The Piety of Henry Blodget

Henry Blodget and I have a history, there’s no denying that. Back in 2001 I sued him and his former employer Merrill Lynch for fraudulently touting tech stocks that Mr. Blodget privately confided were “POS,” “pieces of junk” and “pieces of crap.” My case caught the attention of former New York Attorney General Eliot Spitzer and ultimately led to the $1.4 billion global settlement and Mr. Blodget’s lifetime ban from the securities industry.

Although countless investors lost hundreds of millions of dollars because of his bogus research reports (and he was allowed to keep most of the millions of dollars he was paid to write them), Mr. Blodget has refused to fade from the limelight he once enjoyed. He has successfully transformed himself into a prolific journalist, penning commentaries in august publications such as the New York Times and running various websites including Clusterstock, which specializes in stock research. Given his disgraced past, that takes real cajones.

Last week Clusterstock launched a mild broadside at yours truly, questioning my transparency though essentially conceding the merits of my argument regarding a blog post I wrote on some failed Citigroup hedge funds. The site says Mr. Blodget agrees that “it is possible” that I’m correct in speculating that Citi’s brokers were likely instructed to market the collapsed hedge funds as conservative investments “but he would like see evidence of this.”

Mr. Blodget understands full well how the game is played, particularly since Merrill’s brokers dutifully peddled his research to clients, even when they began to openly question the integrity of his analysis. Furthermore, the Wall Street Journal recently quoted a Smith Barney broker as saying, “"That's why they bought it," said the broker whose clients, many of them wealthy retirees, invested in the Falcon fund. "These kinds of clients weren't looking for a home run."

Interestingly, Mr. Blodget remained mum on my comment that Citi was positioning its own brokers as fall guys, when in all likelihood they were merely following the direction of the company’s wealth management executives. I’d expect this comment to strike a particular nerve given that Mr. Blodget took the fall for Merrill’s conflicted research while his senior managers was given a free pass. As I noted in my earlier post, Wall Street’s senior executives almost never are held accountable for the wrongdoing under their watch.

Finally, there is Mr. Blodget’s issue with my transparency:

Since Zamansky is taking a stand for "transparency," Blodget thinks it might also have been appropriate for Zamansky to disclose that he is in the business of suing companies based on allegations like the ones above.

Setting aside the irony of Mr. Blodget requesting transparency, my interests in the Citi hedge fund post were patently obvious. But in deference to Mr. Blodget’s new found piety, I must point out that in my blog post I referenced angry calls from investors who are my clients. If that wasn’t clear enough, my biography is clearly posted on Seeking Alpha, a financial blog aggregator which is where Mr. Blodget originally saw my post. And finally, my blog post first appears on my law firm’s website.

Most people in the industry know - Mr. Blodget certainly one of them - that I represent investors who have been harmed and abused by Wall Street.

Suffice to say, I never thought I’d see the day when I’d be holding myself accountable to Henry Blodget. Perhaps that explains the pigs I’ve just seen flying past my office window.

Falcon Falling: Citi’s Hedge Fund Litigation Problem

I’m no expert on public relations, but I’d expect the flacks at Citigroup would go to great lengths to avoid maligning the firm’s Smith Barney brokers. But the financial giant’s public defense for peddling risky proprietary hedge funds to wealthy clients seeking conservative investments implicitly undermines either the integrity or the competency of the firm’s brokers.

“Our disclosures and marketing material sufficiently outlined the inherent risk in the funds and their leveraged strategies,” an unnamed spokesman said in a statement issued to the Wall Street Journal regarding the firm’s Falcon and ASTA/MAT hedge funds, which have lost about 75 percent of their value in the past year.

Oh really? Well if the disclosures were so sufficiently outlined, then how come I’m getting calls from outraged clients who vehemently insist they bought into the hedge funds because they were repeatedly assured by their brokers that the funds were extremely low-risk investments? Smith Barney brokers themselves apparently are even willing to acknowledge that these assurances were given. I quote verbatim here from the Wall Street Journal:

Citigroup brokers and fund managers assured prospective investors that the new hedge funds were low-risk, with Falcon likely to post losses of no more than 5% a year in the worst-case scenario, according to people familiar with the situation.

