Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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“Want to know the easiest way of separating people from their money? Join a Church!”

That was the way “Greg” began one of the more interesting discussions I have had in recent months with a reader. Our conversation began with his e-mail, catching me at my computer. “If you have a moment, may I phone?” he asked.

Within seconds I was on the line with a self-described “Investment Con Artist” who admitted to having taken several hundred thousand dollars from dozens of “Believers” during times when “people who have saved money were upset with the low amounts of interest they were being paid by banks.”

Why did he want to speak with me, and what was the urgency I sensed in his voice?

Time is running short

“For obvious reasons, I can’t tell you where I am, but let’s just say that I used to live not far from a town where your column is widely read. I am in my mid-50s and have recently been diagnosed with a nasty form of cancer, which I accept as a payback for the things I’ve done. You know the old saying about there being no atheists in foxholes, and that applies to me. This is the first time that I have ever been serious about prayer, and confessed what I’ve done to a priest. I asked him if there is anything I can do to help lessen my sins. He suggested that I talk with a journalist. I thought of your column. Will you help me?” Greg asked.

While a bit skeptical at first, the longer we talked, Greg gave me more than enough reason to believe what he was saying, in large part because he described in detail one of his scams. As it turned out, several of his victims — also readers — wrote to You and the Law.

Appeal to trust and greed

“These are times when, for anyone fed up with getting hardly any interest on a retirement, savings, CD or other bank accounts, it is natural to look for higher returns. This is how guys like me find our victims, and a church is the ideal hunting ground. It’s the only place where trust is assumed, and you don’t have to prove a thing,” Greg related.

“Just say the Lord’s name enough, talk about values, honesty, helping your fellow human beings, and you will inspire trust. I attend services, contribute generously, always available to help any church member, and drive a nice but not flashy car. I give the impression of being financially successful, well before going to the next step in my plan,” he continued.

“That’s timing and understanding human nature. For example, years ago when interest rates were low and with a cover as a legitimate investment adviser, I casually mentioned that I was able to obtain guaranteed interest-paid-monthly-five times actual, commercial rates. It was, of course impossible, and I was running a Ponzi scheme, paying off early investors with money from people who came in later, until I had stolen most of the funds, and left town, never using my real name,” he added.

I asked Greg how it is that anyone believes they can earn 20 percent interest a month when banks are paying 3 percent yearly? “The answer is found in the Bible, Koran, or other holy books,” he replied.

“They all tell you greed is bad. Yet, this motivates even highly educated, trusting people to attempt almost any way of making oodles of money, tossing common sense right out the window. In these kinds of schemes, happy early investors — who did get that interest check — told their friends. They were my best form of advertising, and people were lining up to give me money. Of course, with every Ponzi scheme, the guy in charge — me — keeps most of the money, and few people ever ask for their entire investment back early enough, until there is no more money available. By that time, I was gone.”

Slept well at night

Greg “slept very well at night,” because he was completely aware of who and what he is.

“I am what psychologists call a sociopath. This was diagnosed when I was a kid. We tend to be highly intelligent people with good communications skills, likeable, but do not have a sense of morality or a conscience. Life for a sociopath is finding the easiest way of getting your hands on money, while seeming to be honest and trustworthy. Normal relationships are not part of our world. You do not care about anyone else, unless it benefits your own personal financial or physical security,” he explained.

Advice for my readers

I felt there was more to Greg’s story than seeking a free pass into heaven, and told him that. He agreed. “Something also motivated me to speak with you. Smaller cities and towns are dangerous places for honest people with people like me around. My mom — now in her 80s — was taken to the tune of $30,000 by someone just like me. Seeing her grief was something of a wake-up call, and I figured that with the little time remaining I have, why not do something good,” was his answer.

We ended our conversation with one more question I had for him. “Beyond a story, which I will write, is there anything else you would like from me?” There was.

“I need a good lawyer. Do you know a good criminal attorney close to Sacramento?”

Even if I did, I’d never tell him.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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Part 1

If your stockbroker sold you improper, excessively risky investments, or-failed to disclose the riskiness of what appeared as an otherwise conservative investment, and as a result you lost your shirt — then today’s story will be especially relevant.

For my readers who are stockbrokers, I’ll tell you right now that I’m going to make some of you angry, revealing what most of your clients would never suspect.

This article began with an e-mail sent to me by Hal, a few days ago.

“My wife and I are both 67 and retired, living off small withdrawals from our 401K retirement account and Social Security.”

