New York Securities Fraud Lawyers Blog
This is Part 2 of an article we posted last week on former NBA-great, Tim Duncan, where we introduced the investing lessons that could be gleaned from Duncan’s relationship with his former financial adviser, Charles A. Banks, who was permanently barred from the securities industry and is now serving a four-year prison term after pleading guilty to wire fraud.
For background on this story, it is a good idea to read Part 1 of this series, where we revealed our first lesson, which was to be wary of the financial adviser who constantly brings you deals. While this might create the impression that your adviser is knowledgeable and has the inside scoop, it is frequently a sign of an adviser who is exposing you to unnecessary risk and trying to earn commissions or undisclosed fees that will eat away at your principal.
A second lesson from this sad story is to recognize a common fraud tactic, which may seem innocent, but should set off alarm bells and have you looking for a new financial adviser. This is when an adviser asks a customer to sign a blank form or just a signature page, as Banks did with Duncan. The adviser will often justify the practice as a time-saver and present it to the customer as a convenience, such as dropping blank forms in the mail with affixed post-it-notes that simply point the investor where to sign. This request often sounds benign or reasonable to an investor, but it is in fact illegal and happens more often than many people realize. Though this practice may seem harmless, signing forms in the absence of one’s adviser deprives the investor of an in-person interaction to ask useful questions and to have the adviser explain all the investment risks and hidden fees that may be associated with the investment.
Third, let’s not overlook the investment itself, Gameday Entertainment, LLC, the sports retail apparel venture that Banks solicited Duncan to invest in. Completely apart from whether this was a solid investment or not, the red flag here is that Gameday was a business that belonged to Banks – a clear conflict of interest! The industry term for this practice is called “self-dealing,” and it too is illegal and a violation of numerous securities laws. That Duncan did not recognize this is not Duncan’s fault, and it is not atypical of how other investors would respond. Securities laws are in place to protect the investor, not the financial professional, precisely because investors necessarily rely on their advisers to be trustworthy, law-abiding, and to put the client’s best interests first.
Fourth, let’s take a closer look at the level of trust that Duncan had in Mr. Banks. It is common for fraudsters to start a relationship by recommending investments that require a relatively small financial commitment. This builds trust early on before larger investment risks are introduced to the portfolio. The risk may not seem all that high because the earlier investments were perhaps safe and appropriate, but now your broker offers you a chance to invest in something that is low risk and high reward – i.e., that you can have your cake and eat it too. This does not exist in the investment world. Risk is almost always proportional to the reward. And further, there is no need for most retirees to gamble in the first place. With Duncan, we saw that Banks gained his trust over the years, and then he found a way to gain much greater control over Duncan’s finances. Duncan’s victim statement shows how vulnerable he was to this during his divorce and how Banks exploited this and escalated his manipulations over time.
Fifth, Duncan’s stated embarrassment – “I’m the poster child for the dumb athlete” – is reflective of the shame that many investors experience after being defrauded. Fraud can go undetected for a long time because it can be extraordinarily difficult to come to terms with one’s own reality, that the adviser who you’ve established a close relationship with over the years, who may have invited you and your family to his home for dinner, or comped you expensive sporting or theater tickets, could really be such a terrible person. The shame associated with this, not only from feeling fooled, but then having to later admit it to friends and family, is also a common reason that financial fraud so often goes unreported, in particular among elderly retirees, because it can be painful to grapple with the reality of financial loss after having trusted someone so blindly.
One final tip. It is no doubt difficult to pick up on signs of fraud or wrongdoing while one is the midst of being defrauded, but investors should always do the minimum homework on their financial adviser. This starts with an often-overlooked Internet search of the individual’s disciplinary history, where the investor can see whether the adviser has a history of customer complaints or prior brushes with the regulators. If your financial adviser is licensed, which he or she should be, a web search can quickly be performed by entering the individual’s full name at the Financial Industry Regulatory Authority (FINRA) BrokerCheck website, if licensed as a broker with FINRA, or the Investment Adviser Public Disclosure (IAPD) homepage, if licensed as an investment adviser with the Securities and Exchange Commission.