Securities Expert Witness

Invest Securities Consulting, Inc.

Douglas Schulz, CRCP

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The authors have taken the rules and regulations of the brokerage industry and put them in laymen’s terms. -- Professor William C. Tyson, The Wharton School & The Law School of the University of Pennsylvania

The Book, Brokerage Fraud is a must read for all compliance professionals and brokerage firm's compliance and legal departments.

This book is a timely wake up call to the brokerage industry to clean up its ways. -- George D. Mullen, Vice President UBS PaineWebber

Tracy Stoneman and Douglas Schulz certainly know what Wall Street brokerage firms wish you didn't. -- Evan Cooper, Editor-in-Chief, On Wall Street, Co-Author

This book can save you thousands of dollars and loads of headaches! -- Jordan E. Goodman, author of Everyone's Money Book

Had "Brokerage Fraud" been available to my wife and I eight years ago, it may very well have saved us the fortune we lost to a mercenary industry that promotes itself as caring and responsible, when in fact it cares mostly for itself.

"Brokerage Fraud" is frank and friendly, organized, comprehensive, easy to digest -- and quite unique, too, because the distinguished authors tell all about an autonomous, all-powerful institution that routinely sheers the uninitiated."

". . . I am an attorney and an investor. Yet, I must say that each chapter of 'Brokerage Fraud' brought new information and insight that is invaluable . ."

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Commentary by Douglas Schulz: Wall Street Journal Article - Margin Lending

(WSJ article follows)

July 27, 2017

An excellent article in today’s Wall Street Journal pointed out that some of the largest broker dealers (brokerage firms) have increased their margin lending to investors since the 2008/2009 crash. As a securities expert witness who has testified in numerous FINRA arbitrations relating to margin, I feel this is alarming. Historically speaking, when individual investor's margin debt/balance increases significantly, it is often a precursor to a bear market. When investors take on ever increasing margin debt (leveraging their accounts), it is a strong sign that there is excessive enthusiasm among investors. Of course, the nation’s broker dealers are happy to see this increasing margin debt. Charging margin interest on the margin/debit balances is a huge profit center for Wall Street.

Margin has an additional conflict of interest because it allows doubling of the size of money to invest. So, by pushing investors to borrow on margin, brokers can double their commissions by selling more investments to their customers. As a securities expert, I have been in hundreds of margin based FINRA arbitration cases going back as far as 1989. When I’m acting as a securities expert witness in a margin related case these are often some of the points I make:


1.    Was the risk of margin/leverage fully explained to the investor?

2.    Was the risk fully explained to the investor that when you have a leveraged stock or bond portfolio, when there is a decline in value of the holdings, that decline in percentages is magnified due to the leverage?

3.    Using margin in a fixed income/bond portfolio almost never makes sense, especially in these low-interest rate environments.

4.    Margin interest charges are a conflict of interest because the margin interest being charged is a profit center for the broker-dealers.

5.    Was the investor fully aware that when there is a decline in the portfolio, the broker-dealer, based on the agreement the investor signed, can sell the client out without any notice at all?

6.    Was the investor fully aware that when a broker-dealer decides to sell a client out (liquidate securities to meet the margin call), the broker-dealer can sell any of the securities they choose?

7.    Margin interest is a capital impairment. I explain to FINRA arbitration panels that it is hard enough to make money in the markets, but when the investor is paying margin interest, it is a drag on potential profits.



Wall Street Needs You to Borrow Against Your Stock

A boom in securities-backed lending is bolstering bank profits, but critics say it doesn’t always benefit clients, and regulators have been keeping a close eye on the practice.

Securities-backed lending is growing in importance at brokerages such as Merrill Lynch.

Securities-backed lending is growing in importance at brokerages such as Merrill Lynch.


By Michael Wursthorn

Updated July 27, 2017 7:46 p.m. ET


Wall Street brokerages have been selling billions of dollars in loans backed by stocks and bonds, a trend that yields lucrative fees for the firms but poses risks for borrowers.

While banks don’t always report these loans in the same way, these securities-backed loans total at least $100 billion for the biggest brokerages—up exponentially since the financial crisis—with several billions of dollars of additional debt held at smaller brokerages, banking analysts estimate.

Executives at Morgan Stanley MS 0.25% earlier this month highlighted these loans to individuals as a big growth area and revenue driver, saying the loans helped expand the bank’s overall wealth lending by about $3.5 billion, or 6%, in the second quarter. On Thursday, Goldman Sachs Group Inc. took a step toward expanding its securities-based lending business through a new partnership with Fidelity Investments.

The loans work a lot like margin loans. Brokerages lend against the value of an investor’s portfolio. But unlike margin lending, customers don’t use the debt to buy more securities. Brokerage executives say the loans can help clients avoid selling assets. The client can get cash without shifting their investments; they also avoid potentially locking in losses or incurring taxable gains, or missing out on future stock market gains. Clients are also able to borrow money at relatively low interest rates because the loans are secured.

