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Oakes And Fosher Sues New England Securities For Alleged Failure To Supervise

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Tale Of Cheating Planner Teaches Lesson

By Jim Gallagher | September 27, 2009

In December 2006, Marge and Clyde Crutcher of Godfrey got a letter from the financial planner managing their life savings:

“Dear Marge, By the time you receive this I’ll be dead. The noted programs you participated in were my creation and are worthless,” said the letter, signed by Robert M. Smart. “The regulatory authorities have gotten wind of what I have been doing and I am sure I face eminent (sic) arrest,” he added.

The Crutchers, who are in their 70s, were in shock. They had given the planner, Robert Smart, about $470,000 to invest. About $300,000 was their own life savings. Another $170,000 was invested on behalf of their teenage grandson, the proceeds of a life insurance payout on the death of the boy’s father.

“At first I thought this was a poor joke. This can’t be. My mind was blowing,” said Marge Crutcher.

“I was afraid she was going to have a heart attack,” said her husband.

Over the next few days, they would learn that all but $100,000 of their own investment was gone – stolen by Smart. All of their grandson’s money had vanished.

Smart didn’t kill himself. He’s now serving five years in federal prison for fraud. He pleaded guilty of defrauding at least eight investors out of $2.5 million, according to court records.

The Crutchers provide a cautionary tale – of how trust can be betrayed, and how a wily operator can conceal the truth for years while fleecing an investor.

Their saga also shows that investors aren’t helpless, even when the stealing broker lacks the money to repay the victims. The Crutchers’ attorney, Bruce Oakes, won an arbitrators award for $300,000 against a brokerage firm that he alleged failed to supervise Smart.

The Crutchers met Smart in 1996. At the time, Clyde Crutcher had just retired from Laclede Steel, where he was a mechanical engineer. The couple were looking for a way to invest his 401(k). Neither he nor Marge had much experience with stocks and bonds.

A couple of friends recommended Smart. “He came to our home. Charming,” said Marge Crutcher. “He was a very nice guy,” said her husband.

On paper, Smart certainly looked like a straight arrow. He was on the vestry of his Episcopal church, a board member of Habitat for Humanity and president of the Rotary Club.

For the first few years, things went fine. Smart put the Crutchers’ money in mutual funds, although he also invested in riskier viatical settlements. Then, around 2000, Smart approached the Crutchers with an “investment opportunity” paying 12 percent interest.

“He said it was a construction company that was going to rehab downtown Grand Rapids and it was a big project in that city,” said Clyde Crutcher. “He said there’d be no problem getting it back. The Crutchers invested $200,000. They were comforted by statements they received from an independent IRA custodian showing their investment steadily growing. “Wouldn’t you think your money was safe?” said Marge Crutcher.

Actually, that doesn’t mean a thing, said Oakes, the couple’s attorney. Many such custodians simply take what they’re given without verifying it, he says. Smart sent in phony copies of promissory notes, and the custodian simply put it in the Crutchers’ account as if it were real.

The lesson here is that investors should look at the source of their statements. If they’re from a well-known institution – a bank or a Fidelity or an Edward Jones – investors can trust them. If not, better get verification.

They should also check a planner’s record at www.finra.org, the website of the Financial Industry Regulatory Authority. Had the Crutchers checked, they may have found that Smart was banned from the securities business in 2004 for failing to respond to regulators’ requests for documents, and that he quit as a broker for H. Beck Inc. in 2003 after the firm began an internal investigation into client loans. They might also have learned of a 1993 court judgment against Smart and his subsequent bankruptcy.

One of the Crutchers’ four adult children died in 2005. The couple decided to invest the life insurance payment for the benefit of their grandson, then 14. They called Smart.

“He said he was going to make him a rich young man,” said Marge Crutcher. “It was a rental-type investment, equipment leasing.”

The Crutchers wired the money to Smart’s personal bank account – another mistake. “Never make a check out to the broker,” says Oakes. Avoid making checks payable to small financial planning firms as well. Make them out to the clearing firm for stock transactions, or to the mutual fund company.

In a plea agreement with federal prosecutors, Smart admitted to taking more than $3.2 million from several clients and investing it in business loans. But the loans were bogus. About $700,000 of the $3.2 million was returned to clients.

Independent financial planners must send their securities trades through a brokerage firm. Legally, that brokerage has the responsibility to supervise the planner, even though he is not an employee.

Smart sent his trades through New England Securities. In March, Oakes convinced an arbitration panel that New England had failed to keep tabs on Smart. They awarded the Crutchers $200,000 in actual damages, $100,000 in punitive damages, plus interest and attorney fees.

Smart had switched brokerages before taking on the grandson’s money, and an arbitration case against the second brokerage is pending.

The typical cheating financial adviser starts out small, Oakes says. They rely on their clients’ trust, as Smart noted in his letter to the Crutchers: “Ironically, it is the implicit trust that you had in me that led to your loss.”