Here is a doozy of a situation that involves opportunity, greed and a complete breakdown in ethical supervision.
We will start at the end, with the ultimate pay-out: Citigroup has just been ordered to pay more than $3 million to a Florida couple who were induced by a stockbroker to put money in a real estate development that went bankrupt.
The problem was that the development deal was not on the brokerage firm’s radar; it was a deal that the broker put in front of the couple in a private, “this is just between me and you,” arrangement. These kinds of investment opportunities (and I use the term “opportunity” very loosely) are called “selling away” deals.
Selling away is bad business any way you want to look at it. It is obviously bad for the brokerage because the brokerage earns no commissions and the brokerage has no control. It is bad for the investor because any kind of safety net is lost in terms of the quality of the investment and it is bad for the stockbroker; as it is a serious ethical compromise and the broker loses protection of the brokerage. However, things don’t always fall into such neat categories.
The Citigroup case as described by Reuters (September 17, 2013) states:
“Dr. Nasirdin Madhany and his wife, Zeenat Madhany, of Orlando, Fla., filed the case in 2010, alleging negligence, fraud and other misdeeds involving more than $1 million in real estate investments they made between 2004 and 2007…”
According to the article, their stockbroker, Scott Andrew King, was working for Citigroup in 2003, and referred the couple to a prominent local politician who was putting together a condominium deal. The brokerage had nothing to do with the development. In addition to the referral, Mr. King also bought a couple of condos for himself, but at a discount. King apparently created an ethical violation on top of another ethical violation; he allegedly never told his clients that he was also buying into the deal.
A Recession Comes Along
I would be the most naïve business speaker to ever to walk up to a podium were I to say that this case of selling away was very isolated. Unfortunately, it happens much more than we might believe.
Had the economy kept booming, the couple and their stockbroker, might have made out quite handsomely. In addition to the condo purchase, the couple along with several others who were “sold away,” became convinced that all these condo deals were so promising that they fell all over themselves to sign a $12 million loan guarantee for yet another condo development.
Then 2007 hit, and was followed by an even more miserable 2008 and an equally miserable 2009. Across the nation, condominium values plummeted to dimes on the dollar.
In 2009, the investors who had signed the $12 million loan guarantee suddenly realized they were about to be liable for a huge defaulted loan. They, like millions of other Americans were staring into the face of bankruptcy. The couple sued the brokerage.
Citigroup argued their case in front of an arbitration panel in 2010 that they were not liable and though they have fought the ruling tooth and nail, they ultimately paid out more than $3 million to the Madhany’s for not monitoring their broker. Incredibly, stockbroker King landed on his feet and he is now with another brokerage!
At the trough
The easy conclusion is that big bad Citigroup deserved their penalty for a lack of supervision, that the stockbroker got away with bloody murder and that the poor sweet couple can now live out their many years of life with pride and decency. It would be a great television drama.
I’m not buying it; not completely.
Should Citigroup have monitored Mr. King more closely? Absolutely! And should everyone in Citigroup offices be required to reinforce their ethical training? Without a doubt. However, nothing in life is ever as simple as it sounds.
The stockbroker is still a stockbroker. It bothers me that we do not know how and why he is still working. Could there have been testimony we haven’t heard about? Could it have been that the stockbroker warned them?
I recall the story of an investor who overhead his stockbroker talk about a very high risk investment. The man insisted that he wanted to invest in the high risk investment as well, and his stockbroker emphatically told him “no.” The investor insisted and the broker finally acquiesced and told the investor who to contact within the company. The investor lost a sizable amount of money.
What really transpired in the conversations between the couple and the stockbroker outside of the brokerage platform? We will never fully know. My guess is that there is no innocent party here, just degrees of culpability.
We must also remember 2003. In most parts of the country, people were investing in almost everything with a roof and front door. Greed fueled the market and greed fueled the collapse.
Even if the stockbroker had not said one disparaging word about the condos, the couple was savvy enough and wealthy enough to invest $1 million in the deal. They were not neophytes in regard to money. Could the stockbroker have been more emphatic in dissuading the couple? Yes, of course. Ethically, the investment should have never been brought up at all.
What ultimately emerges was a textbook case of greed.
I am happy the couple got their money back, but I also believe the full story may not have been told. Ethical considerations aside, greed for greed’s sake never ends well.
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