October 30, 2003 With Guest Andrew Stoltmann

CHRISTINE ROMANS, CNN ANCHOR, STREET SWEEP: As the number of mutual fund scandals rises so do shareholder lawsuits. According to National Association of Securities Dealers almost 1,400 mutual fund arbitration cases were filed from January through September, that is 20 percent of all NASD arbitration cases for 2003 and in 2000, they amounted to less than 5 percent. Andrew Stoltmann is a securities attorney at Maddox, Hargett & Caruso and he joins us from Chicago for a look at what’s at issue and what is at stake. Welcome to the program.


ROMANS: I guess there’s really quite a few ways if you’re a mutual fund investor you have can be taken advantage of. And I want to zero in on what someone who thinks that he or she has lost something in all of this can do. What’s the first thing to do if you’re trying to figure out just how you’ve been harmed by eighter this mutual fund issue that we’re talking about now or any of a variety of other ways.

STOLTMANN: Probably the first thing to look at is the suitability of the mutual funds. Take a look at the percentage returned, the negative percentage return that you might be down. If you are down over 30 to 35 percent in the last year to two years that’s a pretty good red flag that something might be wrong. You may also want to take a look at the trading activity inside of your brokerage account. If there’s any type of mutual fund switching meaning buying of a mutual fund and then selling it six to 12 months later, that’s a real indication something might be wrong with your account, it is an indication that the broker may have been trading your mutual funds in order to make an extra profit for himself.

ROMANS: And so you’re paying fees sort of over and over again. That’s a perfect example of where your broker has put you very last on the chain of important people, and it’s your money.

STOLTMANN: That is right, it’s not surprising that brokers tend to recommend the products that pay them the most amount of money. What many brokers have been doing in the last 6 to 18 months or so is purchasing loaded mutual funds, being it either a shares or b shares. Holding those possessions for six to twelve months. And the investor incurs a 5 percent up front sales load and then a liquidation occurs and a mutual fund is purchased and investors has to pay again 5 percent up front.

ROMANS: You know what’s really frustrating about, this is I think a lot of investors think that when they are getting into mutual funds it’s safe. It’s safer than wading into the stock market. If you don’t know how to analyze stock or you don’t know how to trade a lot of different stocks it’s just safer if you go through a broker or buying mutual funds. And you’re telling me there are a lot of different ways that — I mean that you can get ripped off.

STOLTMANN: I think you hit on a real important point, that investors tended to put their guard down when it came to mutual funds. Because we heard so many market experts in the last five to ten years saying mutual funds, that’s the place you need to be. And investors don’t realize there are a lot of different ways that a broker can take advantage of an investor inside of a mutual fund at the investors’ direct expense.

ROMANS: What we’re seeing a lot of now are suitability claims, that is, investors who say wait a second. Somebody put me into the mutual funds that are completely not right for where I am or for the rest of my portfolio. How do you make sure that doesn’t happen?

STOLTMANN: A number of different ways. Probably the most important method is to, before you invest in any type of mutual fund, get the prospectus, read through it, find out what types of securities the mutual fund is going to invest in. The classic case is the 60 to 65-year-old retiree purchasing technology funds that were recommended by the broker. A lot of the times the brokers have not made it clear what type of investments are inside of that mutual fund.

ROMANS: Andrew Stoltmann, thank you so much for joining us today.

STOLTMANN: Thank you.

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