“Securities based loans can be a valuable financial planning tool for appropriate clients,” a Morgan Stanley spokesman said.

Critics worry that the surging stock market has made investors numb to the risks of borrowing against their investments—a scenario that has played out before. In the runup to the Great Depression, the bubble of 2000 and the financial crisis, investors binged on margin debt that proved perilous when stocks tumbled.

Investors using these loans now could face a similar fate if markets tank and the value of their collateral shrinks, prompting the bank to demand repayment. If the margin call isn’t met, the securities backing the loans are sold and the borrower is responsible for any remaining balance.

For brokerages, these loans have become a reliable source of revenue in the years since the financial crisis, as firms have begun moving from a business model of charging commissions for trading to a system of fees based on assets under management. The loans themselves help brokers retain these assets because customers don’t have to sell stocks and other securities when they need cash. These loans have also become a big factor in brokers’ compensation.

Several Merrill Lynch brokers said they have asked longstanding clients to open a securities-backed line of credit to help them hit bonus hurdles, assuring that clients wouldn’t need to use it or pay any fees for opening it. Merrill brokers receive continuing payments for getting clients to tap credit lines, and those loan balances contribute to year-end bonus calculations, people familiar with the matter said.

Brokerage executives have said the longer a client has one of these loans tied to their account, the more likely they are to use it.

“We were dramatically pushed to put these on all of our client accounts,” said Steven Dudash, a former Merrill Lynch broker who has been managing his own investment-advisory firm since 2014. “Whenever you’re product-pushing, it’s not in the client’s best interest.”

Merrill representatives say its brokers offer these loans to clients in a responsible manner, including disclosing the risks and fees.

“If people need the money, they should sell securities,” said Terrance Odean, a professor of finance at the Haas School of Business at the University of California, Berkeley. “It’s very risky to take a leveraged position in the market, and I don’t think people are thinking about it that way.”

Wells Fargo & Co. recently changed practices around how brokers pitch lending products. Starting this year, Wells Fargo stopped offering brokers bonuses tied to how many loans, including securities-backed debt, they opened for clients, executives of the bank have said.

As of the end of 2016, clients of Bank of America Corp.’s BAC 0.57% wealth unit, which includes Merrill Lynch and private bank U.S. Trust, had some $40 billion in such loans outstanding, up 140% from 2010. Morgan Stanley’s customers had $30 billion in these loans, more than double from 2013. UBS Group AG and Wells Fargo also have made billions of dollars in such loans, people familiar with those banks said.

Morgan Stanley’s finance chief, Jonathan Pruzan, said while discussing earnings this month that the bank expects more clients to take out loans in the months ahead. “That’s been a real key driver of our wealth business,” he said.

The growth of securities-backed loans has drawn the attention of regulators, who have questioned the brokerages’ marketing and sales efforts as well as the suitability of the loans.

Merrill opened more than 121,000 such loan accounts between 2010 and 2014 with more than $85 billion in total credit extended, according to a Financial Industry Regulatory Authority settlement order last year. In the matter, Finra alleged that Merrill didn’t fully explain the risks of securities-backed loans and used risky or concentrated investments as collateral.

Merrill settled its case without admitting or denying the allegations. Merrill reported its securities-lending oversight lapses to Finra initially and cooperated with the regulator’s inquiry, according to Merrill representatives. They said the firm has improved its procedures.

In another regulatory action, the Massachusetts securities watchdog last year accused Morgan Stanley of developing a sales program that encouraged brokers to pitch these loans regardless of whether clients needed them. Brokers involved in the incentive program were given scripts coaching them to offer securities-backed loans to clients who said they needed to pay taxes or cover expenses for a wedding or a graduation party, or if they mentioned “purchasing a luxury item like a car or yacht,” according to the regulator.

“It’s not healthy for the industry,” said William Galvin, Massachusetts’ top securities regulator, who has been investigating how firms motivate brokers to push these loans. Brokerages “should be more concerned about this,” he said, “but they’re in favor of competition and seeing who can get more loans.”

Morgan Stanley agreed to a $1 million settlement with the regulator in April without admitting or denying wrongdoing. A Morgan Stanley spokesman said Massachusetts found no evidence that any clients were harmed or that any of the loans were unsuitable or unauthorized.

“We have taken steps to strengthen and clarify our policies and controls around such initiatives,” he said.

Write to Michael Wursthorn at

Appeared in the July 28, 2017, print edition as 'Borrowing With Stock Soars as Market Rises.'


The Morning Risk Report: How Brokers, Firms Can Fight Frivolous Finra Complaints

By Ben DiPietro

Jul 11, 2017 6:57 am ET

The Financial Industry Regulatory Authority in June 2016 began requiring brokers and registered investment advisors to link to its BrokerCheck site, where consumers can research any complaints filed against them. While many of those complaints are serious.