From the January 2008 issue of Wealth Manager Web • Subscribe!

Law & Order

Shortly after I was quoted in the Wall Street Journal stating that I believe most Americans would be best served by taking their company pension in monthly installments, a securities lawyer contacted me. After asking me to elaborate on my comment, he proceeded to tell me about a series of lawsuits he was working on, and then asked me if I'd ever served as an expert witness Because his particular case involved NASD regulations and many other factors for which I didn't feel qualified as an "expert," I asked what it was he wanted from me. He informed me that he had two other experts to testify on those areas; what he wanted from me was simply my expert judgment on what a financial advisor should have known given these circumstances. With that, I took on my first engagement as an expert witness.

I had worked with individual clients for nearly 20 years--first as a registered representative, then as a wealth manager, and finally as an hourly advisor to middle income clients and do-it-yourselfers. I had also been involved in building our profession through leadership roles in our trade associations. As an advisor, I had of course heard of the type of lawsuits the attorney was handling, but had never been privy to the intricate details. And I never expected to be called on to use my skills in a legal setting.

It turned out that serving as an expert witness has been a very rewarding experience for me on many levels: by helping to correct some injustices, by continuing to learn and be challenged, and to be well paid for my time and effort.

Following is the summary of one of the cases I participated in--public record due to the fact that it ended up in NASD Arbitration--and the major lessons I learned through the process.

Beginning in the mid 1990s a very professional looking, appropriately licensed registered representative started hanging out in the lunch room of several Pacific Bell facilities, especially when the company was undergoing one of its many restructurings. Most of the employees at these facilities started with the company shortly after graduating high school. Nearly 30 years later-- now in their late 40s or early 50s--they were "eligible" for early retirement. Of course, there's a huge difference between being "eligible" to retire and being able to "afford" to retire!

The claimant (that is, the plaintiff) was 48 years old when she retired. Her husband was five years younger, and they were the parents of a thirteen- year-old son. Both were required to work to support their modest lifestyle. They had never owned a home of their own, and they shared one vehicle. The majority of the family's nest egg was tied up in the defined benefit pension plan through the wife's employer. She also had some money in her company's 401(k) plan.

Clearly this "victim" was not a sophisticated investor. In fact, she had no other investments or investing experience. The claimant and several witnesses testified that the advisor (the defendant) had assured them that if they invested their money with her, they would never have to work again--and they would be able to leave an inheritance to their children. Unfortunately, the claimant made the mistake of trusting someone she thought was the competent, objective financial advisor she held herself out to be. How could the claimant have known that the advisor was either ignorant or a liar!

The advisor failed to warn the client that she could not afford to stop working, and that if she took the early retirement option, she would have to find employment elsewhere. Instead, she was told that if she invested her lump sum pension distribution and 401(k) assets with the advisor, the earnings would be enough to replace her paycheck and leave an inheritance to her son.

To fund this early retirement cash flow, the advisor "introduced" a loophole in the tax code which allows retirees under the age of 59 1/2 to tap into their retirement nest egg penalty free--the 72(t) Substantially Equal Distributions clause. Unfortunately, the initial withdrawal rate of nearly 9 percent per year was not sustainable under any circumstance. That is on top of the nearly 2.50 percent annual expenses on the variable annuity. (Any competent advisor would see that coming!) In some years, the withdrawal rate exceeded 20 percent. Within seven years--by the time the client had reached the age of 55--the account was nearly depleted. Even then, the advisor testified, she felt the market would recover and "it" was still going to work out.

If the client wanted to take the early retirement option, the advisor--the so-called "retirement specialist"-- should have made certain that the client was fully aware she would have to obtain other employment to meet her living expenses for the next 15 or 20 years, until she could "afford" to tap into her retirement nest egg. She also should have been advised of the pros and cons of rolling over her defined benefit pension plan. The lump sum distribution caused her to give up a 100 percent PBGC guarantee. She could have rolled over her 401(k) plan assets to the advisor (the only way this advisor could be compensated) to invest appropriately within an IRA account, deferring distributions from these accounts until her ultimate retirement in her 60s.

On Nov. 4, 2007, Kathy Chu of USA Today wrote an article headlined "The Pitch-- Retire early. The Catch-- Shady brokers." According to the article, unethical advisors are saying anything they have to to get people to retire, so they can get their hands on the money. What was really interesting were the comments USA Today readers posted to the online forum. They ranged from "stupid fools-- you should know better!" to "poor victims--how could the advisor sleep at night?"