“The final stages of our retirement planning were about 3 years ago, getting our house paid off, telling our broker that we wanted to gradually move into much more conservative, virtually risk-free investments. Yet, in 2006, 2007 and early 2008, close to 85 percent of our money was in the stock market, invested in things our broker insisted were super safe. We trusted him to watch out for us,” he continued.

“In January this year (2008) we met with our stockbroker, concerning about the economy and the safety of our investments. Most of what we were sold proved to be the worst imaginable, including Washington Mutual, Wachovia, Lehman Brothers, Indy Mac Bank and other financial institutions who have gone out of business, and I should not forget Freddie or Fannie. From a retirement nest egg of over a million dollars — built over 25 years — we have something like $200,000 remaining, in bank C.D.’s. Both of us are now under the care of our family physician, who has us on anti-depressive medication. We tried to play by the rules and now feel so badly cheated.”

“From what we have described here, do you feel there is anything we can do? Do we have realistic claims against our stockbroker for putting us into those investments?”

Those hurt worst did all the right things

The last several months of 2008 will be seen by future historians as one of the most destructive economic times in our nation’s history. So often, those who did “all the right things” in terms of financial planning were the worst hurt.

In many cases, they were the ones with responsibility, discipline and, most of all, fear of poverty handed down to them by parents who still had memories of the Great Depression.

They used credit cards sensibly. They bought what they could afford and what they needed. They didn’t buy a home well beyond their means or drain equity from a house they had nearly paid off, committing themselves to many more years of house payments just to buy an SUV or take a vacation. In short, they realized that unnecessary debt was dangerous. In a nation where only the few maintained a savings account, they took joy in the simple act of saving.

“Your readers are an example of the couple who did everything right. They saved for retirement, avoided debt and trusted a broker to guide them towards the right investment decision. In an incredible number of instances, it was trust wrongly placed, not only because clearly improper investments were sold them, but had the truth been known as to broker’s compensation or the real risk associated with these securities, the customers would have never purchased them,” argues Securities Attorney Nicholas J. Guiliano, who specializes in the area of Investment Litigation.

“You were lucky to get through,” the straight-talking Philadelphia lawyer told me during our recent conversation. “Our phones are lit up like Christmas trees, but it is going to be a sobering Christmas for millions of Americans this year, and very likely for several more years to come,” he fears.

His beliefs were shared by a high school principal turned stockbroker, with whom I discussed how so many hard-working people got taken. We spoke with my assurance of confidentiality.

Your stock broker is only a salesman

“Dennis, the public needs to see past the lovely offices, expensive furnishing, and appearance of prosperity this industry creates. I and thousands of stock brokers like me are salespeople — that’s all we are. So much of what we call “investing” is really a form of gambling — so much hot air — with the assurance if you stick with the program, we’ll deliver just what you need for a secure retirement, your children’s college expenses, or whatever your goal.”

“Our training includes an enormous element of sales psychology — how to create the image that we care, can be trusted, and our experts see the future. The truly dangerous part of this is the art of making the client feel just a little bit silly, stupid or ignorant if they don’t follow our recommendations.”

“We are very good at making the typical client feel inadequate to make sound financial decisions, and to therefore rely on our advice. We replace their legitimate doubts with soothing assurances of our concern for their welfare, and their feelings are well known and have been taken into consideration by management in forming our recommendations,” he added.

“Think of a stockbroker as one of those pretty ladies at the perfume counter of your local department store. She is there for one purpose only — to make a sale. As she is probably on commission only, if there’s no sale, her time with you has been wasted. Of course, if you buy the perfume, at least you’ll smell nice. We can’t guarantee anything similar — and lately, nice isn’t the fragrance which has come to mind — and the public needs to realize that.”

“Sure, there are brokers who do care and don’t knowingly sell junk to their clients. But one of the ethical challenges is our Football Team mentality, where we are encouraged — in part through generous perks — to push certain investments, and to laugh off questions a few gutsy brokers occasionally ask about excessive risk. They are usually patted on the head and told not to worry,” he concluded.

Next week: The warning signs were obvious years ago. But do you have a case against your broker?

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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Part 2

Last week I told you about what happened to Hal and his wife, both 67, retired, and long time readers. From more than a million dollars in their 401K account as of January, 2006, their investments have lost close to $750,000.

Why? What went wrong?

“In our final preparations for retirement, in early 2006 even though we stressed wanting to be ultra-conservative, our broker steered us into some of America’s largest financial institutions who failed,” Hal’s wife, Martha, told me, sobbing.

