Newsday (July 02, 2000)
BROKEN TRUST
By Bryan Virasami
Ha Im Entrusted A Fellow Korean-American With His Life Savings… And Then Watched His Dreams Turn Into a Nightmare
Ha Im, a dry cleaning operator in Flushing, says his family lost its saved-up money after investing with Merrill Lynch’s Forest Hills office.
Merrill Lynch has settled with Ha Im, below, a Korean immigrant who claims he and his wife lost their life savings by investing with the brokerage firm’s Forest Hills office. Im contended brokers used their shared ethnicity to lure them in and then were negligent by investing the couple’s money far more aggressively than they had agreed.
Newsday Photo/Alan Raia/Ken Sawchuk
’There is always another side to the story, but the bottom line is number don’t lie. What happened to these accounts is egregious.’
– Attorney Christine Bae on brokers’ handling of the Ims’ funds
INVESTMENT HEARTACHE
Immigrants say shared heritage made them targets
Despite reservations Ha Im and his wife Jung may have had about investing in the stock market 10 years ago, a Korean-American stockbroker from Merrill Lynch managed to win their trust.
It was five years after they had married and opened a dry-cleaning shop on Union Street in Flushing, and the Ims had hoped to buy a house, a car and start a family someday.
So comfortable was the Korean immigrant with a broker of common heritage, Im says, that he put his family뭩 American dream – and life savings of about $170,000 – into the broker’s hands.
By 1998, however, their dream and money had evaporated. In a complaint they filed May 3 with the National Association of Securities Dealers, the Ims charged that less-than-honest brokers at the firm’s Forest Hills office used shared ethnicity to lure them in and then were negligent by investing the couple’s money far more aggressively than they had agreed.
“I cry every day since I found out, and I have been crying every hour for the past two years,” Jung Im said recently through a translator. “I can’t eat, I can’t digest anything. I’m like a vegetable. I feel like I’ve died.”
That was before Thursday, when Merrill Lynch, which denies any wrongdoing, reached a settlement with the couple. The terms were not disclosed.
But securities attorneys, stock market experts and law enforcement officials say immigrants like the Ims are increasingly venturing into the stock market through brokers who gain trust and leverage by promoting their common ethnic background, language or religion.
As the immigrant population grows and the stock market continues to gain appeal, more and more brokers, whether employed by large firms such as Merrill Lynch, or small independent storefront businesses in Flushing, Forest Hills or Chinatown, draw clients into mostly legal investments by capitalizing on a shared heritage.
But relationships between clients and brokers based on a common ethnic background can turn immigrants into victims of fraud by adventurous brokers out to make high fees at clients’ expense, experts say.
While the particular allegations in the Ims’ case were never proved because the complaint was withdrawn as part of the settlement, enforcement agencies have seen such disputes often enough to coin the term “affinity fraud.”
“It’s a phenomenon that does exist,” said Wayne Carlin, associate regional director in New York for the Securities and Exchange Commission. “The reason it exists is that some people who are out there and want to commit securities fraud figure out that an effective way to get the trust of potential victims is to appeal to group identity, where people are more trusting and more gullible.”
With a reputation as hard workers who are disciplined about saving income, immigrants are often sought by brokers of the same ethnic group through ethnic newspapers and other media. But this popular and legitimate marketing technique increasingly results in broken hearts, according to the New York State attorney general’s office.
“There is definitely a problem in this area,” said Eric R. Dinallo, chief of the attorney general’s Bureau of Investor Protection and Securities, which logs complaints from fraud victims, who include immigrants. “We take them pretty seriously because they obviously impact a lot of people.”
The SEC, which tries to ensure a fair trading environment for investors, doesn’t separate statistics on alleged fraud against immigrants or rank them by the firms. But overall investor complaints or requests for help have risen 72 percent since 1995, according to the regulatory agency.
They increased from 53,237 in 1998 to 73,908 in 1999, or 39 percent.
The most common complaints to the SEC include misrepresentation in selling a product, unauthorized transactions, failure to follow an investor’s instructions and harassing cold calls from broker-dealers.
The North American Securities Administrators Association, a body of law enforcement officials, release an annual top 10 list of investment fraud issues it tackles. In 1998, affinity fraud was No. 1 and has remained in the top five ever since.
Ha Im, 43 and wife Jung, 41, allege that they found out in 1998 that their account was empty, a startling end to their American dream.
Ha Ims’ was a dream 20 years in the making, which he started to build in 1979 by working 14-hour shifts hawking fresh fruits and vegetables on a street-side fruit stand in downtown Philadelphia.
