Cover Story

Bad Brokers: Dr. Maderazo fought back. So can you

Doctors are often sitting ducks when it comes to brokerage fraud. Here's how to protect your hard-earned cash.

By Wayne J. Guglielmo
Senior Editor

Cesar V. Maderazo still gets upset when he recalls how his broker took advantage of him.

The trouble started in 1997, after the Phoenix internist attended a seminar conducted by Piper Jaffray broker Vincent H. Rossi. Impressed by the dapper and smooth-talking Rossi, Maderazo decided to let him manage his $1 million-plus portfolio.

Almost immediately, Rossi persuaded Maderazo and his wife, Leonor, to liquidate their holdings—mostly no-load mutual funds, the rest blue-chip stocks—and invest in what turned out to be essentially equivalent funds. Besides a 1 percent management fee, the transaction also netted Rossi and his firm more than $26,000 in "dealer concessions," which should have been credited to the Maderazos but weren't.

Less than nine months later, Rossi again persuaded Maderazo to flip his portfolio, this time from mutual funds to an assortment of individual stocks. The annual fee on the new account was 1.7 percent. And since the Maderazos had held the traded funds for less than a year, their account was assessed a $21,000 penalty, something Rossi and his firm had neglected to disclose ahead of time.

Concerned about the higher commission but still unaware of the penalty and other problems, Maderazo decided to transfer his account to Paine Webber, where his son-in-law worked. Before, he'd resisted family involvement in his finances, but by this point he was "desperate."

Maderazo's son-in-law became suspicious when he reviewed the documents from the old accounts. Prompted to retain a lawyer, Maderazo filed a claim with the National Association of Securities Dealers, which along with the New York Stock Exchange arbitrates nearly all security disputes. These days, brokerages almost universally require investors to sign an agreement binding them to resolve disputes through arbitration.

In late 2000, an NASD arbitration panel awarded the Maderazos more than $147,000 in compensatory damages, attorney's fees, and other costs. "It was a harrowing experience," Maderazo says. "But I wanted to make sure this broker didn't do the same thing to someone else."

Other investors have felt equally aggrieved of late. In 2001, mediation and arbitration case filings with NASD Dispute Resolution rose to 7,088—a 24 percent jump from the previous year. Negligence, misrepresentation, and unsuitability were among the most common allegations. Of the 6,915 arbitration claims filed, 4,149 60 percent were settled prior to arbitration. Of the remaining 2,766 cases, claimants prevailed more than 50 percent of the time.