Unfortunately, arbitrators sometimes draw the same "stupid fool" conclusions. My job was to remind the arbitrators that anyone who holds themselves out as a professional financial advisor must meet basic standards of practice and conduct. It was not the claimant's fault that she was na?ve about investing and money management. It was not the claimant's responsibility to question the advice rendered by her trusted advisor. The claimant had every right to believe that her advisor was acting in her best interest, providing advice only over areas in which the advisor was competent to give advice, and that the advisor was telling her the truth.

An arbitration hearing involves three arbitrators. One must be from the financial services industry. The chair was an attorney. One of the arbitrators records the hearing on audio cassettes for the record. Arbitrators don't make much money serving the system in this capacity. They are not paid to read documents in advance or to refresh themselves on the facts of the case from day to day, or even over months, as with this case. They are provided with printed copies of all the exhibits which both legal teams use during the hearing. For this case, each arbitrator was provided with eight or nine large three-ring binder's worth of documentation.

The NASD Hearing lasted a total of eight and a half days. During the first five days of testimony, the claimant's attorney laid out "our" case. I drafted a two page summary document, which outlined, in my opinion, what the advisor and her broker/dealer did wrong. This outline became a critical tool in our closing arguments.

Consulting as an expert witness often involves reading stacks of deposition transcripts. What does one party's attorney say went wrong? How does the other party respond?

When I read transcripts of the depositions by all the other parties--supervisors, co-workers, compliance staff, and other witnesses-- it made my blood boil. How could any conscientious financial professional have done the things this advisor was alleged to have done? And how could any conscientious advisor not have followed the basic compliance requirements of their broker/dealer? Moreover, how could any conscientious broker/dealer allow noted deficiencies to continue? The broker/dealer turned a blind eye to the abuses of one of their star producers. According to additional research on the broker/dealer, this was not an isolated offense.

You know that something significant is going on when the arbitrators listen intently, and better yet, take notes. During the first five days of the hearing in November 2006 and the last three and a half days when we resumed in April of 2007, the arbitrators may have briefly reviewed their notes from the first session. The claimant's attorney brought in one more witness to remind the arbitrators of the testimony of other witnesses for the claimant. I immediately followed with more than six hours of testimony. My responsibility was to bring the arbitrators back to the place we left off in April--both factually and emotionally--but that was four months prior, and the details and emotions had faded. I felt an immense amount of pressure, but I was eager to see justice done.

Initially, the advisor's counsel questioned me about my background and qualification as an expert witness. They had scoured the Internet looking for quotes, interviews and testimony to discredit me. When they started pulling out files with my name on them, I was truly surprised; this was not something I was expecting. (If you have any skeletons in your closet that could be used against you in such a case, be sure you disclose them in advance. You don't want to jeopardize a solid case because you're not the right person for the job.)

And the job is hard work! I read hours of depositions and did research for months before the hearing. I spent many hours, on my own time, reading about and preparing myself as an expert witness. During the hearing, the legal team, other experts and I spent very long evenings preparing for the next day. It is emotionally draining work. However, without the diligence of a team of dedicated professionals, all working together for the greater good, such as those I had the privilege to work with on this case, the claimant may not have stood any chance at winning her case--and yes, she did win!

But did we make a difference? Sometimes the only justice is knowing that the correct verdict was rendered, whether in court or in mandatory arbitration. To quote one of the attorneys I've worked with, "We only take on righteous cases and work our asses off to win them."

On Being an ExpertFortunately I was the beneficiary of the expert tutelage of Richard Teweles, Ph.D., retired professor of finance, real estate, and law at California State University at Long Beach. Here is how he would coach a potential expert witness:

Never perjure yourself! If you don't know an answer, say so. Don't guess. If you are giving your opinion, state that fact.

Listen to the question being asked of you and answer that question specifically. Take your time and think before you respond. If you are not exactly certain what is being asked, request clarification.

Remember that all of your notes and research are subject to subpoena.

Never say, "Honestly..." or "to tell the truth..." All of your testimony is to be honest and completely truthful.

Keep your eyes and ears open and stay alert. Watch the other legal team and the arbitrators. The attorney you are working for depends on you to lend your expertise throughout the hearing.


Sheryl Garrett is founder of the Garrett Planning Network and a nationally known speaker, commentator and author.

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