An 83-year-old Naples widow bought $50,000 in “principal-protected” Lehman Brothers notes after her financial adviser assured her that her money was 100 percent protected.
Nearly 3 pounds of prospectus materials confirmed that: She’d get at least her investment back, most likely more.
An elderly Connecticut widow also purchased $750,000 in principal-protected Lehman Brothers notes and derivatives. Her granddaughter hoped the investment would help the family matriarch, who moved into a nursing home after her health declined. It also promised a legacy the centegenarian hoped to leave her 19 great-grandchildren and two great-great grandchildren.
But the 105-year-old woman died in September 2008, the same month the 150-year-old investment giant filed for bankruptcy. The widows were among many older investors who jumped at the “secure” opportunity, which came when other investments were offering paltry returns.
They lost nearly every penny of their investments.
This year, Naples-based Vernon Healy law firm filed lawsuits on behalf of both widows, alleging UBS Financial Services Inc. fraudulently misrepresented the safety of the so-called principal-protected notes at a time when it knew of Lehman’s increasing financial desperation.
The lawsuits alleged the promised “100 percent principal protection” was a gross deception. Instead, the notes were nothing more than unsecured loans to the financially faltering investment house, an effort to keep it solvent.
TARGETING BAD GUYS
The widows’ claims are among 50 seeking $13 million that attorneys Chris Vernon and Susan Healy filed against UBS. The law partners joined forces nearly five years ago, years after they met fighting now-convicted hedge fund swindler David Mobley.
It was then they realized they had a common goal: investor fraud.
Tips to save your savings
Here are tips to protect yourself from incompetent and unscrupulous investment professionals.
Investigate your stockbroker. The Central Registration Depository contains a history of almost every registered investment professional, including employment, licensing and some customer or regulatory complaints. Its free report is available through most states and the Financial Industry Regulatory Authority (1-877-649-5394). By typing a broker's name into VernonHealy.com, the firm will help anyone get that information without charge.
Know what your investment professional should do for you. Investigate the brokerage firm that will hold your accounts. Work with one that generates more than $100 million a year in revenue or carries $20 million or more in errors and omissions insurance. Before selecting a smaller firm, ask about its revenues and errors and omissions insurance — and get the supporting paperwork.
Know what your investment should do for you. Your investment professional should:
■ Help define your needs and comfort level in terms of risk and ensure you understand anticipated return.
■ Provide impartial advice, objectively educate you and help avoid investments that are not in your best interests
■ Help you with a long-term investment plan that includes appropriate asset allocation, diversification, liquidity and principal protection
■ Monitor your portfolio and events that could affect your portfolio, promptly advising you about needed adjustments
■ Disclose all compensation and financial benefits they get as a result of your investment or their proposed strategy.
Recognize danger signs. Catching "mistakes" and "miscommunication" on minor matters may help you move your account before you discover they're actually due to incompetence or fraud that can affect you:
■ Lack of adequate and genuine communication once your funds are invested after the initial "sale."
■ Not voluntarily disclosing fees. Your investment professional and firm should provide you with details of all fees that will result from the maintenance of your account and its activity.
■ High fees. Given the low returns nowadays, high fees can affect your returns. Make sure you're choosing, receiving and benefiting from services. High fees may be justified, but investors often pay unnecessarily high fees for services they aren't using — or that aren't competently provided.
Source: Vernon Healy law firm
“We wanted to make a difference in the financial industry to make sure the bad guys were shut down, to make changes in investor regulations,” Healy said as she sat in their conference room in the Fifth Third building on U.S. 41 North. “It’s a real David-and-Goliath fight every time one of our clients goes up against a big Wall Street firm.”
It may not be a big city firm, but being from Naples helps, Healy said: “Some of them don’t see us coming.”
When the pair opened Vernon Healy, they decided they wanted to take helping clients a step further: Their website, VernonHealy.com, educates people about stockbrokers’ and advisers’ scams and abusive practices and even offers a free tool so anyone can investigate a stockbroker’s background.
The website features investment advice: common abuses, how to choose an investment firm, what to expect from arbitration, and links to financial websites. There are stories about their latest lawsuits and wins, the newest scams, and tips on how to avoid identity theft. They even offer to be co-counsel with other attorneys.
“There’s always fraud going on, but when the economy is bad, there’s a lot of fraud,” Vernon said. “There are a lot of people getting taken advantage of out there that we can help.”
