Investors' Bookshelf: <I>License to Steal</I>

Two Wall Street veterans reveal the little-known -- and often shocking -- practices of U.S. brokerages.
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License to Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor

, by Anonymous and Timothy Harper. HarperBusiness, November 1999; 277 pages.

If there were ever a compelling argument for keeping your money under the mattress, this might be it.

License to Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor

tells the inside story of Wall Street's full-service brokerages, where stockbrokers are alleged to routinely trick, cheat and defraud their customers just to line their own pockets.

Investors are portrayed as victims and their investments are nothing more than capital to make more commissions for money-greedy brokers.

Shocking stuff, to be sure. And the book, cowritten by an anonymous former Wall Street broker and journalist Timothy Harper, lays out the tale to maximum effect.

A first-person account of the broker's career, the book follows him from his early efforts as a cold-caller and trainee broker at "the

Harvard

of financial institutions" to his days selling shares in IPOs valued at millions of dollars at a second-rate brokerage.

Along the way, the authors reveal the murky inner workings of the brokerage industry.

In this whistleblower's tale, brokers are depicted using questionable and sometimes illegal tactics to maximize their income at the expense of their clients.

At one point, the book's greenhorn broker is introduced to the art of hidden commissions.

It works like this: A broker contacts a client and recommends that he or she purchase a stock trading at "around 10." The client agrees to buy 500 shares, expecting to pay $5,000, plus the broker's 3% commission, for a total of $5,150.

But the broker has other ideas. The recommended stock is actually trading at 9.75, making for a spread of a quarter. The broker buys the stock from the market at 9.75, and then sells it to the client at 10.

The client pays $5,150, but the stock costs just $4,875. The client is denied the better price and the broker pockets $275, which includes a hidden commission of $125.

"Figure that hidden commission many times over, many times a day, on trades large or small, and it's easy to see how brokers can play the spread to boost their incomes," write the authors.

The book's message is highly relevant, especially given that more Americans than ever are investing their hard-earned dollars in the burgeoning bull market, the longest in U.S. history.

Equity ownership among Americans is on the rise. Nearly half of all households invest in equities -- a total of 78.7 million individuals as of early 1999, up 85.6% from 42.4 million in 1983 -- according to a study by the

Securities Industry Association

, a trade group for the securities industry.

Most investors hand over their money to stockbrokers who buy and sell stocks and bonds on their behalf. But most Americans know little or nothing about how the nation's brokerages work, and they continue to entrust their money to brokers who they believe will make them as much on it as possible.

In truth, write the authors, most brokers are concerned only with selling and reselling the stocks in a client's portfolio in search of more commissions for their sales -- an inherent conflict of interest.

"Remember, when they send in that money, it's not theirs anymore," a senior broker tells the rookie broker in the book, in a scene worthy of Oliver Stone's movie

Wall Street

. "It's ours. It's ours to make money with. We're never giving it back to them."

The book is not without its flaws. The anonymity of one the authors is a problem. Naming names is "less important than telling what these stockbrokers did and saw, and how they and other stockbrokers routinely abused their relationships with clients," write the authors. But, while anonymity gives the co-author, who is described as a senior vice president and broker on Wall Street, more freedom, it also leaves the reader with lingering questions about his or her credibility.

Another obstacle is the book's rather one-sided portrayal of the industry. In focusing on a small, hard-core group of cold-calling firms and boiler rooms that tout stocks to vulnerable investors, the book has little relevance to the many regional brokerages nationwide that maintain good long-term relationships with clients and encourage responsible investing.

Like the story of

Gordon Gekko

, the

Michael Douglas

character who boasts that "greed is good,"

License to Steal

is a compelling read, but sometimes comes off more like a Hollywood movie than a serious study of U.S. brokerages.

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