03/25/2010 05:12 am ET Updated May 25, 2011

New Defense For Crooked Brokers: Our Industry Is Corrupt

Eric Butler will be serving 5 years in jail instead of "serving" his Credit Suisse clients. He received that sentence in federal court in Brooklyn after a jury found him guilty of misleading clients into believing they were purchasing risk free debt instruments. Instead, Butler and his co-defendant and fellow Credit Suisse broker, Julian Tzolov, purchased high commission auction-rate securities. We all know what happened to that market.

The government asked for a sentence of up to 45 years, but the U.S. District Court Judge Jack Weinstein gave him a break. Why?

The Judge said he took into consideration "...the circumstances of the financial industry in which he worked."

In order to be sure there was no confusion over exactly what that meant, the Judge elaborated. He noted "the pernicious and pervasive culture of corruption in the financial-services industry" which is "beset by avarice."

He also took a well deserved swing at Credit Suisse, stating that "[T]he blame for this condition is shared not only by individual defendants like Butler, but also the institutions that employ them."

It has long been my view that no one should have an account with a retail brokerage firm. They don't have any of the skills they purport to have, like market timing, stock picking or fund manager picking. They also are not fiduciaries to their clients so they can (and usually do) have conflicts of interest. Why so many investors entrust their life savings to these firms remains a mystery to me.

Judge Weinstein has taken the discourse to a new level. Greed and profit drives the brokerage firm model. It is not surprising that supervision of Butler and Tzolov was lacking. There is an inverse relationship between close supervision and high commission generating brokers. Everyone who works in the securities industry understands how the game is played.

Now that a distinguished jurist has exposed the reality of an industry that thrives on the gullibility of its clients, let's hope his observations provide a much needed wake-up call to investors.

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