They were in Flushing by 1990, Im said, when he and his wife cleared out their bank CD and placed the money into two Merrill Lynch cash management accounts that initially fit the couple’s request for a conservative investment strategy -CDs and mutual funds.
In an eight-year period, they say they added cash to their initial $170,000 deposit until it reached $255,000.
But eventually, according to the complaint filed with the National Association of Securities Dealers, Merrill Lynch “manipulated the husband, Mr. Im, into converting the original investment equity out of the safety of CDs into an aggressive all-or-nothing securities trading portfolio.”
Although they withdrew thousands of dollars in the eight years after they switched the nature of their investments, Merrill Lynch made $100,000 in commissions through unauthorized and excessive trades, according to the complaint.
Merrill Lynch denies all accusations that illegal activities led to the losses and argued that the Ims were aware of the unusual transactions.
The Ims’ Manhattan attorney, Christine Bae, said her clients were unsophisticated people who relied on Merrill Lynch to help them realize their dream.
“Merrill Lynch can pitch it any way they want, there is always another side to the story, but the bottom line is number don’t lie,” Bae said. “What happened to these accounts is egregious.”
After the settlement was reached, Bae said the firm did not intentionally target Korean Americans to win them as customers, but added that she remains convinced that the brokers engaged in improper trading that led to excessive fees.
She agreed to withdraw the complaint filed with the National Association of Securities Dealers, a self-regulatory organization of stock brokerages that writes and enforces the rules for trading the stock of mostly small companies.
“While we continue to believe that the trading in the Ims’ accounts was excessive and unsuitable, further investigation suggests, based upon our further review and analysis, that there was no direct effort on Merrill Lynch’s part to target members of the Korean-American community,” Bae and her co-counsel, John Kim, said in the prepared statement, shortly after the settlement was reached.
Although pleased with the settlement, Ha Im said through his attorney, he remains angry with the brokers.
Merrill Lynch spokesman Joe Cohen declined to comment on the pending settlement terms, but distanced the firm from the brokers in question.
“We take our clients concerns very seriously. This involves the actions of former employees,” Cohen said of the three brokers, who left Merrill Lynch voluntarily although two of them are still in the business. “We are always interested in resolving the concerns our clients raise.”
Merrill Lynch had maintained the Ims were kept up to date all along about their account’s trading activities. The company rejected the complaint’s allegation that the Ims had a problem understanding its information, saying that Ha Im is a college graduate who has a sufficient grasp of the English language.
What’s more, Cohen dismissed allegations the firm does not do enough to supervise its brokers and protect immigrant clients, including those who do not speak English as a first language.
“The Ims received monthly statements, the Ims were told in writing on several occasions that our firm questioned the kinds of trading that was going on in their accounts and they made it clear that they were comfortable with and understood what they were doing through financial consultants,” Cohen said.
He said that a large company with $1.8 trillion in assets has nothing to gain by allowing brokers to violate securities rules.
Cohen said if there appears to be a question about a customer’s account where language is a barrier, a third broker who speaks the foreign language would listen in to the conversation to make sure the client is comfortable.
“There is, in effect, an uninvolved person with both English and the foreign language skills who can make sure what the client understands and what the client says is fully translated with the manager,” Cohen said.
Several weeks after starting an internal review of the Ims’ accounts, Cohen said before the settlement was reached that the initial findings showed the firm and its brokers did not engage in any illegal activities.
But Bae, the Ims’ lawyer, after a comprehensive review of the accounts, said she believes three brokers who handled the accounts over the eight-year period circumvented the firm’s high standards.
“The brokers in question appear to have acted to avoid the existing internal controls in place at Merrill Lynch,” she said in the statement.
Bae acknowledged that her clients received monthly statements and letters warning them of unusual trading, but she said letters are inadequate because investors rarely decipher them and rely on the brokers for interpretation.
Several experts, including securities attorneys, said that letters are not enough to let brokers off the hook after a client brings allegations of wrongdoing.
“Asking the fox in front of the hen house, ‘Have you counted the chickens?’ is not supervising properly,” said Seth Lipner, a securities attorney from Garden City.
In one example described in the complaint, the Ims’ account in May, 1996, had about $25,000 in it. During that month, the broker bought and sold stocks that totaled $573,452 resulting in nearly $5,000 in commission, according to Bae.
