How an investor can find out if his financial adviser is a crook

THE BALTIMORE SUN

NEW YORK -- WHEN A mortgage broker approached a Michigan mortgage company last year, offering to sell it some attractive mortgage loans, the company was interested. But first, it ran the broker's name through the 3-year-old National Financial Fraud Exchange (NAFEX).

The broker had said that he'd practiced law in Joliet, Ill. -- which turned out to be true, in a way. He had been in state prison there. His "law practice" consisted of filing appeals for his own release.

Somewhere, that broker is still at work -- probably selling financial products and doubtlessly heading for another forced stay in Illinois. On his way, he's going to steal some money -- maybe even from you or me.

Every day, we entrust our money to somebody we hardly know: stockbrokers, financial planners, insurance agents, mortgage brokers, appraisers, salespeople for private investment deals. Some are honest, some are marginally deceptive, a few are blackguards who won't hesitate to steal.

It's not easy to check these people out. Until recently, for example, NAFEX's files were open only to corporate clients.

But now, they're open to the general public.

You can run the names of your financial advisers through the NAFEX database to see if anything disreputable turns up.

"If someone had a disciplinary action taken against him in the past, I'd say there's a 95 percent chance he'd have recurrent violations," says Mickey Smith, vice president for quality control at Crossland Mortgage Corp. in Salt Lake City.

NAFEX is the brainchild of D. James Croft, executive director of the Mortgage Asset Research Institute in Reston, Va. It collects information about financial and real-estate infractions and frauds, from about 100 government and private watchdogs.

Among the groups NAFEX taps: the two major stock exchanges, the five regional exchanges, all of the state securities offices, the Securities and Exchange Commission, the National Association of Securities Dealers, the National Futures Association, the Commodities Futures Trading Commission, state real-estate regulators, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the U.S. Postal Inspection Service.

The database currently contains about 150,000 names, Mr. Croft says. It's growing at the rate of 2,000 cases a month.

It costs $29 to run a name through NAFEX (call 800-822-0416). If there's a hit -- meaning that a financial professional has a stain in his or her past -- you might be told right on the telephone. Or, a written report can be mailed or faxed.

You'll also be told about "near hits" -- information that's close but not exact. For example, NAFEX might spot someone with the same name but who used to live in a different state. That might be the person you're dealing with, so you'd want to ask about it.

In a study last year of his clients' results, Mr. Croft found direct hits 5 percent of the time and near hits 11 percent of the time. My associate, Kate O'Brien Ahlers, ran some known fraudsters through NAFEX and got hits.

Among the things you might learn about one of your financial advisers: that he or she mishandled escrow money, misrepresented a financial transaction, paid a fine, was suspended by a regulatory agency, lost a license to do business, was sued by a government agency.

There are gaps in NAFEX. It doesn't cover insurance agents or track court cases (unless they're reported by a government agency), and it won't list unresolved complaints.

Here are some other ways of checking certain financial professionals without paying NAFEX.

* Call the state securities commissioner in your state's capital, to see whether your stockbroker or investment adviser has a file at the national Central Registration Depository.

* Call the free hot line at the National Futures Association in Chicago (800-676-4NFA), to check on people who sell options, ++ futures and commodities, especially by phone or TV.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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