these investments in internal e-mails and other communications. Since then, of course, we have heard countless reports of investment fraud and seen dishonest investment professionals cause the financial ruin of hardworking people from all walks of life.

What is the lesson from this for the average retail investment customer?

• Consider investment decisions very carefully. Do the proper amount of homework to verify analyst recommendations.
• Understand that some brokerages make more money through stock and bond underwriting than through stock sales to retail customers. As a result, some analyst recommendations may be tools to gain highly profitable investment-banking business.
• Be aware of consumers’ rights. Investment firms and brokers have “a duty of due care” to disclose all material facts about investment recommendations and to never lie to customers.
• Understand that federal laws and recent decisions have diminished investors’ rights to recover.

Unfortunately, even big investors who do their homework can fall victim to investment misrepresentations. When municipal bonds defaulted, several mutual fund companies that invested millions in apartment building renovations sued a stock brokerage firm, charging that the brokers intentionally misstated the occupancy levels and conditions of the building.  A jury awarded significant compensation for damages as well as prejudgment interest costs and fees.