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This FA Helps Victims Fight Back Against Bad Brokers

By Crucial Clips     September 13, 2017
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Aug. 21, 2017 

BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hi. This is Bruce Love with Financial Advisor IQ. And I'm here with Lee Munson, who's the CIO of Portfolio Wealth Advisors. Lee, as well as being the CIO of your RIA, you also work with lawyers as a forensic investigator or expert witness.

LEE MUNSON, CIO, PORTFOLIO WEALTH ADVISORS: Yes. Some people call it expert witness. Forensic accounting is a very fancy three-dollar term for it. It's something that I've been doing for about the last eight or nine years as a little side job. I pick up two or three jobs a year. It's my moonlighting thing.

BRUCE LOVE: So what types of cases are we talking about? Criminal? Civil? Arbitration?

LEE MUNSON: I've had some cases that have gone criminal. But in general, we're talking about civil cases. I only work with a couple attorneys. One main guy's name is Clinton Marrs down in Albuquerque. He's one of the great security litigators of the Southwest.

BRUCE LOVE: He did [landmark U.S. Supreme Court case] SEC versus Kokesh, didn't he?



LEE MUNSON: And he won that. Shout out to Clinton. It's great to have a buddy who wins in the Supreme Court. So Clinton was actually – I met him because he was one of the original guys that actually helped me break away from my last post, which was back at Schwab Private Client.

And at the time, nobody would represent people from there, because all the guys working, breakaway brokers, all did business with Schwab. So he was one of the only people who didn't have a conflict. After that, he won my case obviously. And then within about a year he said, hey, I'd like for you to be an expert witness on a few cases. And we've been doing it ever since.

BRUCE LOVE: So what are the common sorts of issues that you're seeing in these sorts of cases?

LEE MUNSON: Let's take a step back and look at the history. We started off in post-'08. Because remember, you have about a seven-year statute of limitations, Right? That's not always hard and fast. It was a general rule.

So we started off seeing basically over-risked portfolios in the '08-'09 crash. Then we went from there – a lot of things we've seen lately have to do with the oil crash of 2014, 2015, also the collapse of gold.

So you'll get some – really, this has to do with elder abuse. You get some person who is older. They're susceptible to persuasion and manipulation. And you'll see portfolios where everything was in gold or everything was in gas and oil right near the top.

I think going forward, we're seeing a lot more annuity cases, and I think that's going to be the trend from here on out. So you're looking at equity index annuities, variable annuities, improper sales of that, and then also, as we were talking before today, structured products. And I think structured products are going to be the next frontier in securities litigation over the next five to 10 years.

BRUCE LOVE: So in the U.K. many years ago, with these sorts of – these sorts of products, we have a mis-selling sort of. We have mis-selling on the books. You don't have that over here, though, do you? So I mean, what people -- how do people come to court for these sorts of – or arbitration for these sorts of products?

LEE MUNSON: You know, it's always super easy if the person you're dealing with is a registered rep, meaning they have a Series 7 stockbroker license. Why? Because you can meet them in Finra arbitration. And in general, Finra – it's always the luck of the draw who the three arbitrators are. But it's generally going to err on the side of the client, OK?

But we just did a case where we settled out of court. And we were heading towards federal court in an insurance case because, quite frankly, Finra is a decent regulator with a great arbitration system. Say what you will about – you could be critical all day, but it's a great system.

When you're dealing with the National Association of Insurance Commissioners, you have a real issue on what we refer to as regulatory capture-- influence on the state level.

So it's very difficult to try insurance cases when it's just an insurance-licensed person. I find them very challenging. But they're also some of the best cases because most people simply won't litigate that case.

BRUCE LOVE: Finra is a self-regulator.


BRUCE LOVE: Are you saying you've got no problem with the arbitration system they have together?

LEE MUNSON: I don't, because I've been through it personally. I've been an expert witness. I think it's very fair, because it's not looking at what the letter of the law is. It's looking at what is fair and equitable.

And I think that's a different type of standard when you're dealing with something as subjective as advice and uncertain markets. Again, I think there is more hazard to taking a case to a court, right, because you're dealing with a jury and a judge that may not have a background in finance.

Now, it can backfire. There was a case recently that Clinton did not win, you know, my attorney buddy that we go on these cases. And sometimes you get the luck of the draw.

The most recent case that he was working on that I had been watching for some time had to do with the key central issue: What is the duty of care when a broker is dealing with a state or government official, right? And that's a case where it is unclear if there's a fiduciary responsibility.

And in some Finra cases, they find that there is no responsibility. You get a different set of arbitrators, more likely, who are going to say, hey, we don't care what the law says. Clearly, you took advantage of someone.

And that's where Finra arbitration does a really good job is seeing through the law and saying was this wrong? And does there need to be financial remedy beyond just what the law says? And that's a beautiful thing. Sometimes it works for you, sometimes against. But I would rather have my day in court in a Finra arbitration than federal court any day in securities litigation.

BRUCE LOVE: I guess the flip side of that, though, is if a duty of care test is nice and rigorous and it's a good precedent –


BRUCE LOVE: – it's better to be followed. But you're – but you're arguing that you also need some leeway because we're talking about clients and advisers.

LEE MUNSON: Right. And also, remember this is a cat-and-mouse game. I think George Soros first said, the regulators are always behind the curve ball. I think that's true to a certain extent. And I think that when you're in-- think about this.

When you're dealing with Finra District 3 in Denver, you're not going to be taking them out to a steak dinner to have them see it your way. If you're dealing with a local insurance commissioner in a fly-over state, you can buy steak dinners. And you can get regulatory capture, which just means influencing things you shouldn't be influencing. And so I think that that's a big issue.

And it's going to be a big issue because, again, I think the future of securities litigation is going to be more firmly on these ideas of annuity sales, structured products. And what is the duty to care for stockbrokers in the government and institutional investor arena? Because right now they're not being protected. And I think you're going to see a lot more cases come up.

BRUCE LOVE: Lee, thanks so much.

LEE MUNSON: Thank you.