Money Lost and a Search for Answers

The Miami Herald

September 21, 2003

A million dollars lost in three months. An investor too embarrassed to face his family. Another $800,000 gone in less than three years. A young widow having to change her and her children’s lifestyle. These stories are like many that have come to the fore the past three years as the stock market hit the skids. And as investors start picking up the pieces of their shattered portfolios, many figure that they didn’t get good advice. Or they suspect that their advisors’ interest was conflicted since they worked for Wall Street firms that had underwritten the very stocks the brokers were calling such good buys. Or they fear that representatives of the mutual funds they’d invested in had offered payoffs to the very advisors who had recommended them. In South Florida, Wall Street’s ills have affected a lot of lives. Cary Taylor, 43, had only a few months to set up her future. Her husband, Jeff, an up-and-coming partner at the Miami office of the law firm White & Case, had been diagnosed with leukemia. The couple quickly set up an estate plan, putting all of Cary’s future money into a trust account that would be controlled by professional financial advisors. Jeff Taylor, 38, died in July 2000, five months after being diagnosed. Their son, Jefferson, was 4, their daughter, Carlee, 3. By November, Cary Taylor had put almost $2 million in life-insurance proceeds into accounts at Northern Trust. She made withdrawals to cover the cost of living as she stayed home to care for her children. Eventually, she started a new relationship, even had a new baby and began fixing up a house in the Palmetto Bay area. But her finances were falling apart.

Unsound Advice

With her trust account down 17 or 18 percent, Cary, an office manager for her husband’s law firm before their marriage, sought financial advice. She was told to hang in there. “I knew the stock market was going down, with all the dot-coms exploding,” she says, “but I didn’t know what I was investing in. I’m not that sophisticated, [and] I don’t have time for this. I told them, ‘Don’t bother me with it. Just make the money.’ “And they did the opposite.” Handing over the reins and not looking back can prove a major mistake, says Vern Hayden, former chairman of the National Endowment for Financial Education. Cary Taylor’s lawsuit against Northern Trust alleges that her accounts were heavily concentrated in risky technology and telecommunications stocks. She had about 30 percent in tech stocks, her attorney says. Today, those accounts are worth about $1.2 million. Northern Trust has reduced her withdrawals for living expenses so much that she has taken the children out of St. Thomas Episcopal Parish School. Her husband had worked hard to ensure their enrollment there, she says.

Questionable Creed

“You’re going to a trust company, and it is not merely a motto to them; it is their creed: ‘We protect for generations,’ ” says her attorney, Mark F. Raymond, of the Miami firm of Tew Cardenas Rebak Kellog Lehman DeMaria Tague Raymond & Levine. “Well, they didn’t even protect for the next few years, let alone the next generation that was standing in front of them.” Cary Taylor is suing to gain control of the trust that holds her money. Her lawyer’s firm has three suits going against Northern Trust on behalf of 10 other plaintiffs and, according to Raymond, has been contacted by a dozen potential plaintiffs. What Northern Trust did, Raymond says, was provide the same stocks to many customers regardless of the customer profile or risk tolerance. It also faced a conflict of interest, he says, in that it paid its employees more for selling stocks listed as preferred investments. “As a matter of law and policy, Northern Trust will not discuss a client’s financial affairs, and we do not comment on pending litigation,” says attorney Alex González, of the Miami office of the firm Holland & Knight. He was reading from a prepared statement written in response to The Herald’s request for comment. “However,” he adds, “we can say that the case is without merit and that we intend to vigorously defend our position.”

Whom Do You Trust?

Michael Morse, 35, of Hollywood, used to be an assistant municipal bond broker but had never bought stocks before the bubble market of 2000. That January, he handed over $350,000 to a broker at a local Morgan Stanley office, someone he’d once worked with. By the end of the month, his account had gone up $34,000. “In my mind, Morgan Stanley was a big name,” Morse says. “I just thought that not anyone could work there. They were experts, trained analysts.” He deposited more money, some of it belonging to his grandmother, and persuaded his sister to move her account there. The family, he says, had previously only been invested in municipal bonds. In all, he added $270,926 to his account by June. He also started going out on a limb, buying on margin (borrowing from the brokerage firm to purchase more) until his account had reached the amazing height of $1.2 million – a mere six months after he’d opened it. Things stayed good until November. Then, somehow, $1.2 million turned into $336,000. By December, it was $101,000. Over $1 million seemed to have simply . . . evaporated.

Unwelcome Surprise

Morse says now that he told the broker more than once to sell everything if the portfolio fell below $1 million. The broker didn’t follow his instructions, he says. So Morse started looking into the cause of the collapse. What he found was that much of his account – almost all of it, in fact – was in a single tech stock called Ariba Inc. Then he read online that the largest holder of Ariba shares was none other than Morgan Stanley. Nonetheless, his broker, he says, continued to hand him research reports that painted a positive outlook for the stock. Later, Morse learned that Morgan Stanley had also underwritten Ariba’s initial public offering. It was about that time that his family business, Margaret Morse Tours, organizers of tours to Israel, began declining, the result of escalation in the violence in the Middle East. Soon thereafter, the business closed and Morse changed careers, going into real estate. He had no financial cushion to fall back on. He had lost 30 pounds. He thought of suicide, he says, and became antisocial. He couldn’t even find the nerve to face his family, whose money was also gone. “It’s quite shocking to see how much of a roller-coaster ride stocks had in just one year,” he says. Why didn’t he take charge and tell his broker to stop loading up on Ariba? “I did attempt to,” he says, “but he would say that I had so much buying power that I should use it.” And, he admits, with technology stocks returning 30 to 50 percent a year, investing looked easy. “I thought this was a new dimension,” Morse says in the Plantation office of his attorney, Darren Blum.
“I was just wrong, like a lot of people.” “Had he been diversified,” Blum says, “we wouldn’t be sitting here.”

Accountability

Morse has brought an arbitration claim against Morgan Stanley, charging breach of fiduciary duty, negligence in the handling of his account and negligence in the supervision of his broker. Blum bases the claim, in part, on Morgan Stanley’s participation in a $1.4 billion global settlement over conflicts of interest involving analysts who supposedly researched stocks of companies that were investment-banking clients of their firms. The Herald repeatedly asked Morgan Stanley for comment on Morse’s claim. Morgan Stanley declined. This summer, another arbitration case handled by Blum resulted in a $100,000 award to his client. Blum says it was the first in the nation related to the research settlement.

Warning Signs

Be wary if a broker or financial advisor:

• Guarantees you’re going to make a lot of money
• Insists that an uninsured investment has little or no risk
• Advises you to put all of your money in one investment
• Recommends investments you do not recognize and does not try to explain them clearly or says they are too complicated to understand
• Argues with you or ignores your instructions
• Is vague about the amount of commission or fees he or she will earn
• Asks you to sign any documents you have not fully read or do not fully understand.

Source: Securities Industry Association, www.securityindustry.org

Candace West/Herald Staff Shell Shock: Michael Morse, right, says Morgan Stanley cost his family over $1 million – and the family business. He and Plantation attorney Darren Blum are taking the broker to arbitration.