Scumbag Storytime

I’m in a venomous mood so let’s play storytime. Keep in mind I can’t prove any of this in a legal sense. The only way to do so would be testimony from witnesses and victims, which won’t happen for reasons I’ll get to.

Story 1: Friend of mine, broker, starts work at a new firm. One of the established brokers comes in to his office, welcomes him to the firm with the usual backslapping “GREAT TO HAVE YOU ABOARD! WE GOT A GREAT THING GOING HERE!” disingenuous bullshit.

Oh, and established broker happens to mention he is personally underwriting a tax-exempt product and if the new guy really wanted to be a team player, he’d take down AT LEAST a million bucks of it. New guy takes the million, distributes it to clients and two weeks later the thing is trading with a value of exactly $0.  The tax exempt status had been pulled.

Established guy, who collected a check for somewhere around $500K when the deal sold, barges into new guy’s office when he hears questions are being asked and tells him “DON”T BE A PUSSY. YOU PLAYING WITH THE BIG BOYS NOW”.

Story 2: Institutional sales guy has a sideline underwriting his own deals in same way as the asshole in the above example. Two days before a secondary offering in a  (very) junior mining company, he borrows all of the available shares of the company from every major brokerage. Why? So no one can short it when the new shares come out no matter how egregiously priced they are. Smaller check this time, maybe $300K.

Story 3: This is complete hearsay but because I know the broker involved a bit – someone who annually massages government documents to keep handicapped parking priveleges he doesn’t need  – I believe it. Rumor was that one of his clients was one of the top five new issue buyers at the firm (a large one). Problem was that the woman who’s name was on the account had Alzheimer’s disease and had been hospitalized for a decade.

Story 4: The great rare earth metals scam. This was a helicopter drop of free money for a certain type of unscrupulous broker.  China is the source for the vast majority of rare earth metals and when the government slashed exports after a diplomatic spat, the private deal underwriting machine kicked into high gear. “WHAT A GREAT STORY! THE DEFENSE DEPARTMENT NEEDS THIS SHIT! I know this guy with a property way up north with a huge Yttrium and he only needs $10 million to develop it. We can get in on the ground floor.”

Never mind that rare earth metals aren’t rare. The reason they come from China is they are massively un-environmentally friendly to process and China is one of the few countries where they don’t care if the groundwater eventually turns fluorescent purple. Which is why, in developed countries, it takes seven years from groundbreaking to production.  Oddly enough, the “ground floor” investors in new rare earth metals stocks weren’t informed that cash flow was seven years out, long after China would ease export restrictions. Most of these companies no longer trade but there were lots and lots of $300k checks issues to the brokers who underwrote these deals.

These are the worst examples that came immediately to mind but with a few phone calls I could give you 30 more horrific tales.  The reason outsiders don’t hear about them is two-fold. One, companies make a lot of money ignoring these types of things. Some, like the rare earth scam, are mostly legal anyway. The second, and more important reason, is that no other insider is likely to complain because almost all of them, at one point or another, have done something shady themselves. They do not need a regulator going through all their trades over the past decade.

The Daily Mail today published an expose Saturday entitled “The regime of fear inside Barclays” and to be fair the whole thing sounds pretty bad. Shredding a report is a new level of sweeping compliance problems under the rug. But in light of personal experience my suspicion is that Barclays’ (who I never worked for btw) biggest deficiency is an inability to avoid detection.  Horrible shit happens everywhere, every day and it takes a complete and utter moron to get caught.

So my first reaction to the Daily Mail’s tut tutting about the state of the industry is “You have no fucking idea”. Barclays isn’t a company “out of control” its just a run of the mill brokerage company. I have no idea how we got to this point but its going to take a whole lot more than a few breathless newspaper reports to fix it.

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20 thoughts on “Scumbag Storytime

  1. kris says:

    I copy/pasted this one, just in case you pull this away as you did with another one recently.
    Just in case, juuuuuuust in case. This one is fantastic.