“Invest in America, invest in your country,” he always told us, showing charts at what buying stock does. When we suggested selling our investments which had gone up in value — taking some of your winnings off of the table — he said we would miss out on further stock gains. He treated us like his son, and we trusted him,” she added.

Today, they are under a doctor’s care, taking anti-depressive medications. The fact they have a $200,000 bank CD was, “my doing, over Hal’s objections, because I realized that everything we had was in stocks, and it scared me,” Martha related.

I ran my reader’s factual situation by Philadelphia Securities Lawyer Nicholas J. Guiliano, who gave me the following analysis.

Investing means risks

“Your readers suffered tremendous losses which went far beyond the acceptable risks of being an investor. Fannie Mae and Freddie Mac were not safe, conservative investments contrary to what brokers all over the country were telling their clients. In early 2004, Regulators warned too many people were being placed into home loans they could not repay. This information was published in the trade publications brokers read,” he pointed out.

“Since February 2007, there was ample, credible information in the marketplace in the form of billion dollar write downs at the world’s largest financial institutions that confirmed the extent of the subprime loan crisis and ensuing financial meltdown.”

“Fannie and Freddie-among others — was a time bomb, with huge losses and write downs. The writing was on the wall at least two years back.”

“An investment advisor who has a conscience and is competent should never put clients in your reader’s situation into an incredibly risky investment such as these,” he said.

Brokers have a very high duty of care for their clients, known as a Fiduciary Duty. “The investments offered must be appropriate for their age, financial resources, risk tolerance and not because it generates a fat commission for the broker,” Mr. Guiliano stated.

“We are seeing so many cases where brokers downplayed known risk and knowingly made completely inappropriate recommendations to clients just like your readers. Given their age and present economy, they will probably never recover,” Attorney Guiliano observed.

“But what about large life insurance annuities that are now being pushed?” I asked the securities lawyer.

His answer gave reason for concern.

“If you place the bulk of your retirement funds with an annuity company and it fails, you could lose most of your money, regardless of their so-called guarantees. While there are State Guarantee Associations, you would be surprised at how little is actually protected,” he pointed out.

“A good broker or financial adviser needs to carefully explain the real possibilities of what happens when a company goes bankrupt and you own its stock, or if you have purchased a large insurance annuity,” he warns.

The need for balance

“Investments need to be age balanced. In general the younger you are, more risk can be assumed, but when you are getting close to retirement, common sense dictates less risk and more cash. This means bank CD’s and US Government Full Faith and Credit investments.”

“Losing money goes hand-in-hand with being in the stock market. If your broker’s recommendations were consistent with what you understood and wanted, there is very little basis for a claim, he was quick to point out.

“67-years old, retired and most assets in stock is simply inappropriate, actionable and your readers should have this potential claim evaluated by a lawyer who has particular experience in securities arbitration,” he firmly maintains.

For any reader interested, there is an association of The Public Investors Arbitration Bar Association at: Www.piaba.org

Finally, Mr. Guiliano opened one additional door where innocent employees have lost much of their employer sponsored pension and profit sharing retirement accounts.

“Lawyers in my field are expecting to see another casualty of the stock market crash: employer managed office retirement accounts. Where the boss managed employees’ retirement money in high risk ways — and suffered huge losses — this will hurt employees deeply and lead to suits alleging mismanagement,” he feels.

But that is a story to be written another day.

Attorney Nicholas J. Guiliano has an extremely informative Web site that’s worth looking at — especially if you see yourself in today’s story. www.Stockbrokerfraud.com.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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Being your own boss by going into business for yourself is part of the American Dream. It can also turn into the American nightmare. We’ve all heard the statistics about 70 percent of new businesses failing within the first three years. Today, those rates are even higher for many “start-ups.”

But suppose that you’re not going to actually “start” a new business, rather, you’ll buy one that is being run successfully, and has an established customer base. If what you pay is reasonable, then it should be smooth sailing, right?

That’s what a young “Dr. Dave” was assured by a knock-your-socks off enthusiastic, and personable, “Dr. Sarah,” who was about to make a career change at age 55 and needed to sell her medical practice quickly at a price of “only $150,000,” Dave related. Both he and Sarah are pediatricians in the San Jose area.

