A Brokerage House (and subsequently, several other major brokerages) was caught with its corporate hand in the cookie jar.

Despite their professed best intentions, brokerages still admit to the occasional—albeit minor—misstep.
“Minor” is, of course, relative. By minor, it means the loss of hundreds of millions of dollars of clients’ funds; by embarrassment, it means “malfeasance and fraud.”

What happened was this:  A Brokerage House (and subsequently, several other major brokerages) was caught with its corporate hand in the cookie jar.

Here’s how it works (or, at least, is supposed to): let’s say that a company needs a hundred million dollars or so to expand. It approaches a financial service firm , seeking to sell new issues of its stock, thereby obtaining the capital it needs.  The Brokerage House then does its homework on the company. If the company’s prospects are economically viable, the Brokerage House will have its brokers attempt to sell you—in legal terms, the “client”—shares in the company.

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The Brokerage House is rewarded how much? Let’s be conservative; call it $5 million or so (plus other commissions and fees) for placing the stock with their huge 14,000-broker army, which is spurred on to sell the stock.  Sound fair so far? When it works properly, it is.  But issuing new shares dilutes the per-share ownership in a company, which can have an adverse impact on both existing shareholders and those who purchase the new issue. Or it could be that the company is in an industry that’s not projected to fare well in the near term—making buggy whips comes to mind here. But for whatever reason, the circumstances indicate that an issue of new stock is not always a great deal for investors; as an advisor to individual investors, the stock broker is supposed to wave its clients away from less than-advantageous stock purchases.

However, investigators find out the Brokerage House was releasing glowing reports on the public offering, aggressively urging clients to buy the new issue.  The problem: the Brokerage House already knew the stock was a dog; confidential internal memos among officials said, in effect, an investor would have to be crazy to invest any money in the security.  Meanwhile the Brokerage House was pushing it hard, eagerly pocketing commissions both from the issuing company and from clients they convinced to invest in it. When the stock tanked—which it did, emphatically—a lot of individuals lost a lot of money.  Sadly, this was not a unique case. In fact, it’s been standard operating procedure for a very long time.