Greed is back. As markets recover, clients begin a marathon to make up losses. For many, it’s going to be a legitimate race. But, for others — who see themselves with a sense of entitlement, their eyes will be on cutting corners through insider trading profits, creditor fraud and tax evasion. 

These undesirable clients will seek your help.  They may use their account relationship with you to hide their deeds. If you ignore red flags as they appear you may be unwittingly drawn in as their willful accomplice. 

If your honor and reputation is worth more to you than your client’s questionable business, this report should offer some guidance on how to begin the process of protecting yourself.

“Greed is good.” This is the credo of the aptly named Gordon Gekko (Michael Douglas), the antihero of Oliver Stone’s 1987 film Wall Street.  Gekko, a high-rolling corporate raider, is idolized by young-and-hungry broker Bud Fox (Charlie Sheen). Inveigling his way into Gecko’s inner circle, Fox quickly learns to rape, murder and bury his sense of ethics. Only when Gekko’s wheeling and dealing causes a near-tragedy on a personal level does Fox “reform”-though his means of destroying Gekko are every bit as underhanded as his previous activities on the trading floor. 

As life often imitates art, a real life version of the movie Wall Street played itself out in the courtroom and media less than ten years ago. In this real life drama, the antihero was Martha Stewart, the media mogul and cooking diva whose sense of entitlement included insider information about ImClone Systems at the end of 2001. 

Stewart avoided a loss of $45,673 by selling 3,928 shares of her ImClone Systems stock in late 2001. The day following her sale, the stock value fell 18%. When asked officially if she sold one day before the stock’s collapse on insider information, she said “no.” 

Stewart needed the help of Peter Bacanovic, her stockbroker at Merrill Lynch to corroborate her story. Both Stewart and Bacanovic were boxed into a corner by making false statements to investigators. 

As a Federal jury found, Bacanovic was covering up for Stewart. Bacanovic placed a very high value on preserving and protecting his relationship with the cooking diva. He traded his career, ethics and values to protect her. 

From Brokerage House to the Big House 

The parallel between fiction and fact saw the ended careers of both Fox in Wall Street and Bacanovic, Stewart’s broker in real life. Bacanovic wound up serving five months in Federal Prison near Las Vegas and five months of probation. He was fired from his job at Merrill Lynch and banned from the securities industry. 

He said in a New York Times interview, “I was indicted not because I was the biggest criminal on the block or the biggest insider trader in history.  I was indicted simply to bring a case against my celebrity co-defendant.  I was a device.” 

An advisor can be blinded by client loyalty, says Dayle Carlson, a well-respected criminal law expert and correctional consultant in Northern California.  It takes a sense of ethics and clear values to draw a line between right and wrong. 

I interviewed Carlson last week for this report from his office in Sacramento. He said that the profits created from a good client may often overshadow the sense of right and wrong.  A client relationship often involves social events such as golf tournaments, tennis matches and parties. It’s tough to say “no” to a client when you’re managing millions of dollars. 

Carlson sees all kinds of criminal behavior, but when it comes to financial crimes involving greed and fraud, the theme is often consistent. Carlson calls it “hubris behavior” which he sees quite frequently in his practice. His definition is one who is both extraordinarily arrogant and exhibits a strong sense of entitlement.  In Stewart’s case, Carlson is correct. 

Carlson says hubris behavior may offer you a clue that your client is on the wrong path. He added that your client may send you other signals.

These include: 

• Reluctance to Discuss Account Changes.  Clients reluctant to provide information  for updating account information or transaction processing.
• Conflicting Information.  Clients who provide conflicting information without providing explanations for their inconsistencies.
• Suspicious Activity.  A sudden change in the pattern of business involvement.  A request for wire transfers or transaction with unknown sources. 

He added that observing stressful behavior is also a key to knowing what your client might be doing. Carlson said, “Stress may come from addiction such as gambling or sexual addiction or from financial problems.” 

Spotting Trouble 

Keeping an eye on your clients is part of your duty.  Section 326 of the Patriot Act and other requirements of your customer identification program should require frequent screening of your client’s activities to detect any kind of suspicious activity. 

Although there is no screening formula that can be used to detect a client with a bankrupt value system, asking the right questions may often yield results.  Tax evasion might manifest itself in the sudden use of offshore corporations, foreign trusts or an increased desire to travel to places like the Cayman Islands and Liechtenstein. 

Much of the luster of offshore bank accounts has worn out amidst the aftermath of the UBS scandal, but there still remains the diehard client who is bent on cheating Uncle Sam and feels fully justified because he may not like the way the government is being run. 

Insider trading is another slippery slope that you as an advisor need to watch for.  The last thing you need is to be asked by your client “do you have any inside information.”  When I was a stockbroker I used to get that question asked all the time and my answer was always no.  However, the client that can’t accept no from his advisor often doesn’t stop with you. 

He may continue pursuits and go right to the source of the information he seeks in order to determine how to make a trade on your watch with inside information. 

Silence Is Not Golden 

If you detect that a client may be up to no good, keeping quiet about it can be your biggest mistake.  With prosecutors looking at ensnaring as many people that help the culprit as possible, financial advisors are prime targets.  The ostrich approach of sticking your head in the sand and ignoring the telltale signal of criminality can make you an accomplice and culpable in any legal proceeding. 

Therefore, it is important and crucial that, upon discovery, your suspicions be reported to the compliance department and a plan be undertaken to give the client his pink slip. 

It’s good business to get rid of your bad clients. Prosecutors look for wealthy clients who are considered highly valued targets for their prosecutions.  Early detection and elimination of bad apples can save both your career and a great deal of embarrassment to your firm. 

Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.