“I have family who can help me with the money, and Sarah says that she makes about $250,000 a year, so it seems like a really good purchase price. I really want to have my own medical practice. My parents have read your column for years, and they suggested that I give you a call. My wife and I will be driving to Los Angeles in a few days and would really appreciate meeting with you and getting your opinion, but frankly, it’s to make my parents happy,” the young doctor told me.

As I refer to Dave as being a “young doctor,” you might be wondering why I’m using that term. Should age have any bearing on a decision to buy Sarah’s medical practice? Before answering, the following personal information about Dave needs to be considered.

Fresh out of training

Dave is 31 and completed his residency in pediatrics less than one year ago and is now working for an HMO earning close to $120,000 a year. He has been married for less than a year to Carolyn, an absolutely beautiful gal from Texas who “likes nice things and doesn’t worry about going deeply into debt to maintain a certain image,” he explained to me over coffee at my office. While his wife did come into the office to say hello, she immediately left to go shopping, leaving her husband to discuss their financial future.

“I have to admit that my wife’s attitude toward money is quite different from mine,” he admitted. “I was raised with the notion that being in debt isn’t a good thing, and that if you can’t afford it, don’t buy it. When Carolyn and I were university students, she often got into trouble with her rent payments and credit cards, but as you’ve noticed, she is such a beautiful woman. I fell in love with her despite those minor shortcomings,” he commented.

“Dave, I agree, she is indeed lovely, but what you are describing isn’t minor. If a couple is not on the same page financially, this spells big trouble for the marriage,” I replied. He nodded but remained silent, listening. My comments were not exactly what he expected to hear.

“So, tell me about your job, do you like it?” I asked. He did, indeed, describing how great it felt to actually be working full time in pediatrics, “and when we are out shopping, or at the movies, patients and their families recognize me, come up and chat. I’m told that I have a good way with kids, and am so glad that I selected this medical specialty,” he said with a big smile.

What’s the hurry?

“Wouldn’t you agree with me that you are just now really sharpening your skills as a doctor?” I asked. He agreed, admitting that he still had a lot to learn. “Then, what’s the hurry to run your own shop?”

“Well, you can earn more money in private practice, and my wife feels this opportunity is perfect for us. Sarah has an established practice, and she’s only asking $150,000. As she made $250,000 last year, how could I lose? Also, she has made it clear that I really need to decide quickly — within a week at most — or she’ll offer it online and certainly get a buyer that way.”

“Dave, doctors are great at the practice of medicine, but, most lawyers will tell you that they often make poor business decisions,” I replied picking up the phone and calling my friend, Bob Hawkes, a business consultant in Southern California who has worked with a number of small business development centers across the state. If anyone had the credentials to advise Dr. Dave, it was “Doctor” Bob.

“When we take away all of the nice office furniture, exam tables, instruments, books, computers, all of it, what really does every sole medical, legal, or accounting practice boil down to, Dave?” he asked.

Bob answered his own question: “It’s that individual — it’s their name. Financial success is a direct result of the ability to attract and serve our patients or clients, to keep them coming back, and referring in new business.

“Never forget that the practice of medicine is a business. Patients and clients are your customers, and there’s nothing which requires the customer to keep on coming back when they learn that it isn’t Dr. Sarah their kids will be seeing, but some new guy, this Dr. Dave.

“In big city medical practice, when doctors want to retire, they will almost always bring in an associate, generally as an employee or on a “buy-in” basis, working together, to establish continuity. This way, once the new doctor takes over, most patients will likely remain.

“In rural areas — or where a physician becomes ill or dies — it’s different. There, with a basic shortage of medical services, a practice can simply be sold, and the patients generally have no choice but to remain,” he pointed out.

“Finally, Dave,” Bob counseled, “Let’s get real here. The pressure on you to buy within a week is a bad sign. You need the time to have an accountant review her books to see if what you are being told is true. Run the other way. You’ve got plenty of time before hanging out your own shingle.”

It was good advice.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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“I have received an invitation to attend a free real estate seminar put on by a company that flips homes but have never had any experience in buying or selling real estate. The TV show makes it look pretty easy to buy a house and quickly sell it for a big profit.

“However, on-line there are lots of negative comments about these seminars, from people feeling sucked into paying thousands of dollars for advanced training and getting nothing of value. I’m a retired Hanford elementary school teacher and have a tough time in saying no to anyone, so a high pressure sales situation worries me.

“Have you ever been to one of these seminars? Do people make money from their courses? Do you have any advice?”

