INVESTORS BEWARE: EARLY RETIREMENT SEMINARS PART II: A REAL LIFE EXAMPLE

by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com, www.aboutbrokerfraud.com

THE HAYES LAW FIRM, P.C., www.dhayeslaw.com, 1-866-332-35567 toll free

People who retire early are susceptible to pitches from broker dealers that guarantee comfortable early retirements.  During such pitches, often at free lunch seminars, the broker or investment adviser may promise high levels of withdrawals and high rates of return.  The investor should be wary, as early retirement pitches almost always promise too much. 

The following narrative is a true story... It illustrates the warnings issued in the previously submitted blog.

Three Citigroup brokers, Jeffrey Sweitzer, Mathew Muller and Joseph Zentner contrived a 72(T) scam.  From 1994 to 2002, Sweitzer conducted 40 seminars, alone or with Muller. The team of brokers based in Charlotte, NC, who used misleading sales materials during dozens of seminars and meetings for hundreds of employees of BellSouth Corporation.  Most of the employees were early retirees. 

As a result of the sales presentations many of the BellSouth employees came to believe that they could afford to retire early by relying upon monthly withdrawals from their retirement savings pursuant to Section 72(t) of the Internal Revenue Code. The employees cashed out their pensions and 401(k) accounts, and invested these proceeds with Citigroup.  More than 400 BellSouth employees opened over 1,100 accounts with the Citigroup brokers.

Using charts, graphs, handouts and other documents at the seminars, the Citigroup brokers led the BellSouth employees to expect that for 30 years they could earn 12 percent annually and withdraw 9 percent annually, all without touching their principal.  This projection, of course, was far-fetched.  (See NASD News Release, June 6, 2007).

The Citigroup brokers projected the amount a generic 53-year-old BellSouth employee would earn from an initial investment of $300,000.  They said that this typical employee would earn more than $1.8 million, could withdraw from $27,000 to $69,000 annually, and still have more than $770,000 in principal remaining 30 years later, at age 83.  (See NASD News Release, June 6, 2007).

Sweitzer told one couple: "I'm going to tell you by way of expectations that you should be able to expect 12%.  That is not guaranteed, but I fell like good times, bad times, ugly times, beautiful times, we should be able to average 12...We expect to earn 12%.  We pay 9%....[b]asically, 10 years down the road you are looking at doubling your money...We may do 15, may do 18 or 20.  But good times, bad times, I think that we would do 12%." (See NASD News Release, June 6, 2007).

Of course things did not go as planned.  Over 200 BellSouth employees saw the principal in their accounts decline by a total of approximately $12.2 million. (See NASD News Release, June 6, 2007).

NASD found that the brokers' sales materials and presentation failed to adequately disclose the following:

1. The expected 12 percent annual net returns exceeded the historical average return of the S&P 500 index over 70 years, and that for many periods during that time the S&P 500 returned far less than 12 percent.
2. The recommended investments could decline in value so much as to deplete the customers' principal investment.
3. The customers would pay fees of two to three percent, requiring them to earn 14 to 15 percent annually to achieve the expected 12 percent return. 
4. The recommended investments exposed BellSouth employees to greater market risk that the employees would have faced had they opted to retain their fixed annuity pension payments from BellSouth.

NASD found that Citigroup failed to supervise the activities of the brokers.  Citigroup should have known the brokers were holding seminars and using misleading, unapproved sales material.   Citigroup branch auditors did not require Sweitzer to produce samples of the materials he was using at his seminars.  They did not even confirm that the seminars and related documents had been approved.  (See NASD News Release, June 6, 2007).

Liability can be traced to Citigroup's failure to respond to several red flags. Citigroup's compliance officials had an opportunity to review one of the team's seminar handouts in 2001, but failed to detect and follow up on the misstatements and omissions.  (See NASD News Release, June 6, 2007).

On June 6, 2007, the NASD fined Citigroup Global Markets, Inc., $3 million to settle charges relating to the use of misleading materials in retirement seminars and meetings for BellSouth employees in North and South Carolina.  Additionally, NASD ordered Citigroup to pay $12.2 million in restitution to over 200 former BellSouth employees. (See NASD News Release: Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading Documents and Inadequate Disclosure in Retirement Seminars, Meeting for BellSouth Employees, June 6, 2007)

Comments

[Jack Payne]

Sounds much like the stock options scams pitched at hi-tech employees by brokers in the late 1990s hi-tech boom. I wrote a syndicated piece on this (also for my blog) recently. The parallels are smellingly similar.