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Quoted in the Wall Street Journal September 24, 2018

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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.

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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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WALL STREET JOURNAL ARTICLE - SEPTEMBER 24, 2018

In the Wall Street Journal article below both Mr. Manson (arbitration scheduled for late October 2018) and Mr. Dielman are cases where I am/was the Claimant’s securities expert. I’m especially proud of the Dielman case (Mr. Dielman and his wife, in addition to being wonderful people, Chris is one of the more famous lineman in NFL history) because we received a $1.1 million award and I was the sole expert for the Claimants where the Respondents had 3 experts!  Additionally, I think you will agree that the $1.1 million award is quite an accomplishment considering that my client made $3.7 million in his account.


Opportunities to Invest in Private Companies Grow

The number of people allowed to buy into private companies is up 10-fold since the ’80s, The Wall Street Journal finds, but such investing can be high-risk

SEC Chairman Jay Clayton has talked about expanding access to private markets to people who don’t meet the financial limits but have professional licenses or advanced degrees.

SEC Chairman Jay Clayton has talked about expanding access to private markets to people who don’t meet the financial limits but have professional licenses or advanced degrees. PHOTO: BRENDAN MCDERMID/REUTERS

COMMENTS

By 

Jean Eaglesham and 

Coulter Jones

Sept. 23, 2018 1:00 p.m. ET

The Securities and Exchange Commission is drawing up plans to increase the number of people allowed to buy stakes in hot Silicon Valley startups and other private companies. But that population has already grown 10-fold since the 1980s, a Wall Street Journal analysis found.

Opening UpPercentage of U.S. households accredited toinvest directly in private companiesSource: WSJ analysis of data from the Securities andExchange Commission and the Federal ReserveSystem's Survey of Consumer Finances

%1990’952000’05’10’1502468101214

More than 16 million U.S. households—about one in eight—are already allowed to invest directly in private companies, according to the analysis. Private companies don’t have to make the disclosures that public companies do, and regulators thus limit them to only relatively wealthy investors. When the SEC first set its rules of entry for private markets in 1982, only 1.5 million households made the cut.

The reason more households are eligible: The SEC uses income and net worth to determine who can invest, and the thresholds haven’t changed in more than three decades.

As private markets boom and the number of public companies shrinks, SEC Chairman Jay Clayton says he now wants to give even more investors the opportunities to buy into fast-growing private companies, such as Uber Technologies Inc. and Airbnb Inc. Further opening access to these markets could ultimately reshape the financial landscape, allowing millions of retail investors to add startups to traded stocks and bonds in their portfolios.

But such investing can be high-risk and more opaque than the public stock market—and a draw for fraudsters. Tens of billions of dollars a year of private stakes in companies are now being sold by securities firms with an unusually high number of brokers with three or more investor complaints or other red flags on their records, a recent analysis by the Journal found.

“The biggest area of fraud has always been in these private offerings,” said Denise Voigt Crawford, a former Texas securities regulator. “Now you’ve got more people that are eligible to be the victims of fraud.”

An investor typically has to be “accredited” to buy stakes in private companies, which requires an annual income of more than $200,000 or a net worth of more than $1 million—a rule designed to ensure that anyone allowed into these markets can afford to lose what they put in.

Not Keeping PaceThe financial thresholds for private-market investing haven't changed in more thanthree decades. Investors can qualify either by income or net worth.Minimum annual income or net assets to be an accredited investorSources: Securities and Exchange Commission; Bureau of Labor Statistics Consumer-PriceIndexNote: The definition of net assets was changed in 2012 to exclude an investor’s primaryresidence. The minimum income required for a married couple to be accredited investors is$300,000.

.millionNet assetsInflation-adjustedInflation-adjustedIndividual income1985’90’952000’05’10’150.00.51.01.52.0$2.5

The SEC hasn’t increased the accredited-investor limits since they were set, apart from a 2012 tweak that excluded primary homes from the calculation of net worth. If the limits had been adjusted to keep pace with inflation, an accredited investor would now need an annual income of about $515,000—more than double the actual $200,000 limit—and a net worth of more than $2.5 million, the Journal found.

Sales of these investments, known as private placements, are expanding rapidly as investors chase profits outside more traditional stocks and bonds. Last year, a record $710 billion was sold through brokers, a nearly threefold rise from 2009, the Journal reported. For this year through August, at least $500 billion has been sold through brokers.