‘Most students do not make money’

The week after receiving our reader’s inquiry, we spent from 8:30 until around noon at an incredibly interesting seminar on flipping real estate. It felt like being at both a religious revival meeting and a dinner hosted by cannibals where seminar attendees were the main course.

The entire objective of the free program is to get you to sign up for a three day $1497 seminar followed by others costing thousands of dollars.

Arriving at 8:30 a.m. Saturday, a group of the flipping company’s staff members with a hungry, fake look, communicating, “You are my commission!” hand out registration forms containing powerful disclaimer language which we saw no one take the time to read before signing and turning in.

Repeatedly, we asked for a copy of the form; reluctantly given one, the hassle explained by one sentence making complaining customers go away:

“Most students do not make any money and they also purchased additional training materials.”

‘We give you an unfair advantage’

The messages at this free seminar were convincingly stated by a talented, high energy presenter:

• Real estate investing — flipping homes and buying tax liens — is easy, realistic and our instructors open the door of possibilities for you.
• Wealthy people have an unfair advantage which we give to you. We have access to information that others do not.
• Take action! Don’t sleep on it! Sign up for our three-day seminar! Go to the back of the room and sign up now!
• Surround yourself with smarter people — people who can help.
• To get what you’ve never had, you must do what you’ve never done!
• Stand up and follow me to the back of the room where we’ll sign you up. And yes, we have payment plans.

Reality is something quite different

“House flipping has enormous risk and those successful at it are seasoned, experienced people with money they can put at risk bringing a structure up to local building standards without affecting their personal economic health,” Sacramento real estate appraiser Atom Levi told You and the Law.

Forty-seven years an appraiser, Levi holds the highest national designations in real estate appraisal, MAI and SRA, and has been a licensed real estate broker for 37 years. He is well acquainted with home-flipping seminars, “That do little beyond selling hope to the desperate and deceiving the naïve.”

“There is no free lunch and you can’t just put a coat of paint on a property and sell it for great profit, especially now that house prices are elevated because financial institutions are keeping billions of dollars of properties off the market, by allowing people to remain living in homes without making payments. This is a shadow inventory of houses, and it is enormous,” he points out.

“The TV show ‘Love It or List It’ is a good example of how an older property has many unseen issues and you do not know what you are getting into. You have to replace this and that, you would like to have a competent building inspector look at it before you buy. But these properties are generally sold as is and sight unseen.

“So, often it’s a bag of problems, such as a meth lab you can’t clean up. You have to have experience and deep pockets, figuring in transactional costs, commissions, fees, title insurance, and putting yourself at great risk if you do something in a non-conforming manner. And if the market shifts, you must sell at a loss.

“Appropriate building codes which are applicable in your local must be respected, often calling for a complete re-wiring, new roof, new plumbing and the list grows from there,” he stressed.

“Typically, the people who do this are investors with deep pockets, and it is the only thing they do,” Levi points out, adding, “When these seminar people admit in their literature that most students do not make any money please believe it!

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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If you’re thinking about becoming an entrepreneur, you may be wondering whether you’d be more successful starting a business or buying an established business.

“‘Start your own business, open your own shop’ has always been part of the American dream,” observes Josh Tolley, nationally syndicated talk show host and author of the recently published Acquisitional Wealth.

“Sadly, few people pay enough attention to statistics that show approximately 50% of start-ups fail within five years. However, if a business remains open for a decade, the odds are that it will survive and has the potential to be marketable. So, if you have the option of investing in a new business or buying a well-established, going concern, just think of the hassle, worry and grief that can be avoided. But you’ve got to go about it the right way, realize the importance of having your own support team, and don’t even dream of doing it alone!”

Don’t fall for social media instant experts

In recent years, a number of our clients have run their business ideas by my staff — ideas and schemes, as Tolley correctly points out, “that often (stem) from a growing social media presence of insta-experts and coaches who sell do-it-yourself, expensive ‘how to buy a business’ courses, along with a list of several self-named resources that are available to buy now from their websites.

“Very much like the stock market mania of the COVID years, otherwise sober, mature adults act more like high school kids infatuated with their first love. This is where the failure to have competent, professional help and guidance can prove costly,” he says.

I asked Tolley to set out some of the most glaring mistakes anyone wanting to buy a business can make.

1. Follow the wrong advice and think you can do it on your own.

So many people are trying to go it alone, following the advice of an online business coach who says, “I can guide you in buying an ongoing business, so why pay for a lawyer or an accountant?”

