IT'S THE stuff that Wall Street nightmares, and movies, could be made of.
A lawyer passes secret stock tips on to his brother-in-law, but the authorities find out and both end up in deep trouble. A stock broker is accused of acting sort of like Robin Hood, taking money from rich accounts and giving it to accounts where it's needed more.
But this didn't happen on Wall Street, or on celluloid. It happened in Buffalo.
No doubt all this is making some investors sigh and say to themselves: Yes, this is the way it goes. The stock market is a dangerous place -- a real dangerous place.
Of course it is. It's just as dangerous as the rest of the world. You have to be careful out there -- but then again, it's unfair to judge the whole idea of stock market investing, and the entire brokerage industry, on the basis of these two isolated instances.
For the record, then, here's how these two cases fit in the grand scheme of things:
The insider-trading case -- which may well be the first in Buffalo's history -- involved local attorney Henry M. Porter and his brother-in-law, William Wolski. Porter, who did some legal work for Mark IV Industries Inc. of Amherst, was accused of passing inside information about Mark IV's takeover attempts on to Wolski.
The Securities and Exchange Commission accused both Porter and Wolski of profiting from those inside tips to the tune of $115,102. Under a civil settlement with the SEC in which they neither admitted nor denied guilt, Porter and Wolski agreed to return those profits and to pay a fine equal to the profits. Now the U.S. Attorney's Office is considering filing criminal charges against the two men.
This is big news in Buffalo, but in many ways "it's your standard, garden-variety insider trading case," says Jeffrey S. Rosen, a Washington-based attorney
well, sort of
formerly with the Securities and Exchange Commission.
Rosen says the SEC often negotiates civil settlements with suspected inside traders, whereby they pay back their profits and pay an equal amount in fines.
"It's neither very big nor very small" when compared to other insider-trading cases, Rosen says. The SEC has gone after people for trading involving both smaller and larger accounts, and "similar cases have been prosecuted."
Roger M. Deitz, former senior trial counsel at the SEC and a former visiting law professor at the University at Buffalo, adds that it's not at all unusual for a lawyer to be accused of insider trading.
"It happens too often," Deitz says.
It's tough to say for sure, but the case of local stock broker William S. Carroll apparently isn't all that unusual, either.
The Erie County district attorney's office is investigating allegations that Carroll shifted money from some of his clients' accounts to others without permission. Carroll, who worked at the local office of
Prudential-Bache Securities Inc. until last month, stands accused of moving that money to cover shortfalls accrued in accounts where securities were purchased with borrowed cash.
Apparently, hundreds of thousands of dollars disappeared from the accounts of some of Carroll's clients -- money that Prudential-Bache is replacing. Because of this, the DA is considering filing larceny charges against Carroll.
There are no numbers to be found about how many brokers are charged with larceny; to check that, you'd have to contact virtually every criminal prosecutor in the country. But Deitz says: "This sort of thing happens. It's fairly common."
At the same time, it doesn't happen every day. Securities-industry sources say unauthorized "journaling" -- which is what Carroll is accused of -- doesn't seem to happen as frequently as, say, the "churning" of accounts with unnecessary trading. Brokers are more likely to "churn 'em and burn 'em" than to journal 'em.
How likely is it that a broker will abuse his or her clients in some way? God only knows. But don't get the idea that the majority of brokers are out there ready to fleece you.
There are about 275,000 stock brokers in America registered through the National Association of Securities Dealers. Last year, the NASD took disciplinary action on 846 of them, barring 158 from the business.
That, of course, doesn't account for lawsuits or arbitration cases, but the point is clear: Neither the numbers, nor the Porter and Carroll cases, should be used as indictments against stock market investing. Instead, they should merely serve as words of warning.
There will be some cheating in the stock market, just like in any other business. Perhaps you'll encounter some brokers who want to get their hands deep into your back pocket, so don't be naive.
Remember: a broker is a salesman. That's his job. It's your job to decide what you should buy, and from whom you should buy it.
"What you have to beware of is that the dishonest broker is also quite smooth and slick," says Laree Hulshoff, vice president with Shearson Lehman Hutton Inc. of Buffalo. "That's true of dishonest people in medicine and in the law and in banking and in everything else."
So don't just buy from a broker because one calls. Find out a little bit about the broker first. Seek out references -- not just from clients, but from clients' accountants, who actually can analyze what a broker has been doing.
In other words, before you shake hands with your new stock broker, you better know whose hand you're shaking.