More and more employees approaching retirement age are being victimized by unscrupulous brokers who are advising them to retire early, invest their retirement funds with the broker and begin withdrawing those retirement funds under IRS Rule 72(t). The result has often been that the brokers end up earning big fees and the employees end up losing their nest egg. In many instances, brokers are approaching employees at their place of employment and offering “free advice” or “free lunch” seminars, often without knowledge or approval of the employer. At these seminars, employees are advised they can retire early, earn large returns on their retirement funds and make large annual withdrawals under IRS Rule 72(t), which allows investors to withdraw retirement funds prior to age 59 ? if the investors commit to take out the same amount each month for at least five years. These programs often leave the employees penniless. Indeed, in some cases, investors have seen their principal diminish to the point where they have no choice but to go back to work. The Financial Industry Regulatory Authority (FINRA) and other regulatory agencies recognize this as a growing problem and are investigating firms such as Morgan Stanley, InterSecurities, Securities America and Citigroup for inappropriate conduct in this area..
A recent example of these problems involved retirees from Eastman Kodak and Xerox who were advised by Morgan Stanley brokers. Morgan Stanley brokers Michael J. Kazacos and David M. Isabella approached Kodak and Xerox employees by holding free financial seminars. These seminars were often held on the employer’s premises which gave the appearance of approval by the companies. At the seminars, unsuspecting employees were lured into believing that they could retire early, earn large returns and make large annual withdrawals if they would place their retirement funds into a tax deferred account managed by the brokers. These funds were then placed into inappropriate, high-fee investments. Investors have now sued claiming that Kazazos’ strategy had one main goal- to move money in and out of various accounts to generate the maximum amount in fees. The strategy relied heavily on earning large returns, which were never realized. The investors further allege that they were unsophisticated employees who were routinely targeted by “free advice” seminars where they were told they could take out 10% from their portfolios each year and still have a “comfortable income for life.” FINRA is investigating the Morgan Stanley branch in Rochester, NY involved with Kodak and Xerox retirees and has made a preliminary decision to recommend disciplinary action against the brokers along with restitution to investors.
Unfortunately, these types of scenarios are becoming more prevalent nationwide. Retirees with Kansas City Southern, ExxonMobil, General Motors, Ford Motor, Uniroyal, Bellsouth and Sears have been victims of similar investment misconduct by brokers at firms such as InterSecurities, Securities America and Citigroup. In Shreveport, LA, brokers from InterSecurities promised employees of Kansas City Southern that they could earn a 13% return and still withdraw annually an amount equal to their salaries. FINRA determined that these brokers were earning 7.25% on each investment sold to these employees. Four Kansas City Southern employees were awarded $2.1 million. In Baton Rouge, LA, brokers at Securities America promised employees of Exxon Mobil they could earn returns of 18% and still make annual withdrawals equal to their salaries. In 2006, FINRA awarded 32 ExxonMobil employees $13.8 million, one of its largest arbitration awards. Bellsouth employees were told by brokers of Citigroup they could earn 12% returns on their accounts. In 2007, regulators imposed a $3 million fine against Citigroup and ordered $12.2 million in restitution be paid to 200 ex-employees of Bellsouth.
With the number of baby boomers who are approaching retirement, FINRA and other regulators believe the problem will only get larger. In-house benefits managers should be on the lookout for advisors recommending early retirement under 72(t) and FINRA is offering to train corporate benefits managers and financial advisors who run in-house seminars. According to Hewitt Associates, the number of companies who offer investment advisory services to its employees from outside firms is growing and their numbers don’t include the many on-site financial seminars that are taking place without the consent of management. These seminars are even more dangerous because management has not scrutinized them, yet having them on the premises of the employer lends credibility to the presentation. Last year 110 securities firms and branch offices holding free financial seminars were investigated by federal and state securities regulators. Most were found to be making guarantees they shouldn’t have been making such as promising specific rates of return which has prompted further investigations by regulators.
If an investor has become involved with one of these programs or is encouraged to participate in such a program, he or she should contact counsel immediately. These programs involve significant risk for investors.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.