In the beginning, nearly all their clients were from Collier and Lee counties. As they accumulated wins, however, their reputation grew, and now out-of-state clients outnumber local clients. Most of the new clients found their website or were referred by lawyers and accountants.
About two years ago, they added a bilingual associate, Victor Bayata, who had interned with them through law school.
“We want to expand our practice into Puerto Rico, South America and internationally,” Vernon said. “During the financial crisis, I got calls from as far away as Russia.”
Just weeks ago, before a trial in Los Angeles, they settled one of their cases against UBS, which sold roughly $1 billion of the Lehman notes, despite being aware of its financial desperation. Last year, the Financial Industry Regulatory Authority punished UBS, fining it $2.5 million and ordering it to pay $8.5 million in restitution to investors.
They can’t say what their clients won during arbitration, but they will say it’s far more than what investors were paid by Lehman in bankruptcy court, about 5 cents on the dollar. The widows’ cases are still pending.
GROWING BEYOND NAPLES
Scam artists, stockbrokers, investment houses, banks — Vernon Healy has gone against them all, representing everyone from savvy bankers and lawyers to senior citizens scammed out of their savings.
Last year, Vernon Healy was featured in an AARP Magazine article, “The Time Bomb in Your Nest Egg.” This year, they were mentioned in Forbes and they were just listed this month in U.S. News & World Report as one of the best law firms in America for 2013.
They’ve been repeatedly named to the Best Lawyers in America ranking. Vernon was named 2013 best lawyer in the Naples and Fort Myers area for securities/capital markets law, commercial litigation and “Bet-the-Company” litigation, so named for lawsuits that can devastate a company. Those are honors he’d received in the past as well.
Healy was named a 2013 Best Lawyers in America for the Naples and Fort Myers area in security law. In December, she was named Collier County Women’s Bar Association 2011 Woman Lawyer of the Year.
But you won’t hear many details about their claims, trials and settlements. That’s because most undergo arbitration through FINRA, the independent Financial Industry Regulatory Agency, which requires details and settlements to remain confidential.
Still, their clients are pleased.
Attorney K.O. Herston of Knoxville said he “didn’t want to reinvent the wheel” on a complicated UBS case by filing a lawsuit for an elderly client, a farmer’s widow who lost more than $300,000. So he turned to Vernon Healy and worked as co-counsel.
“We got a very good outcome for our client,” Herston said of a confidential settlement in August, just before trial. “(Vernon and Healy) knew exactly what happened. They had everything. This is why I went to them.”
WATCHING YOUR POCKETS
So what can people do to avoid being scammed?
The partners advise people that before hiring a broker or adviser, always check the adviser’s background through FINRA or Vernon Healy’s website. Google the broker, too.
“It’s a good thing to check up on your broker every couple of years because you don’t know if they’ve accumulated complaints,” Healy said.
There are products now that are difficult to understand, even for advisers — many of whom were unaware the UBS notes weren’t protected.
“Warren Buffett said he won’t invest in derivatives because he can’t figure them out,” Healy said. “If Warren Buffett can’t figure it out, I know I can’t figure it out.”
He said they still have concerns about “structured notes,” including a concept known as reverse convertibles.
When an investor buys a structured note issued by his or her brokerage firm, it’s essentially an unsecured loan to the firm, which can be used for operations or “however they see fit,” Healy said.
“The major brokerage firms have decided they would rather borrow money from their own clients on an unsecured basis than borrow money from a bank or institutional lender. In our opinion, they aren’t doing this to provide you with a wonderful opportunity, but rather they’re doing it because they can get much better loan terms out of you than they can from a banker or professional lender.”
“The financial industry is effectively using structured products to borrow billions of dollars from Main Street investors with no collateral,” he said.
FRAUD AMONG FRIENDS
One of the most common mistakes the two attorneys see is “affinity fraud.”
“Whether you’re a Rotarian, a Christian, a hard-core tennis pro, you meet this person who turns out to be a con artist,” Vernon said of people telling friends about investment opportunities. “What happens is people let their guard down.”
“ ... Even though your friend may be well intentioned, your friend may not know ‘Joe’ is a bad guy — unless your friend is a financial adviser,” Vernon said. “(Scam artists) all find their way into the country club, the church, civic association, or charity. You’ve got to be careful …”
He breaks down scammers into the two most common: Pleasers, who can’t bear to disappoint people, and sociopaths, who have no empathy for what they do to investors.
“It really doesn’t matter if they’re remorseful or not,” Vernon said. “If my client lost money through negligence or fraud, it hurts just as bad. It hurts their finances — and their families.”