The NewYork Times (May 15, 2001)
Welcome to America, and to Stock Fraud
By Susan Sachs
When it comes to separating immigrants from their money, few techniques have gone untested.
A century ago, newcomers were cheated by more seasoned compatriots who met the boats from Ellis Island with offers of nonexistent jobs or housing. More recently, they have fallen prey to neighborhood swindlers and miracle-working medicines.
Now, the keystone is that quintessential American dream machine, the stock market.
Over the last few years, an increasing number of immigrants have arrived with substantial savings to start their new lives. But far fewer have come with experience in financial markets or much proficiency in English.
Add to that a tendency to trust completely an adviser of the same ethnic background and the result, say securities regulators, is a rash of recent complaints against registered stockbrokers from devastated immigrant investors and a sharp increase in financial frauds perpetrated by, and aimed at, immigrants.
That type of swindle has become so prevalent, in fact, that the regulators have given it a name- affinity fraud.
The North American Securities Administrators Association, an organization of state officials, calls affinity fraud the second most common investment fraud in the country. Only the unlicensed sale of securities is more prevalent.
“Fraudsters go where the money and the trust are,” said a Securities and Exchange Commission spokesman, John Nestor, “So we see a lot of problems in ethnic neighborhoods where a language barrier separates investors from reliable information.”
“Immigrants are a very vulnerable population,” he added. “People who lack experience with investments aren’t able to distinguish between an investment and a gamble.”
One immigrant investor with such a complaint was Jeong Hee Hong. She had no job, a son in college and life savings of about $200,000 when she met a stockbroker at a party last year.
A recent immigrant from South Korea, Ms. Hong spoke almost no English and knew next to nothing about the stock market. But she felt at ease with the broker, who was Korean-American and , in her own language, reassured her of a comfortable future.
“He told me that even when the market goes down, his clients make money because he has the magic touch,” Ms. Hong recalled recently, speaking through a translator. “At that time, I needed income to live. I kept telling him to be careful because it’s my last life savings.”
The broker, who worked at the UBS PaineWebber branch in Flushing, Queens, offered to fill out all the paperwork in English to open an account. Ms. Hong said she accepted gratefully, not realizing that he would then falsely list her as a speculative investor with 10 years of experience in trading equities, bonds and even options.
Barely seven months later, she was almost broke. Most of her nest egg had been lost on volatile technology stocks that she said were bought and sold without her knowledge. And she had paid out $23,000 in commissions, fees and interest on margin loans she said she never authorized.
Ms. Hong, as well as six other novice Korean investors, have filed a claim for compensation and damages with the National Association of Securities Dealers, which arbitrates disputes between investors and brokers. The brokerage firm has not yet formally responded to the complaint.
The investors, who include factory workers who invested their life savings and students who invested their inheritance, accused the brokers of putting their funds in high-risk investments unsuited to their circumstances and churning the accounts to generate excessive fees and commissions.
Most of their money was invested in technology stocks that later collapsed.
“If these customers went in and were informed about margin, about the kinds of companies these brokers were putting them into, if they had authorized at least some of the stock trades, then you take the loss,” said Christine M. Bae, a lawyer for the Korean investors. “But that’s not what happened.”
The claim names as respondents UBS PaineWebber; the Queens branch manager, Michael Liming Yung; and the brokers Joon Ho Chun, James H. Kwak and Sam Jin.
A spokesman for the brokerage firm, Paul Marrone, declined to discuss the specifics of the claim. “We take our clients’ concerns very seriously and are in the process of reviewing the matters alleged in the statement of claim,” he said. The three brokers, Mr. Marrone added, voluntarily quit PaineWebber in early April.
Despite their handicaps of language and their basic investing ignorance, immigrants have been actively courted, not only by fellow immigrants peddling investment schemes, but also by established brokerage firms looking for new customers through ads in foreign-language newspapers.
But innocence is bad investment strategy for anyone, securities experts say.
“The immigrant community is also far less experienced and sophisticated than Americans,” said Kevin P. Conway, a Manhattan lawyer representing dozens of immigrant investors who have filed complaints against brokers they say duped or misled them.
“Sometimes we ask the client, what did the broker say you could expect in this market?” he added. “And they say, 100 percent. For somebody who has never invested in a regulated securities market and may or not have read a couple of stories about Microsoft going from 2 to 100, it can sound good when someone from your homeland says to you, ‘I can get you 100 percent.’”