Bae said that on average, most of the stocks purchased were not allowed to grow but sold within 30 days. She said approximately 70 to 82 percent of the stocks bought were sold within 30 days.
The Ims’ brokers, according to the couple’s attorney, abused her clients’ trust for personal gain through churning. But the brokers’ supervisors should have seen a red flag and disciplined the brokers, which she said Merrill Lynch failed to do.
Cohen of Merrill Lynch said the company’s inquiry had not yet substantiated those allegations by the Ims. Moreover, he said, Merrill Lynch supervisors contacted the clients when records raised eyebrows.
“Despite these communications, at no time did the clients respond to management inquiries or change their trading style,” he said.
In addition to cases involving immigrant victims in New York and throughout the country, the SEC is currently involved in various cases that include brokers who have targeted fellow church members of a Christian church and senior citizens, all part of the growing trend of affinity fraud.
Among the cases the SEC is currently pursuing is one involving a Brooklyn lawyer and his firm, World Financial & Investment Co., that allegedly obtained $1.2 million from hundreds of people from Dominica who were in the United States and Dominica, by promising returns in excess of 300 percent, according to the SEC.
In its complaint filed in November in the U.S. District Court in Brooklyn, the SEC said Victor M. Wilson raised the money between March 1997 and April 1998 and told clients in both countries they were investing it with Credit Bank International Co., founded by Roger E. Rosemont, the ambassador-at-large” of Melchizedek, an island in the South Pacific.
Some initial investors did receive high returns and Wilson collected about $175,000 in fees before the scheme was revealed and investors learned Credit Bank was not a bank, Melchizedek was not a country and Rosemont was no ambassador, according to the SEC.
Wilson did not return a telephone message seeking comment.
The attorney general’s office has prosecuted several cases across the state, including one in which a Chinese immigrant who was active in a Chinese community lured 25 to 30 non-English speaking Chinese investors to invest in what the attorney general called “unsuitable or inappropriate investments.”
The Chinese investor was subsequently barred from the securities industry and the attorney general secured partial restitution for the investors.
Securities attorneys and other experts say investors are protected by existing federal laws that hold brokers accountable. Internally, most securities firms, especially large companies such as Merrill Lynch, maintain systemic procedures to prevent investors from being victimized.
Some experts say, however, that while laws are broken mainly at smaller firms, brokers anywhere who are intent on making high fees by manipulating customer who are charged with raising red flags.
Independent attorneys and observers say the protocol is for managers to keep the accounts in line.
“Each branch manager for the firm is legally responsible to supervise their people and they are legally responsible to make sure people are not churning the account,” said Ashok Vora, a professor of finance at Baruch College in Manhattan.
The typical first reaction of the manager, said Lipner, the Garden City attorney, is to send out a form letter to clients that asks them to call if they object to the trade records.
“If the managers think there is a problem, the managers should get on the phone and find out for himself,” Lipner said. “If you don’t get something back, why don’t you call them, that’s the manager’s responsibility, especially when you’ve dealing with the immigrant community.”
Affinity fraud is growing as more people join in the market boom. But whether it involves a fellow church member defrauding an entire congregation or a single broker and client, most victims later say they never saw it coming.
“Every client who’ve been defrauded has told me sooner or later, something to the effect: ‘I trusted him or I trusted her,’” said Martin Feinberg, a sents investors. “It’s just a question of trust.”
Baruch’s Vora said newly-arrived immigrants rely on people from their own background to help them in a new and strange country.
“If you’ve an immigrant and you don’t know much about the country and the system, you tend to trust people who are similar to you,” he said. “Every group has some crooks, it doesn’t have anything to do with which country or ethnic group you’ve from.”
Assistant professor Z. John Zhang of the marketing department at Columbia University, agreed.
“Ethnic targeting is becoming very popular, it’s going on with a lot of companies because Asian immigrants are in a big income level,” he said.
Nancy Condon, spokeswoman for the National Association of Securities Dealers in Washington, D.C., said she couldn’t discuss the Ims’ case or say whether immigrants were a growing target of fraud.
“We want to make sure investors feel comfortable brining their concerns to us so we do our very best to ensure confidentiality,” Condon said. “We don’t track who is it that lodges the complaints but every complaint is investigated.”
Ha Im still operates a 300-square-foot dry cleaning shop on Union Street. He said he, his wife and their 8-year-old son live in a small co-op apartment and don’t eat out, go to the movies or own a car. And the ordeal has strained their marriage.
“I came to the United States for the dream, for comfortable life and to take care of my family,” Im said.
