The New York times recently reported on an investment scandal that has cost dozens of Northsiders millions of dollars. Investors are still trying to recoup their losses.
The bad news started in 2010, when Northsider Steve Wyatt, who oversaw $100 million in investments, began experiencing severe losses. Wyatt had worked first for Smith Barney then transferred in 2007 to Morgan Stanley, which has an office in Ridgeland. Office manager Fred Brister recruited Wyatt with a million plus offer. At the time, Wyatt had a great track record.
Wyatt’s reputation as a stock market guru grew. Word spread among Northsiders. Hungry for big returns, investors flooded Wyatt with money. But instead of riches, the hopeful investors got fleeced.
Morgan Stanley blames the losses on repercussions from the financial crisis. Disgruntled investors say Wyatt was engaging in highly risky trading maneuvers that were inappropriate given the nature of his clientele.
Northside attorney Kim Breese has represented numerous Wyatt investors in arbitration procedures under the FINRA, the Financial Industry Regulatory Authority, a private association created by the investment industry.
Large investment firms typically require an arbitration agreement when a client opens an account. FINRA manages this arbitration process. It is the biggest arbitration process in the country, with thousands of arbitrators overseeing 6,000 cases a year. Investors win about half the time.
Critics of this arbitration process say it’s rigged in favor of the industry, since many of the arbitrators are industry professionals. Responding to this pressure, FINRA has been slowly moving toward non-industry professionals as arbitrators.
The Wyatt case is so big that the Mississippi Secretary of State office recently became involved, setting up a reimbursement fund last month for investors.
Mississippi Secretary of State Delbert Hosemann said in a settlement with Morgan Stanley that the company had “failed to reasonably supervise” Mr. Wyatt. “Clearly, they had warning signs — they had indications of personal issues,” Hosemann said of Morgan Stanley. “All of those were either dealt with in a cursory manner or not dealt with at all.”
The settlement barred Mr. Wyatt and his immediate supervisor from the securities industry for life. Morgan Stanley was also instructed to create a $4.2 million fund to reimburse clients, a small part of what customers claim they lost with Wyatt.
One hundred and ninety-four Mississippi accounts are eligible to receive compensation from the secretary of state settlement. Some investors have criticized Hosemann’s settlement for letting Morgan Stanley off light, since actual losses have measured in the tens of millions.
Customers tapping Hosemann’s reimbursement fund must sign a release from pursuing further reimbursement. Hosemann’s settlement acknowledges the state reimbursement fund amounts to no more than 20 percent of the total losses. Attorney Breese believes arbitration is a much better route for investors.
The New York Times reported risky and unconventional investment strategies used by Wyatt. He acted more like a hedge fund cowboy than a prudent stockbroker.
The New York Times reported
“I WILL MAKE YOU A PILE OF MONEY,” he wrote in an email to another client in 2007. “It ain’t gonna be easy and it may seem unorthodox at times but stay with me and do what I say.”
The evidence now being used against Mr. Wyatt in arbitration began to pile up soon after he joined Morgan Stanley.
In his first year, he took the money in some of his clients’ accounts and put it in just two stocks — BlackBerry, the cellphone maker, and Valence, a battery maker that later went bankrupt. Four clients who went to arbitration last year saw their investments in both stocks fall more than 60 percent, according to their records.
Morgan Stanley has said in legal documents that those stock trades were made in accounts that customers controlled. The customers said Mr. Wyatt rarely consulted them before trading and did not ask for approval on the big holdings of BlackBerry and Valence — behavior the Mississippi Secretary of State also noted.
Less than a year after Mr. Wyatt arrived, the Morgan Stanley risk officer in the Mississippi branch had made a handwritten list of “Triggers on Steve” with 10 problems, including trade errors, high fees and significant losses.
Several maxims could apply here: There is no free lunch. A fool and his money are easily parted. Measure twice, cut once. The bigger they are, the harder they fall. Stick to your knitting. If it sounds too good to be true, it probably is. Don’t put all your eggs in one basket. What goes up must come down.
I asked a friend in the investment business a question: Are stockbrokers honest? He answered me thusly: “Ten percent are perfectly honest. Ten percent are totally out for themselves. And the rest are in between.” Sounds about like people in general.
If you let someone else manage your money, you must realize that they can employ various investment strategies that increase their income. It’s just a fact of life.
I am reminded of when the Wall Street Journal used to pick five top stockbrokers and have them compete with darts thrown at potential investments taped to a wall. Half the time, the darts won.
If you put 100 investment gurus in a room and asked them to flip a quarter for two hours, one guy would flip more heads than anybody else. Then everybody would think he had some special skill. Nope. Just random statistics. In a word, luck.
