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Perspective on Dangers in Client / Broker Relationship

CNN Your Money, March 5, 2004

GUEST: Andrew Stoltmann

DAVID HAFFENREFFER, CNN ANCHOR, YOUR MONEY: That Martha Stewart case has cast new light, of course, on the broker-client relationship.

GERRI WILLIS, CNN ANCHOR, YOUR MONEY: Securities attorney Andrew Stoltmann joins us now with more on the dangers of being too close with your broker.

Let’s start, Andrew, with this. You know, I think this story is so amazing. And we were joking early, if you had a jury of Martha’s peers, what would that look like? Would they all have, you know, close relationships with their brokers? I don’t know. But tell us to what degree do people need to be thinking about this issue and checking up on their broker?

ANDREW STOLTMANN, SECURITIES ATTORNEY: Well, I think just like with your doctor or with your lawyer, you don’t want to be too close to your stockbroker. You need to keep it as an arm’s-length relationship. You wouldn’t be socializing, chances are, with your doctor or your lawyer.

And you have to remember that the stockbroker is a little bit different than most other professionals in that many times the broker’s interests are diametrically opposed to the client’s interest. And you really have to be careful that you don’t cross over that relationship line.

HAFFENREFFER: So shortly after we learned of this case, of course, the pictures began to surface of Martha Stewart and her broker, Peter Bacanovic. It looked like either a tennis match or a polo match or something like that. That started to ring a bell in your mind as a bad idea?

STOLTMANN: Sure. Yes, I think when you are that close to your stockbroker, the guard kind of comes down a little bit. And anytime an investor’s guard is down, the investor’s ripe for being taken advantage of. And even it may not be something that’s nefarious in nature, but just by having your guard down, you’re not as diligent as what you would be if you had that arm’s-length relationship.

WILLIS: Well, it went even further, Andrew, with Martha, I think. You know, not only was she close to her broker, but her friends were her investors, you know, very close relationships with brokers, with clients. Is that just a situation you want to avoid?

STOLTMANN: It is. And brokers many times like to get that close relationship with a client, in large part because often they’re looking for referrals to other clients. When you have a client who’s a billionaire, chances are the client’s hanging out with more wealthy individuals, and the broker wants those individuals as clients.

And I think that’s a little bit of what we saw with Martha Stewart and her broker.

HAFFENREFFER: Yes, but you could say the same thing for the investor as well. They want to get closer to their broker because, if some hot IPO comes along, maybe they get first dibs at it.

STOLTMANN: Yes, that’s true. But once you’re talking about getting the hot IPOs, you’re getting a little bit closer, just a little bit closer, to hoping that that broker provides some information to you that maybe he’s not providing to his or her other clients, and certainly receiving the hot IPO, nothing wrong with that. But you’re just getting a little bit closer to the line that Martha Stewart apparently stepped over with her broker.

WILLIS: Well, I guess what I want to avoid, Andrew, is the broker who’s had problems in the past, maybe being too close, maybe stepping over the line in other ways as well. So how do I check that broker out?

STOLTMANN: Excellent question. Probably the single best way to do it is to contact your respective state securities division. Each broker who’s a licensed broker in the securities industry has what’s called a CRD, a central registration depository file.

And that file will tell you if he’s had any other customer complaints that have been lodged against him, whether he has been the subject of any lawsuits. And it’s real important that the broker — or excuse me, that the client contacts your state securities commissioner, and quite frankly, do some due diligence on the broker to see what their background contains.

HAFFENREFFER: What do you imagine, on the heels of these convictions — and, again, for Peter Bacanovic today, it was guilty on all counts except for one — will happen to his career as a stockbroker?

STOLTMANN: His career is over. If you’re convicted of a felony, all of the major brokerage firms, Merrill Lynch, Morgan Stanley, Smith Barney, they will not let you operate as a series seven licensed stockbroker. His career is over.

WILLIS: Well, Andrew Stoltmann, a securities attorney in Chicago, thanks for joining us.

STOLTMANN: Thank you.

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