Mr. Conway said that one of his clients was a Russian investor who signed up with an unlicensed daytrading firm in Brooklyn that promised to teach clients how to make money in the stock market. The owner of the firm also advanced money to neophyte traders.
The investor did not realize until he had quickly run through his funds that he was borrowing at the equivalent of an annual interest rate of 38 percent.
“Our client was lured in because the ad was in Russian, the person who owned the facility was Russian and the client felt comfortable,” Mr. Conway said.
It is a testament to the power of hope, and perhaps greed, that promises of easy money sway even people who lived through pyramid schemes and stock scandals after the collapse of the Soviet Union.
“An American person, knowing all the tricks of the trade, is suspicious, while a Russian person doesn’t have a chance when confronted with skilled sales technique,” said Henry Shapiro, a financial adviser in Brooklyn who writes frequent cautionary articles about the stock market in the Russian-language press.
“A lot of them don’t know what they’re doing,” added Mr. Shapiro, commenting on the average immigrant investor. “It’s like they are buying lottery tickets. They don’t know how it works but they know it pays out big money every once in a while.”
The ignorance of immigrants has also made them prey to outright fraud at the hands of fellow immigrants.
Affinity fraud victims may be people swindled by members of the same church, ethnic group or profession. But prosecutors and regulators say immigrants have increasingly been the targets.
Federal authorities, for example, charged an Indian immigrant in Texas two years ago with stealing $1 million that people in his church, who also were immigrants from India, had given him to invest. The man fled before he could be arrested.
Last year, in another variation on the theme, Massachusetts securities regulators charged an investment counseling company run by Russian immigrants with imposing excessive fees on its clients, also Russian immigrants.
In a similar case in Kansas, the Securities and Exchange Commission fined a brokerage firm in 1999 for failing to properly supervise a broker who was born in Bangladesh and defrauded clients who were immigrants and foreign exchange students from Bangladesh. The commission also charged Hispanic-run companies with defrauding Hispanic investors in the last year.
Immigrants have also been hurt by foreign exchange and options trading schemes recently. The Commodities Futures Trading Commission has fined two separate Russian and Chinese companies in New York that it says defrauded immigrants from the same ethnic backgrounds. In Los Angeles, as a result of a 1988 commission investigation, a judge ordered a Hungarian couple to pay back $1.1 million to Hungarian immigrant investors defrauded in a commodities futures swindle.
“The cultural affinity issue is very significant,” said Mark S. Herr, director of the New Jersey Division of Consumer Affairs. “In some cultures there is a strong belief that no one is more trustworthy than a family member, and the definition of family gets more stretched in the New World than in the old.”
Yong Ho Lee, a Korean immigrant who runs a small business in New York City, said trust in a fellow Korean was what brought his family to the PaineWebber branch office in Flushing two years ago.
His mother, who lives in Hong Kong, opened an account there because she was acquainted with the parents of one of the Korean-American brokers in the office.
Her aim, said Mr. Lee, was to generate a safe steady income to pay the $6,000 monthly living expenses of a second son, Joung Ho Lee, who is paraplegic. The Lee family is among the complainants in the claim against the brokerage.
“He told us that PaineWebber had a special program that would produce a 12 percent return.” Mr. Lee said, recalling the conversations he and his mother had with the broker.
Instead, the family’s $630,000 initial investment shrank to $120,000 after 13 months of losses on short-term technology stock trades and charges of more than $115,000 for commissions and margin interest.
Mr. Lee, who graduated from an American college, said he was vaguely aware of the activity in the account but hesitated to ask the broker’s supervisor about it.
“At that time I was just starting my company and I didn’t really have the time,” he said. “And with Koreans, you don’t want to go behind someone’s back. It’s not in our culture.”
First Photo; Yong Ho Lee says trusting a fellow Korean led to investment losses for his paraplegic brother, Joung. (Vincent Laforet/The New York Times)
Second Photo; Yong Ho Lee, third from left, and his brother, Joung, left, are among the Korean families represented by Carlton R. Asher, standing, and Christine M. Bae in a complaint against a Queens brokerage firm. (Vincent Laforet/The New York Times)