Behind the Scenes at Olde
At a typical "discount" brokerage firm, such as Schwabb or Fidelity, the person who answers the phone does not care what stocks you buy. The person is paid a flat salary and offers no expert opinions. Olde Discount Corporation, on the other hand, allows its stockbrokers to recommend stocks to clients, despite its billing as a "discount" brokerage firm. Olde has hundreds of offices across the country. An analysis of internal documents generated by Olde which have recently come to light discloses a firm run more like a military boot camp than a brokerage firm.
These internal records indicate that, at least during the 1993-1995 time period, Olde imposed rigorous requirements on and offered tantalizing incentives to its stockbrokers so that they would sell a select group of stocks. Olde designated a group of 200 or so mostly little-known Nasdaq stocks Special Ventures, and it prohibited its stockbrokers from recommending any stocks not on its Special Venture list. Many clients of Olde believed that Olde brokers recommended stocks from all available stocks and were unaware of the requirement to sell from a restricted list.
Olde made a market in many of these Special Venture stocks, which meant that Olde could sell from its own inventory, thereby profiting on the commission and also on the markup between a stocks bid and ask prices. This method of compensation is typical for firms that promote stocks in which they make a market. However, Olde dangled a bigger carrot before its brokers. At least as early as 1994, Olde created the Night Credit Program. In a memo from Ernie Olde himself to all sales personnel, Ernie Olde describes the responsibility of brokers to sell a minimum of 1,000 shares of stock overnight, every night - after the market closed. Brokers would do this by viewing on a computer screen the "night credit" (additional compensation) available for selling 25 or so stocks out of the Special Venture list. The problem was that the night credit was often as much as the commission, thereby creating strong incentive to sell those particular stocks. Clients had no idea of the special compensation and the Olde rules which motivated brokers to recommend certain stocks.
Effective January 1, 1993, Vice President of National Sales for Olde disseminated a Sales Policy Guide for 1993 to all registered personnel. Among other things, the memorandum announced the creation of the Measurement Department. This department was designed, you guessed it, to measure the performance of Olde stockbrokers. Remember, in the brokerage industry, the yardstick for measuring "performance" is sales, not customer satisfaction, not profitability of customer portfolio, and not number of customer complaints. Oldes Sales Policy Guide for 1993 required stockbrokers to record telephone conversations reflecting a minimum of 50 offers of Olde Special Products (Special Venture stocks, fixed income products and mutual funds) each day. Stockbrokers were urged to scout for inactive accounts to make the sale. The memo urges stockbrokers to follow up each prospect once each month until the prospect buys or the stockbroker determines (after at least three or four calls) "that the prospect is not a decision maker" - an interesting label for a customer who simply declines to purchase a recommended security.
On a daily basis, each branch office of Olde was required to call their Regional or District Manager with figures also noted on their "Monthly Report Card". Such numbers included the gross sales of all Special Products for the day; the net number of Special Ventures positions for the day, the number of initial Special Product offers for the day, the number of follow-up Special Product offers for the day, the number of the total accounts "activated" for the day, the number of IRAs opened for the day, and the number of conversations for the day.
Stockbrokers who met certain minimum requirements gained the privilege of being called "Superbrokers". In 1993, Superbroker criteria consisted of brokers grossing $100,000 or more in commissions in a 6 month period or at least $200,000 in Special Products before year end. One of the benefits of being a Superbroker, which Olde touted to all of its brokers, was qualifying to have an Assistant, qualifying for having their name and branch phone number on customer monthly statements, and qualifying for "Commission Protection" for 6 months. "Commission Protection" meant that as long as the brokers customers purchased a Special Product in their account within the last 6 month period, then the commission for any other Special Product purchased, even if solicited and executed by another stockbroker, went to the stockbroker with "Commission Protection".
The memo required simply that brokers who were employed at Olde prior to January 1, 1992 had to be a Superbroker.
For those stockbrokers who did not qualify as Superbrokers, Olde charactorized them as stockbrokers with "commission privileges". In order to maintain "commission privileges" in 1993, Olde stockbrokers had to gross a minimum of $10,000 each month in Special Product production and build an average of 2 Special Venture positions each day. That means that the brokers had to sell 2 Olde Special Venture stocks a day.
The sales policy guide for 1994 was similar, except there were higher requirement levels.
Olde accurately summarized its Sales Policies for 1993 and 1994 with the following line at the end of the 17 page memo:
These rules have been written for one (1) main reason: to help you make more money.
The "you" referred to is the broker, not the client. Olde stockbrokers, many of whom were young and hungry, needed the commission and night credit money in order to rise above their base salary of approximately $1,200/month.
Oldes sales and management style resulted in a rash of arbitration claims across the country. However, Olde is not the first brokerage firm to put its interests before its clients. What makes Oldes conduct somewhat more egregious is that Olde did it under the guise of a "discount" brokerage firm - not an appropriate term for a firm that, at least for a while, generated more revenue per trade than that of a full service brokerage firm.
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Ms. Stoneman is an attorney specializing in investment related complaints.