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COMPLY-How lawyers who chase brokers invest their own money

09/26/2013 11:58 AM EDT
Copyright 2013 Reuters

By Suzanne Barlyn

NEW YORK, Sept 26 (Reuters) – Lawyers who fight brokers on behalf of aggrieved investors often see the most sordid side of Wall Street. So it is not surprising that they would be extra-cautious about investing their own money.

In a typical week, these lawyers field calls from people who allege their brokers led them astray or that a long-trusted firm peddled securities that were far riskier than marketing materials suggested.

Many of those claims end up in the Financial Industry Regulatory Authority’s arbitration unit. There the lawyers hear about the inner workings of a brokerage firm – everything from how it developed and marketed the security in question to how much brokers actually understood about what they sold.

Reuters recently spoke to three securities arbitration lawyers who represent investors to find out how they invest. Here is what they said.

Philip Aidikoff, 65, of Aidikoff, Uhl & Bakhtiari, Beverly Hills, California

Notable case: A $54 million ruling against Citigroup in 2011 on behalf of a group of investors for their losses in complex municipal bond funds. It was the largest FINRA award ever on behalf of individual investors, according to Securities Arbitration Commentator Inc.

Investment strategy: Aidikoff says he has long been a conservative investor. “I’ve seen what can go wrong,” he said. “I’m not trying to hit home runs.”

He entrusts his money to the wealth management division of Kayne Anderson Rudnick, a Los Angeles based investment adviser that he pays “far less” than 1.5 percent of the value of his assets – and no commissions. “I don’t have the time or tools to do this myself,” Aidikoff said.

Aidikoff avoids complex securities that he says often camouflage their true risks. Among them: reverse convertibles, a type of short-term note that is linked to the performance of an underlying stock and uses options to boost yields. He also shuns bond funds, because he believes rising interest rates may lead to plunging bond prices and potentially steep losses for investors. “I think they are the next big product to blow up on the horizon,” he said.

Instead, he relies on his advisers to build portfolios made up of individual stocks and bonds. Corporate bonds, for example, represent a large percentage of his individual retirement account, followed by agency and Treasury bonds. (Because retirement funds offer tax deferral, it can make sense to stash high-income securities in them.)

Andrew Stoltmann, 41, of Stoltmann Law Offices, Chicago

Notable case: A $1.46 million award in 2009 on behalf of ex-National Basketball Association star Horace Grant, who claimed that his brokerage firm misrepresented the risks of bond funds it sold. A federal appeals court upheld the ruling last year.

Investment strategy: Stoltmann worked as a broker for a major firm for a few years in the mid-1990s, and that soured him on the industry. “People wouldn’t trust their money to brokers if they knew all the inherent conflicts of interest,” he said.

Among the problems: Brokers earn sales commissions, an incentive that may motivate them to push products that are not appropriate for certain investors. They also take part in sales contests, Stoltmann said.

Stoltmann has his own registered investment advisory firm, but he says he is not actively running it.

For his own money, he opened a self-directed brokerage account at Malvern, Pennsylvania-based Vanguard Group, which is known for its low-fee investments.

He invests in Vanguard’s traditional index funds, whose low operating costs are typically passed on to investors as higher returns, he said. He shifted to exchange traded funds after Vanguard rolled them out in 2001 because their costs are even lower.

His favorites include Vanguard’s Small-Cap ETF, which track the index made up of small publicly traded companies, and the Mid-Cap ETF,, which does the same for midsize companies. “I like the long-term growth prospects of small and mid-cap funds – and I’m a patient investor,” Stoltmann said. “I buy and hold forever.”

Adam Gana, 33, of Gana LLP, New York

Notable case: A $2.8 million ruling in August against a Bronx-based tax preparer and broker who was indicted for running a Ponzi scheme.

Investment strategy: Gana’s nearly 10 years as a securities lawyer have had an impact. “The fact that you see smart people who lose tons of money really starts to scare you,” he said.

Gana trades stocks on his own after researching them in investment publications. One factor he considers: the time it will take for dividends he racks up to equal his initial investment.

He recently sold Apple Inc stock that he bought for $99 per share in 2009, more than quadrupling his investment. (Apple closed at $481.53 on Wednesday). “I made enough, and the market is also saturated with smart phones,” Gana said.

But Gana is skittish about picking individual bonds. For this, he turns to a Morgan Stanley broker whom he found after asking around for references and researching public disclosure records.

Among Gana’s favorites: highly rated municipal bonds that he can hold for the long haul. “They have to be for good projects that are not going to go bust – like bridges in New York,” he said.

Gana gets to hear those bond stories, because he will not give his broker permission to trade without his approval. The lawyer says he tried that but “got too scared.”

Today’s Snapshot:

$102.78 +0.415 69,481 $102.40-103.28 4.32
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09/26/2013 11:48 AM EDT. Quotes delayed at least 15 minutes.

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