Government regulators are putting the squeeze on one of the vilest forms of investment fraud: scams targeted toward young members of the U.S. military.
Last week the National Association of Securities Dealers suspended and fined a former broker with First Command Financial Planning for abusive sales practices and unsuitable recommendations.
Louis Stough has been suspended for 10 months and fined $25,000. The NASD found that he recommended to 12 members of the military that they liquidate their Systematic Investment Plan investments -- usually a monthly program designed to allow for continuous investments over a 15-year period -- and purchase mutual funds with a 5.75 percent sales charge.
"Brokers must consider sales charges when recommending that a customer move assets from one investment to another," said Barry Goldsmith, NASD head of enforcement. "Brokers must also consider the costs to the customer of moving investments from one mutual fund family to another. In this case, the broker acted improperly by failing to consider comparable options within a fund family that carried no sales charges and failed to disclose that option to his customers."
As a result, Stough's unsuitable recommendations involved 47 separate transactions that generated total commissions of more than $34,400 to First Command Financial Planning. Stough pocketed $16,500 in fees. First Command has paid restitution to the customers and Stough has returned his commissions.
This situation, unfortunately, represents just the proverbial tip of the iceberg. Last December, the NASD sanctioned First Command to pay $12 million in fines and restitution for misleading statements and sales practices in presentations at military bases across the country, including Camp Pendleton and other facilities in San Diego County.
First Command has issued more than 8,000 checks to abused customers totaling more than $3.6 million. Most of the restitution was paid to active duty and retired military personnel.
Other scams, however, have left troops in a much worse position. Spec. Brandon Conger, an infantryman with the 82nd Airborne Division, testified last December before a Congressional committee about his involvement with American Amicable Life Insurance.
"In August 2002, during my third week of basic training in Fort Benning, Georgia, my drill sergeants held a briefing for my platoon concerning a group of financial advisers who were coming to speak with us about mutual funds. The drill sergeants said they were good investments. And if we started now and stuck with them, that we would make lots of money," said Spec. Conger.
The next day the advisers held a classroom briefing and showed how the money would grow over a period of years. Conger thought investing in mutual funds would be a good companion investment for his life insurance.
"I was putting $20 a month for life insurance in the Army. I did not need life insurance," he said. The advisers passed out paperwork to authorize a monthly withdrawal of funds from his banking account to purchase the purported mutual funds.
When Conger was deployed to Iraq in March 2003, he had yet to receive any information or statements to explain where the money from his bank account was being invested.
After returning from service in Operation Iraqi Freedom in January 2004, he resumed his efforts to learn about his investments.
"I decided to call them. Most of my calls were never answered. And those that were ended up with me being put on hold until I hung up the phone," reported Conger.
In April, a fellow paratrooper gave him the bad news: The investment was a fraud.
"This has been an extremely disappointing ordeal for me and some of my fellow soldiers, not because I lost money, but because I was misrepresented by a former soldier working for American Amicable Life Insurance, who used his contacts to gain the trust and confidence of young soldiers," said Conger.
The biggest problem regarding the sales of investment and insurance products on or near military bases is the lack of government regulation.
"Sales practices on military bases should be regulated by a centralized office in the military, which should work closely with state securities regulators and the Securities and Exchange Commission," said Mercer Bullard, founder and president of Fund Democracy, a nonprofit advocacy group, in testimony before Congress.
"The financial services industry is regulated under a dysfunctional, smorgasbord of rules promulgated and enforced by a wide variety of state and federal regulators. The reports on sales abuses on military bases illustrate how this patchwork of regulations compromises consumer protection, increases costs and suppresses competition," said Bullard.
Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.