The result is an epidemic of financial and legal problems. If you are buying a business, definitely use the experience of a broker, a transactional attorney and, if applicable, an accountant familiar with the dynamics of the enterprise. “It’s going to save you years of headaches, stress and possible legal ramifications to the business,” Tolley notes.

2. Buy retail or income-producing property.

The second most frequent mistake is getting into either retail or income-producing real estate. Tolley underscores, “Retail is not where you want to start, and you must accept the fact that there is a lot of unstable ground when it comes to retail. Restaurants are retail. Anything can upset the apple cart, from a pandemic to even construction on the road in front of the business/restaurant you just purchased.”

He makes a strong case in his book: “Make sure that you are purchasing a business that is not dependent on retail conditions, but instead depends on market or B2B (business-to-business) conditions.”

3. Think you’re going to be successful without going all in.

Contrary to other endeavors in life, if you’re going to acquire a business, jump in entirely or don’t jump in. “Once you have acquired a business,” Tolley points out, “you have to commit and really go for it. So often, I’ve seen the results of ‘entrepreneurs’ who tried to continue working their regular job. A variant of that mental process thinks, ‘Well, we saved $200,000 for a down payment, so let’s try $50,000 down to just give it a taste.’ That never works out.”

4. Change your team of advisers during the process.

“Don’t listen to your friends who might have owned one business once or who have no experience at all,” Tolley cautions. “This isn’t a time to get a consensus from friends and family. Unless they’ve done this successfully, their opinions don’t really carry a whole lot of weight. As many first-time buyers don’t come from a business background, their friends and family tend to have a similar lack of experience, and so their advice may lead down incorrect paths.”

How to prepare to buy a business

Before buying a business, you have to prepare financially by:

Keeping your credit score high
Not incurring any unnecessary new debt, such as a new car
Postponing any sort of credit hit until after the purchase
Ensuring your tax records are clean and up-to-date

Concluding our interview, Tolley shared a prescription for a successful business purchase by someone who has never before owned or operated a business: Start learning as many business skills and acquiring as much practical business knowledge as you can, rather than focusing on specific industry capabilities.

“Your overall business skill set is going to serve you much better in acquiring the company and running it successfully,” he says. “For example, with a restaurant, how to manage employees is going to serve you better than mastering a risotto recipe. Related and important skills will come with the business; knowing how to drive the business — like learning how to not just drive a car but race it and win — is now your goal.”

Dennis Beaver Practices law in Bakersfield and welcomes comments and questions from readers,
which may be faxed to (661) 323-7993,
or e-mailed to Lagombeaver1 – at – Gmail.com.

The post Four Big Mistakes to Avoid if You’re Buying a Business appeared first on Dennis Beaver.

In 2008-2009, when the stock market crashed, so many people who were either close to or in retirement not only lost their shirt, but also their self-confidence, trust in their own decisions, respect from family members and a complete loss of faith in their financial advisor. Heart attacks increased significantly, especially among the elderly, as a Duke University study reported in late 2011.

“But just wait. If they jump back into the stock market, life for many of them — who lost over half of what they had accumulated over many years — could get much worse if we see even a mini-crash,” warns a Southern California stockbroker who we will simply call Mr. X, a veteran of 25 successful years with one of the nation’s largest investment houses.

He has a warning: “Many of these same people are now being frightened into getting back in, told that if they do not, they will not have enough money to live on.”

Mr. X isn’t selling a book which promises to save us all from disaster and does not claim to be prophet. Rather, he finds “mounting evidence of highly dangerous financial propaganda, aimed at those very people — crushed financially and emotionally by their earlier losses — the last ones who should ever dream of putting what they still have at risk back into the stock market.”

Not everyone needs to be in

“There are many people who should not be in the stock market — either by temperament and their inability to emotionally cope with loss — or who have no need to own stocks, which are never a sure thing, and always far from it,” X points out. “When you have sufficient income sources without stock dividends or stock appreciation, then you probably do not need equities.

This includes people who:

Live within their means and save;

Remain clear of unnecessary debt, especially from credit cards;

Do not treat their home like an ATM:

Own some type of income property, royalty, annuity or a small pension; and,

Will receive Social Security.

“You avoid the craziness — the fear — of making a mistake in not buying stocks again, by asking: Are my needs met, or will they be with what I already have in place? What can I lose by being at risk again in the market? What would that do to me emotionally, and in the eyes of my family?”

