53 Individuals, 13 States Name Schwab
A federal court has certified a class action lawsuit brought by the Ponzi scheme victims of flamboyant South Carolina investor, Al Parish, naming Charles Schwab & Co. as liable for its involvement in the sale of unregistered securities, a violation of the South Carolina Uniform Securities Act of 2005.
Parish was sentenced to 24 years in prison in the Federal Correctional Complex in Butner, NC where Bernie Madoff is serving his sentence for a Ponzi scheme.
53 individuals from 13 states now make up the class.
Estimates are upward of 600 people lost more than $100 million by investing with Parish, a former Charleston Southern University economics professor who has been ordered to pay $66 million in restitution to his victims.
The complaint alleges that Schwab is a broker-dealer under the S.C. Uniform Securities Act and is liable for helping Parish direct customers’ retirement funds into questionable Parish investment vehicles.
IRA rules allow an individual to self-direct those funds into stocks, mutual funds or other qualified investments. Schwab reportedly assisted Parish by providing the means for its customers to invest IRA funds with Parish without losing those funds’ special tax treatment.
“Parish and Schwab would invest in promissory notes. It’s rife for fraud,” says Motley Rice attorney, Badge Humphries, who represents the plaintiffs.
Humphries added that when banks serve as IRA custodians, they don’t have the same duties to customers as broker-dealers, such as Schwab, under the S.C. Uniform Securities Act. “Schwab will argue we are just an IRA custodian like everybody else, but Schwab’s status as a broker-dealer under the law is not determined by its role in particular transactions,” he says.
Class claims are based on Schwab’s alleged role as a broker-dealer in materially aiding the sale of unregistered securities and as a control person of those liable under the Act. Broker-dealers help execute trades on behalf of a customer and are regulated under the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Humphries says that Schwab had initially refused to be involved with Parish as a qualified IRA custodian. But after an Internet IRA custodian refused to hold any more investments in the form of promissory notes, Schwab stepped in.
“So our complaint alleges that by facilitating Parish’s fraud and rolling over promissory notes to a new transaction, Schwab materially aided the sale of those unregistered securities,” Humphries tells IB News “So our complaint alleges that by facilitating Parish’s fraud and rolling over promissory notes to a new transaction, Schwab materially aided the sale of those unregistered securities,” Humphries tells IB News.
Humphries says that under both state and federal law, broker-dealers are professionals who have a heightened duty to police these types of investments.
What’s wrong with a promissory note? Basically an IOU, a promissory note is not secured. “Some investors did not know that they were investing in a promissory note. They thought they were investing in whatever pools Parish Economics was selling,” Humphries says.
Schwab has since changed its policy and currently does not deal in promissory notes.
Parish would offer different investments to consumers – a fixed investment pool, a stock pool, a futures pool, and a hard asset pool.
“He was reportedly like Bernie Madoff in some ways,” says Humphries, “basically making you beg to steal your money. It was difficult to get into circles with him; you would have to be invited. They thought they were part of an exclusive club.”
And it didn’t hurt that Parish knew the value of good PR.
Dubbing himself, “Economan” complete with a muscle-bound superhero logo, he ran on the ego-fueled belief that he could beat Wall Street. Part of his legend was his reported $1.2 million pen collection, including a $170,000 diamond encrusted pen.
Parish says in a June 26, 2008 interview with the Charleston newspaper, The Post and Courier, that he did make money for 100 investors.
Many defrauded investors are now past retirement age. Humphries says one woman in her 70s has gone back to work at the only job she could find at her local church. Others are wiped out.
Not all investors were inexperienced. One investor with an MBA had always been hesitant about investing but finally did because of the involvement and reputation of Charles Schwab & Co.
The receiver, based in Atlanta, is distributing what’s left of the assets. At issue in the Schwab case is approximately $10 million in investments with Parish.
In many Ponzi schemes there are no assets that remain. Humphries says, “Luckily for these class members, by virtue of Schwab’s role in these transactions they may be able to recover something.”
Other investors forwarded cash onto Parish rather than using a broker-dealer, and those investments are not part of the class and therefore not recoverable.
South Carolina is one of 18 states that have adopted the Uniform Securities Act of 2002 and this will be one of the first cases to interpret the civil liabilities provision.
Certifying a class means that Schwab cannot force arbitration on individuals within the class because of FINRA’s rules governing broker-dealers. Otherwise, investors would have faced individual arbitration all over the country and incurred unnecessary expenses that can act as a significant barrier to recovery.
The class currently of 53 represents plaintiffs from all over the country including Arizona, California, Colorado, Florida, Georgia, Louisiana, Massachusetts, Missouri, New York, South Carolina, Virginia, Washington State and Wisconsin.
Humphries and Bill Narwold of Motley Rice, LLC represent the class along with co-counsel James Mixon Griffin and Richard A. Harpootlian. The case is Brown et al. v. Charles Schwab & Co., Inc., D.S.C., No.2:07-cv-03852-DCN. #