    As I’ve said it in the past, most of your posts seem like confessions to me. There’s nothing better than confession for….catharsis.

  2. Sonny says:

    Well it’s a mystery to me why the individual investor no longer wants anything to do with the stock market.

  3. ToNYC says:

    The only Science in Finance is the Law of Asymmetric Information. Back in the day, they called it High Priests and Cave Dwellers. Same lie, different day.

  4. tspare says:

    What I don’t understand is doesn’t the broker care about losing his/her client? If I was sold a stock from my broker that goes from $5 to 0 (of a junior rare-earth metal miner who only plan to have a hole in the ground), I would close my account right away. Do they really have that many stupid clients with that much money?

    • alexander wayland-james says:

      where would you go? that’s like saying you’d divorce a girl who totals your car…. realistically not that easy

  5. [...] Why you should be careful of “special treatment” from your broker.  (Interloper) [...]

  6. ctb says:

    I wish they would make Jim Chanos head of Finra. You would get rid of all the fraudsters in a hurry. Awesome Post!

  7. [...] Brokerage horror stories that you’ll never hear of (Interloper) [...]

  8. Sonia says:

    Complete slander. I know many people in the industry & they’re working to do the best job they can for their clients day after day in a tough economy. Theses stories are from the 80’s before industry reform. You’re perpetuating age old stories. Let it go.

    • kris says:

      The whole ‘intermediary system’ cannot exist in honesty.’

      It’s a lot tougher to maintain honesty when one’s business is making a spread.

      • alexander wayland-james says:

        well I think theyre talking more about people who collect commission fees.

        But yeah, you can’t be an expert at everything so somebody somewhere somehow is going to rip you off.

  9. jessefelder says:

    More rule than exception here. Thanks for sharing.

  10. OUTSTANDING POST. After read books of the “street” from the 1800s, seeing great stuff like this reminds me that NOTHING has changed, not one bit.

  11. Diogenes says:

    I don’t think it’s “slander” – the stories he posted ring true – but the author’s, and especially the commenters’, interpretation smacks of propaganda. You know, the sort of thing that Putin probably orders his newspapers to publish: pick up a wire service story about some guy in Nevada who didn’t get to vote because the machines in his polling place broke, and slap on a headline and lead paragraph blaring something like, “American Elections Are All Phony!”

    I can see that Interloper is aggrieved against his former industry. But he ought to think more about his civic responsibilities before venting in ways that mislead people who lack any context, any background in finance, that might enable them to independently assess what he says (as is obvious from the comments from, for instance, Sunny and ctb). Yes, Interloper, I know it feels good to get it out of your system.

    If anyone reading this wants to learn something (which I very much doubt – as with Fox News, this kind of blog tends to attract only true believers), consider this: Caveat emptor has always been the rule. In fact our entire regulatory system is built around that principle.

    Liar’s Poker was published some 25 years ago. If you’ve read that, then nothing in the above post would shock or surprise you. But — and this is absolutely key — once you’ve opened your mind enough to know just a little about who and what you are dealing with when you invest, that knowledge is liberating. Rather than driving you to guns, God and gold, it equips you to ask the right questions of your brokers and about your prospective investments. It frees you to invest for your future, with your eyes open.

    • alexander wayland-james says:

      thats so true. I’m not at all moved by these stories. This isn’t exactly an industry people get into out of the kindness of their hearts. Do your own research and don’t click on spam.

  12. [...] a mere marketing gimmick. And if you don’t know why this is by now go have a read of “Scumbag Storytime” over at Interloper. As I commented on his post, my experience tells me stories like these [...]

  13. There has never been a tough millisecond for the brokers without scruples. The problem was only glamourised in the ’80’s but certainly has existed before and ever since. If no one gets penalised then whose really to blame, the broker or the ethical watchdog whose been sleeping?

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