The financial advisory unit of American Express violated its fiduciary duty to clients by providing secret incentives to its sales force to sell poorly performing in-house mutual funds, New Hampshire regulators allege. American Express Financial Advisors reportedly rewarded its sales staff with higher bonuses, more praise and, in some cases, with free one-year leases on Mercedes-Benz cars, for selling the proprietary funds. The New Hampshire Bureau of Securities Regulation investigated the unit's sales practices between 1999 to 2003 and has asked a hearing officer to impose penalties of up to $17.5 million, including restitution.
The complaints are particularly scarring because earlier this month American Express proposed to spin off its financial advisory unit, which analysts value at $10 billion.
New Hampshire regulators said that poor returns from American Express funds hurt investors and that while the firm made an effort to disclose this conflict of interest, it was half-hearted. The disclosures were less detailed and "evolved from nonexistent to vague legalese," according to Mark Connolly, director of the New Hampshire Bureau of Securities Regulation.
The unit also paid its executives handsomely for promoting its funds. For instance, in 2003, Larry Post, group vice president for New England, received more than $1 million in compensation, which included roughly $900,000 in bonuses, some of which were linked to proprietary product sales.