No duty to watch out for your money

X cautions us to be wary of ads which create an image of stockbrokers who place their customer’s financial interests first. That’s what a fiduciary does — places the client’s interest first. But, stockbrokers are not fiduciaries.

“Regardless of these comforting ads, a stockbroker has no legal duty to watch out for your money or act in your best financial interest, and certainly not to put you first. We sell investment products, and just like anyone in sales, it is because we want a commission,” he notes.

“We must not knowingly put you into something completely inappropriate, but until the law changes, a stockbroker has no fiduciary obligation to customers. So, unless it is very clear that you are suffering from some mental impairment and your decisions cannot be trusted, we will do what our customer instructs. That’s why adult children need to be aware of what mom and dad just might be getting into, if there are questions about judgment or self-control,” X suggests.

“Also, realize there is no requirement for us to call you and say, ‘Sell this stock!’ Some brokers will, but most are only too happy to sell you something and then almost vanish,” he stressed.

“Just talk with the people who rode the 2008 crash all the way down — losing in many cases well over half of their money — and worse yet, could have gotten out early, had their brokers just said, ‘Look, it’s bad, sell now, keep your profits in cash and wait to get in later.’ But that rarely happened.”

It’s more than just losing money

“Losing money in the stock market is often much more than just losing money. It can ruin your marriage. It can get you sued by your employees if you manage and lose their retirement money,” broker X underscores.

“Finally,” he points out, “Often investors have no idea of what the term ‘risk tolerance’ means to them. The answer is only revealed in a down market. If you have proven to yourself that you cannot accept risk then, you have already answered the question, ‘Should I again be in the market?’”

So, what are we to do? Annuities claim to protect our nest egg, provide money in the future and not be subject to loss in a stock market crash? But do they, and are they as safe as all the fancy ads claim? We’ll have the answers next week.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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Late-night TV is packed with commercials for companies that promise to help inventors patent and market their idea or product. Having seen those ads for the past 15 years he has been a patent attorney in Bakersfield, Jim Duncan observes:

“I have seen  disappointment and money — lots of money — stolen by so many of these invention promotion firms from trusting, hard-working people who came up with an idea and just wanted a better life for their families.”

“We say that necessity is the mother of all invention. Someone comes up with an idea. They discuss it with friends who comment, ‘What a great idea! I’ve never seen anything like this before. You should really get a patent on this. You could sell it to Walmart.’ If they watch late-night TV and see these ads, [that] often begins a costly walk down a dangerous path. These ads say, ‘Got an idea, send it to us and we will give you a free preliminary review.’ The freebie gets the scammers in the door, and so our victims take the bait, call the 800 number and send in their idea. Inevitably, they receive a return communication: This sounds like a great idea, we can provide a market analysis for $700-800.”

You think, “What’s that in the face of making millions?”

“They send that money and next receive a fancy leatherette booklet, packed full with non-specific material regarding how the market works, consumer demand in the United States for this kind of product — all of it easy to get online free.

“You get 3 pages reviewing your product and are told something along the lines of, ‘This is the greatest idea we have ever heard of! You have an invention which is going to make you millions!’ ”

It is at this stage where that late-night TV commercial is really going to pay off, because now, as Duncan describes, “The pressure is on and you are becoming a true believer. You start receiving these types of phone calls which reel you in further:

• We need to take this to the next step and can promote it for you.

• We attend all trade shows and have a huge network of connections.

• We have an established track record with the decision makers and will take your idea to

them.

• We work with all of the major companies and will get you a contract with one of them.

• The price for all of this is only $10,000 and you can put it on your credit card.

“Over the years, I have had so many clients come to me who have gone along,” Duncan said. “The invention promotion firm typically has a patentability search done but providing little analysis. They frequently conclude that the invention is patentable, but usually the protection is limited to a design patent, which only protects the ornamental appearance of an item. It is the easiest to get and the least valuable, as opposed to a utility patent, which provides the greatest protection.“

“The bottom line is that they want you to spend thousands of dollars and they promise to market your invention and sell it. In California, they are required to tell you the number of their clients who have had a return on their investment — that is, those clients who have actually been able to market the invention and that it has generated income.  If you can find and read the fine print, in my experience the typical number of people who have had a return on their investment is one out of 10,000!” Duncan said, shaking his head.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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At no time in recent memory has the real estate market in the San Joaquin Valley been as hot as it is now. New and re-sale homes, as well as lots suitable for construction bring prices that could hardly have been imagined just a few years ago.