“That’s why they bought it,” says a Smith Barney broker whose clients, many of them wealthy retirees, invested in the Falcon Funds. “These kinds of clients weren’t looking for a home run.”

Investors rely on the overtures of their brokers, who fashion themselves as financial consultants or advisors, not highly compensated salespeople. “We make money the old-fashioned way. We earn it” – as Smith Barney used to say.

Unfortunately, most brokers don’t have the training or the acumen to understand highly complex and sophisticated financial instruments. So they dutifully rely on the representations given to them by their superiors, who are richly compensated for moving the products out the door.

Herein lies the vicious circle: Citigroup concocts inherently risky funds for its brokers to sell to their wealthy clients that generate handsome fees for the firm and commissions for its brokers. The brokers are told to market the fund as a “conservative” investment, notwithstanding that fact that the funds are so levered that a few ticks the wrong way causes the house-of-cards to collapse. The brokers mimicked the company’s recommended sales pitch to their clients and successfully wrangled hundreds of millions of lucrative assets.

Citigroup, understanding that it has a significant legal liability on its hands, publicly insists that company sufficient disclosed the risks when it marketed the funds. If that was truly the case, the brokers who marketed the funds will deservedly be held legally accountable for failing to educate their clients about the obvious risks.

But more than likely, many of the Smith Barney brokers who marketed the funds themselves were likely led to believe the funds were in fact “low risk.” At a minimum, there was a lack of due diligence. Now that markets are under pressure, Citigroup wants to shift the onus of blame to its brokerage force, rather than hold its wealth management executives accountable. Blaming the folks who followed orders - rather than the ones who gave them - is the way Wall Street works.

Calling for an Investor's Bill of Rights

While the presidential candidates have been aggressively courting homeowners with mortgages under duress, they seem to care little for the rights of individual investors. As today's New York Times points out, these are grim days for investors who have fraud claims. Recent Supreme Court decisions including "Tellabs" and "Stoneridge", which as we've blogged about previously, have raised the bar for what constitutes fraud and limited third party liability (i.e., investment banks, law firms, accounting firms, etc. that are alleged to have contributed to fraud).

That's why I believe an investor's bill of rights should be on the table. Candidates can sign-on or reject its provisions – at least then we would know where they stand. Among the provisions I suggest are:

• Right to an SEC which protects investors: Only SEC commissioners who actually accept the agency's mission of protecting investors (rather than cozying up to Wall Street interests) should be nominated.


• Right to fair arbitration hearings: The first step towards balancing the arbitration process is to eliminate the industry panelist on three-member arbitration panels. An arbitration panel should consist of individuals who are conflict free and representative of the universe of American investors.


• Right to tax-free awards: In many cases, claimants are required to pay taxes on arbitration awards, punitive damages and attorney's fees. To me, this rubs salt in an aggrieved investor's wounds.


• Right to an honest broker: If a broker has three or more arbitration awards against him or her, it's clear that they are abusive towards their customers. I propose a "three-strikes-and-you're-out" rule. After the third award, a long-term suspension should be levied.

Proxy rights, executive compensation and other important investor issues should be considered as well.

And since we are on the topic of presidential candidates and Supreme Court decisions, they should pledge to balance the court's anti-investor bias. Its fine to say that you are for the traditional interpretation of the Constitution as Senator John McCain has, but one must focus on how that affects investors – both big and small.

The Supreme Court has reversed over 70 years of case law which expanded investor rights in securities cases. Enough is enough. The next Supreme Court nominee should not be confirmed if he or she shows disdain for investor rights.

One additional note on the aforementioned New York Times article: while it does a good job of explaining new hurdles for investor lawsuits, it doesn't cover arbitration. Many investors – institutional and individual – are better suited by filing claims against brokerages using FINRA-sanctioned arbitration proceedings. Though the deck is still stacked, investors certainly fare better than in class actions especially in light of the recent Supreme Court decisions.

Candidates: Let's see where you stand.