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Shoddy Broker Sales Practices Blamed For Millions In Losses

December 16, 1987

WASHINGTON (AP) _ Small investors needlessly lost millions of dollars in the October stock market crash because of shoddy sales practices prevalent among brokers long before the historic plunge, Congress was told Wednesday.

Nearly half the callers to a toll-free, nationwide investor hotline complained of broker practices that ″were exposed, but not caused, by the events of Black Monday,″ according to the North American Securities Administrators Association.

″It is clear that serious problems in the financial markets existed weeks, months and even years before the Oct. 19 crash,″ James C. Meyer, NASAA president, told the House Energy and Commerce subcommittee on finance.

Brokers have a legal obligation to consider the suitability of a particular investment to their client’s financial situation, Meyer said. Instead, ″the prevailing attitude about investment instruments in the bull market appeared to be: ‘if they sell, you push ‘em’,″ he said.

Representatives of securities exchanges, however, defended the performance of the nation’s markets at a time of historic levels of trading volume and said they were vigorously investigating customer complaints.

Unlike the calls to the hotline, most of the written complaints received by the securities exchanges are a direct outgrowth of the heavy trading and rapid drop of the market, they said. Customers complained of difficulty getting trades executed or said they weren’t given enough time to meet calls on margin loans before their accounts were liquidated.

″The week of Oct. 19 placed demands upon the New York Stock Exchange that most observers would have thought insurmountable. But despite such demands, and recognizing the problems we experienced, the exchange is proud of the way it functioned,″ said Richard A. Grasso, NYSE executive vice president.

NASAA, which represents state and provincial securities administrators in the United States, Canada, Mexico and Puerto Rico, based its conclusions on an analysis of 2,562 calls to a toll-free investor hotline between Nov. 9 and Dec. 4.

The callers suffered projected losses in the Oct. 19 market crash totaling $457 million, an average of $170,000 each. Losses ranged from $62 to $5 million.

The association offered these horror stories:

-Geraldine Herrell, a 54-year-old quadriplegic from Carrollton, Texas, with no job and no income other than a small monthly disability check, said she was encouraged by her broker to enter into a series of exotic option strategies. She lost all but $2,700 of her savings.

-Fred McIntyre, 45, a railroad inspector in Omaha, Neb., traded options with a $150,000 municipal bond account as collateral for margin loans. The crash wiped out his account and left him with a debt of more than $300,000.

-Claude Holloway, 42, a Peace Corps auditor in Washington, had $30,000 invested in the stock market. He said he could not reach his broker by telephone or in person on Oct. 19 despite repeated attempts. He said he succeeded in placing a sell order on Oct. 20, but it wasn’t executed until Oct. 22.

The most common complaint, 29 percent of the hotline callers, concerned problems with brokers executing trades late or getting the trades wrong.

The next most common gripe, 14 percent, centered on brokers who put their customers in unsuitably speculative investments.

Another 14 percent concerned problems with margin accounts, in which investors put up only a portion of the purchase price of securities but are responsible for covering any subsequent losses in value.

A miscellaneous category, accounting for 14 percent of the calls, was dominated by claims that brokers didn’t adequately explain the mechanics and risks of mutual funds and other investments.

Nine percent said brokers misled them about the safety of their investment. Another nine percent said the crash led them to discover their broker was conducting unauthorized trades in their accounts. Eight percent had trouble reaching their brokers and 3 percent had unspecified complaints about sales practices.

Kenneth Liebler, president of the American Stock Exchange, said a series of hotline calls in the midst of a wrenching market drop do not necessarily represent the experience of the investing public in general.

However, the NASAA report said the number of complaints was ″more than sufficient to make observations and draw conclusions.″ The association received calls from all 50 states. California, accounting for 16 percent, had the most, followed by New York and Florida, each with 12 percent.

Meyer, director of the Tennessee Division of Securities, offered these recommendations:

-Raise margin requirements for futures to the 50 percent level now required for stock accounts.

-Require brokers guilty of poor sales practices to disclose their discipline records to customers.

-Offer clear and specific disclosures on the risks involved in margin accounts, futures and options accounts and mutual funds.

-Provide an easily understandable disclosure of arbitration requirements. Many standard contracts with brokers require customers to resolve disputes through industry-sponsored arbitration hearings rather than through the courts.

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