An SEC advisory admonishes investors to "conduct background checks" on prospective financial advisors. But critics say the agency doesnt have sufficient control over the industry and might as well add: "because the commission won't be protecting you."
To illustrate the importance of vetting planners' marketing claims, the advisory cites the recent case of Michael George Thomas, formerly of Oil City, Pa., who claimed to be an advisor but was never registered anywhere. Authorities say he tried to sell a pooled investment vehicle to high-net-worth clients.
But after promoting himself as a member of Fortune magazines "Top 25 Rising Business Stars" no such list actually exists; the magazine does have a 40 Under 40 list of the most influential business people that has not included him and for lies about his investing history, Thomas agreed to pay the SEC a $25,000 fine and to be banned from the industry for five years. After that time, he is permitted to try to gain permission to work as an advisor again.
FLASHING NEON SIGN
"This guy's conduct has all the hallmarks of a neon sign flashing, Con artist, con artist, con artist, says John Freeman, a former SEC special counsel in the division of investment management who is now a professor at the University of South Carolina School of Law.
"Why did the SEC make such a big point of this?" asks Knut Rostad, president of the Institute for the Fiduciary Standard, which supports an industrywide requirement that advisors put clients' best interests before their own. "The advisor is given a second chance notwithstanding a pattern of false statements. The entire industry is far, far too lenient on clearly false statements and outright fraudulent statements."
Thomas could not be reached for comment by phone or through the website for the Thomas Organization, a firm he says he founded. An SEC spokesman declined to answer any questions about the case or its advisory.
In it, the SEC warns investors: Do not trust someone with your investment money just because he or she claims to have impressive credentials or experience, or manages to create a 'buzz of success.' "
It then urges investors to check the background of advisors by using the Ask and Check section of the SECs investor.gov website. It also directs investors to use FINRA's BrokerCheck, a database that has been recently shown to be incomplete.
Several days ago, FINRA launched a costly promotional campaign, designed by a top ad agency, urging investors to use BrokerCheck to check out their advisors. However, nowhere on the BrokerCheck site does the regulator inform users that the tool often fails to include serious problems about advisors such as pending federal indictments for fraud or ongoing FBI investigations into alleged investor harm.
Thomas lied to prospects by claiming that his own portfolio grew by an average of 40% a year since 2008 when, in reality, it lost money, the SEC says in its administrative case against him. Thomas also allegedly claimed he turned a $600 investment into $6 million when, in fact, he generated losses. And at the time he advertised his enterprise as successful, the commission says, it was insolvent.
Although Thomas' marketing materials described projected returns for the 10 prospective companies in his investment vehicle as conservative, Thomas did "virtually no [due] diligence with respect to the companies and knew that many, if not all, of the investments contained significant risk, including a high likelihood of default," the SEC says.
"Moreover," the commission found, Thomas "failed to warn investors that he had no contracts, letters of intent, or other agreements relating to the 10 companies."
In the end, Thomas' marketing effort failed to attract any investors, the commission says, so no one was defrauded.
As Freeman sees it, the SEC has become too gun-shy as a regulator. "I think the SEC is afraid of its own shadow when it comes to Wall Street and that the public is not being treated the way it deserves to be," he says.
An ex-"advisor" like Thomas should never be permitted to work as a planner again, adds Jack Waymire, founder of the Paladin Research & Registry, a website where consumers can search for advisors Paladin has vetted in exchange for providing personal information to Paladin.
"I think anybody who's got an ethical lapse showing that basically they would scam people should be out," Waymire says.
As of Thursday, Thomas' LinkedIn profile described him as a "private venture capitalist" based in Beverly Hills. It also said he has started 30 companies since 2006. The website for the Thomas Organization still says Fortune magazine included him on the non-existent list of top business achievers.
Despite his persistence in lying to the public even after the conclusion of his SEC case the commission decided that once his bar from the industry elapses, it is "in the public interest to give Thomas another chance to work with clients.
As Freeman sees it, the ruling is indicative of a laissez faire attitude that gave us the crash.
"It's a huge mess," Waymire adds.
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