The SEC is expected to seek public comment in coming months on expanding the accredited-investor definition. It is unclear how many more investors would become eligible for the market under the SEC’s plan. One addition Mr. Clayton talked about recently is people who don’t hit the financial limits but have professional licenses or advanced degrees.

Further opening access to private markets could let millions of retail investors add hot startups such as Uber Technologies to their portfolios. An Uber logo is seen on a car’s windshield.

Further opening access to private markets could let millions of retail investors add hot startups such as Uber Technologies to their portfolios. An Uber logo is seen on a car’s windshield. PHOTO:JOHN TAGGART/BLOOMBERG NEWS

John Harrison, executive director of the Alternative and Direct Investment Securities Association, embraced the SEC idea, saying sophisticated investors “should be allowed that opportunity” and are an essential source of capital for growing the economy.

But Barbara Roper, director of investor protection at the Consumer Federation of America, said the current accredited-investor limits “aren’t even remotely adequate to ensure people are protected from potentially devastating losses.”

An SEC spokeswoman declined to comment.

Complaints from investors have grown in recent years with the swirl in sales. Arbitration claims relating to two kinds of private markets’ investment, private equities and limited partnerships, ballooned from 192 in 2013 to 294 last year, a 53% five-year jump, according to the Financial Industry Regulatory Authority, which oversees the brokerage industry.

Senior InvestingPercentage of U.S. households accredited to invest directly in private companies, byage groupSource: WSJ analysis of data from the Securities and Exchange Commission and the FederalReserve System's Survey of Consumer FinancesNote: Figures for 2018 are estimates.

19892018Ages 17-3435-4445-5455-6465-7475-950%5101520

Some brokers target people approaching retirement, whose salary or pension savings push them over the accredited-investor thresholds, according to lawyers representing investors. A third of the accredited households are retirees, the Journal’s analysis found.

Roy Manson, a former health-care executive in Scottsdale, Ariz., said he wanted a low-risk investment strategy after he retired in 2011. But his Center Valley, Pa., broker, Robert D’Agosta of Berthel Fisher & Co. Financial Services Inc., persuaded him to invest what Mr. Manson said was the “lion’s share” of his savings in private placements and other high-risk investments, some of which fell sharply in value. “These sales earned the broker high commissions,” said lawyer Christopher Lonn, who is representing Mr. Manson in an arbitration claim due to be heard next month.

“I’ve had so many sleepless nights,” said Mr. Manson.

Mr. D’Agosta and a spokeswoman for Berthel Fisher both declined to comment.

Some regulators and others wonder if financial limits are the best way to decide who has access to private markets.

“Being an accredited investor does not today make you wealthy, and it absolutely does not make you sophisticated,” said Douglas Schulz, a former investment adviser who testifies in arbitrations for investors.

Kris Dielman, shown in 2011 when he was with the San Diego Chargers.

Kris Dielman, shown in 2011 when he was with the San Diego Chargers. PHOTO: JIM MCISAAC/GETTY IMAGES

Kris Dielman, a former San Diego Chargers guard, and his wife Sandy, for instance, are “entirely unsophisticated financially” and leaned exclusively on their broker, Indiana-based Robert Hoffman, who worked for Woodbury Financial Services Inc., according to an arbitration claim filed by the couple against Mr. Hoffman and Woodbury that was reviewed by the Journal.

In the claim, the broker allegedly told Mr. Dielman that a $450,000 investment in 2007 in a now-defunct company building blimp-like aircraft would increase his net worth by “2m (on paper).” The following year, Mr. Hoffman sold Mr. Dielman a $150,000 stake in a military building in Indiana, writing in an email, according to the claim, “we will ride this thing like a cheap hooker!”

Mr. Hoffman, who Finra barred from the securities industry last year, declined to comment. He agreed to be barred for failing to cooperate with a Finra investigation, without admitting or denying the regulator’s findings.

A representative of Advisor Group Inc., which owns Woodbury, didn’t respond to requests for comment.

An arbitration panel in June awarded the Dielmans $1.1 million in their claim against Woodbury. Mr. Dielman told the Journal that “this whole thing was bullshit: The guy sleazed me.”

—Lisa Schwartz contributed to this article.

Write to Jean Eaglesham at jean.eaglesham@wsj.com and Coulter Jones at Coulter.Jones@wsj.com