When a former enforcement official for the Securities and Exchange Commission says the securities industry “is as dirty as a plumber’s boots,” it’s worth taking note.
Pat Huddleston’s new book, “The Vigilant Investor,” exposes what he says is the ugly side of many brokerages, from the secrets of sales scripts to the dangers of the “free lunch” seminar.
“When I say the industry is dirty, I don’t mean to imply everyone in the industry is dirty,” said Huddleston, who worked at the regulatory agency in the early 1990s. “Only that the industry typically promises something it has no intention of delivering, which is a client-first way of operating.”
The Federal Bureau of Investigation estimates Americans lose $40 billion a year to investment fraud and those losses are not limited to Main Street investors. Pension plans, hedge funds and institutional investors fall victim as well.
In his book, Huddleston tries to educate readers on what they don’t know about how brokerage firms operate and on the red flags that may indicate trouble in their account.
For example, it’s usually a bad sign if you receive a letter from a branch manager that appears to be nothing more than a customer-relations effort, such as, “Hello. I am the branch manager. If you have any questions, call me.” Huddleston said it likely means your account has been flagged by the firm’s compliance computers.
“It means your broker may be mishandling your account,” he said. “The branch manager is required to contact you. It’s called a ‘happiness letter.’
“You think it’s nice. But he’s covering his butt.”
Huddleston, who served as the SEC’s enforcement branch chief from 1990 to 1996, is an attorney and CEO of Investor’s Watchdog, an Atlanta company that conducts securities fraud investigations.
He also serves as a court-appointed receiver in SEC fraud cases.
“The impetus of this book is I felt I could reach more people this way to teach them what I know after two decades in this business about how to spot scams and misconduct,” he said.
While there are many good brokers who work in the securities industry, Huddleston feels they work in a system that is constantly pulling them toward ethical compromise.
“It’s a produce-or-get-out culture,” he said. “It’s not wrong for an organization to set achievement goals for its producers. But (brokers) have to keep in mind what their customers are counting on them to do, which is help them accumulate assets for a comfortable retirement.”
Huddleston recommends being skeptical of American companies whose shares trade only in Canada, which has no federal securities enforcer comparable to the SEC.
He encourages readers to find out how money managers profit with their clients’ money and guides readers to resources they can use to research brokers and firms.