This real estate boom has interesting side-effects, as one Hanford real estate broker observed in an e-mail. “We have private sellers, real estate agents, brokers and developers at times doing anything to kill good deals that are already in escrow, knowing they will be able to squeeze more money out of a new sale of the same property. Ethics and morality often lose out to greed, and a lot of very disappointed people now have an even lower opinion of this profession, than in the past, I am sorry to say.”

Within the past few weeks, I have spent a great deal of time on the phone with two readers who would completely agree with that statement. This is the story of Terry and the very nice custom lot she and her husband contracted to buy near the J. Simas Elementary school in Hanford.

“There are about 30 lots in this subdivision, and we fell in love with the location and planned development. Years ago we purchased a house from the developer. I will call him Rusty, but that’s not his real name. We trusted him and immediately agreed to his asking price for the lot. An escrow for the lot was opened, the requested deposit paid and an architect hired to draw plans, which cost us over $4,000. This was more than just a vacant lot; we made an emotional investment in the location,” Terry stressed.

It Began With a Phone Call

Terry purchased the lot for $80,000. Her deposit was delivered to the escrow company, and she expected it to close by the beginning of September. Then came the phone call.

“A message was left on our answering machine to the effect that we had to pay $4,000 more if we wanted the lot. So, we called Rusty, and he gave us some strange story about the city wanting him to do another soils compaction test, as the first one he did was not acceptable, and he was passing the cost along to all of the buyers – about 30 of us. I said this did not seem to be our problem – as we already had a binding contract, and if there was a problem with city approval, this was none of our doing, and we expected him to honor his contract,” she told me.

Unfortunately, the developer had a very different view of what it means when you sign a contract. “Listen,” he shouted at Terry, “Either you pay more or I will tell the escrow company to pull the plug. Don’t make me laugh talking about ethics or legalities. I am not going to be out over $150,000 because the first soils guy I hired did a lousy job, and I do not care about what the contract says, because I can sell it for more to someone else. Take it or leave it!”

At that point, Terry e-mailed me, asking if Rusty could legally cancel the deal. Without reading contracts, escrow instructions and speaking with the developer, I could not confidently answer the question. The next day her husband dropped by my office with everything I needed to examine.

Legal Analysis – The Developer is Wrong

Based upon what I read, in my legal opinion there was no way this character could get away with this. He signed a contract, opened the escrow, and knew that my readers had invested money in house plans for this particular lot–plans which would have to be redone should they find another location. My calls to his office–and requests that he call me left on his answering machine–went unreturned.

While it appeared that Rusty was clearly wrong, there are usually two sides to every dispute, and I needed him to answers these questions: (1) If what I have been told is correct, how can you justify insisting that my readers pay one cent more? (2) Let’s say the city required that you have additional soils work performed, but this was months after the sale was entered into. Unless your contract permits passing along those costs, how do you ethically and legally explain what you are doing? Finally, do you understand what a contract is, and that once signed, your obligations are pretty well set in concrete?

Unexpected Turn of Events

Our developer was not a happy camper and, I was informed, in addition to a seriously strained sense of right and wrong, he also has a loud mouth and a temper. Terry and her husband involved the title company and their own agent–and let it be known that I was interested in the outcome. For some odd, reason, Rusty was made at a lot of people, me included, but then something nice happened. Something completely unexpected.

Terry’s agent phoned the developer’s agent, and said, “Agent to agent, how can your client possibly refuse to honor the contract? It is unethical and possibly illegal to raise the price in the middle of a deal. This just isn’t right. We have to fix this.”
The developer’s agent could have ignored those comments. But he agreed and made an extraordinary offer. “I will give up my commission–around $3200 if you do the same, then the deal will sail through. It’s the right thing to do,” he said.

So, here we have two real estate professionals who placed the interests of the buyers above their commissions. No one forced them to do so. They saw the legal issues, and more importantly, the ethical and moral issues involved.

One of them told me, “There was no justification for what the developer was trying to do. The contract did not permit passing along these costs. To anyone looking at his tactics, the word extortion would immediately come to mind. It was so unfair to Terry and other buyers in the same position. I felt disgusted and was not going to let these innocent buyers get hurt.”

Terry and her hubby will soon start to build their home. They need a nice place, a little slice of calm in a rough world. Terry is a Parole Officer and her husband is a Correctional Officer, and two of the nicest people you could ever meet. But don’t get Terry mad at you; this lady has a sense of justice and fair play that is so old fashioned. And so very, very right.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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