Subject: [NEXTEL-1] So You Want To Be A $1.2M A Year Nextel Analyst?

From: [email-masked]
Date: Sun, 07 Dec 2003 18:51:44 -0500

So You Want To Be A $1.2M A Year Nextel Analyst?
Market blues A fired Legg Mason broker contends that his bosses cost his clients
millions of dollars in lost investments.

By Jay Hancock and Paul Adams
Sun Staff
Originally published December 7, 2003

Star Legg Mason stockbroker George E. McDowell seemed bulletproof
at the top of the bull market bubble. His clients weren't faring badly,
either.

As the Nasdaq index floated toward 5,000 four years ago, the bundles of
technology stocks that McDowell sold were rising 10 percent to 20
percent a month.

McDowell says he
was making close to
$100,000 a month.
And Baltimore-based
Legg was reaping big
fees for selling the
investments.

But then the stock
bubble exploded -
and so did
McDowell's relations
with Legg and his
customers.

In the aftermath is a
dispute that puts both Legg and its former million-dollar broker in legal
jeopardy and raises a question that underlies recent soul-searching on
Wall Street: Who's to blame when hot investments go cold?

The disagreements have prompted a flurry of litigation, the hiring of an
outside counsel by Legg and investigations, previously undisclosed, by
attorneys general in Maryland and South Carolina, where McDowell is
based.

On one side is a deeply religious salesman anguished over a shattered
career, millions in losses for his customers and what he says is Legg
Mason's responsibility for the damage.

"These people hate me - my clients," McDowell, 59, said in a series of
interviews that began in July. "I can go to church and they avoid me. And
I don't blame them."

On the other side is Legg Mason, which like other brokers enthusiastically
peddled technology shares in the 1990s but then saw technology shrivel
along with the portfolios of many clients when the market lost air. The firm
vigorously denies McDowell's assertion that the firm is responsible and
says the evidence makes it clear that his allegations are groundless.

McDowell claims he was eager to advise his Legg clients to sell millions in
tech-stock bundles called unit investment trusts, or UITs, in mid-2000
after the bubble had reached its zenith.

But - and this is the allegation at the center of the government inquiries -
he says he was barred from urging clients to sell by Legg Mason lawyers
who worried he might appear to be "churning" accounts to earn excessive
commissions.

Legg challenges McDowell's claims. "We would never prevent a financial
adviser from liquidating client positions in clients' best interests," said
Peter
L. Bain, the firm's chief administrative officer.

Records show McDowell sold clients out of hundreds of unit-trust
positions after the supposed ban, said an outside lawyer hired by Legg to
examine McDowell's claims.

"I found no credible evidence in my inquiry that anyone in Legg Mason's
compliance department directed George not to sell any of his customers
out of UIT positions," said the outside counsel, Charles O. Monk II, of
the Baltimore office of Saul Ewing.

But McDowell says the records Monk examined are inaccurate or reflect
instances in which customers initiated transactions. McDowell was
allowed to sell UITs if it was a client's idea but couldn't suggest it himself,
he said.

McDowell's claims have prompted investigations by South Carolina
Attorney General Henry McMaster and his Maryland counterpart, J.
Joseph Curran Jr.

Legg Mason documents have been subpoenaed in both states, people
familiar with the matter said, and at least one current and one former Legg
Mason employee besides McDowell have been interviewed under oath.

McMaster spokesman Trey Walker confirmed that his office is looking
into McDowell's allegations.

"I can also confirm that the state of Maryland is conducting an
investigation into this incident and has interfaced with our office on a
number of occasions," Walker said.

He declined to comment further. A spokesman for Curran would not
confirm or deny that a Maryland investigation is under way.

Hanging in the balance are dozens of McDowell's clients, many of whom
lost hundreds of thousands of dollars on risky investments.

Among them is Imogene Burns, a retired mechanical and architectural
designer from near Spartanburg, S.C., where McDowell also lives.
Widowed when stocks were near their height, she said she burned up
three-fourths of her nest egg by investing with McDowell and Legg
Mason.

"I lost between $300,000 and $400,000. It's a lot of money for someone
who has worked all their life to save some," Burns said. "Fortunately, I
have a good income in retirement, and I can live on that. But I had
certainly hoped to have what I had saved for major things" such as travel.

If McDowell's present disgrace contrasts with his long, successful career
as a stockbroker, his embrace of technology stocks and unit investment
trusts in the late 1990s also was unusual. For most of his life, he says, he
concentrated on safer stocks and occasionally bonds.

But like many in the 1990s, he and his customers were lured by the riches
to be made by buying pieces of profitless Internet merchants,
overextended fiber-optics outfits and any other dubious company with a
"tech" label.

Unit investment trusts had been around for years as a way to bundle
bonds or quality stocks into a one-price package. But like almost every
other aspect of the securities business, they contracted tech-stock fever in
the late 1990s.

By the time the market peaked in March 2000, McDowell said, about
half of the at least $80 million in assets he managed for his 200 Legg
Mason clients was invested in unit investment trusts. And perhaps 95
percent of that, he said, was in technology and other "growth" shares.

He had left longtime employer A.G. Edwards and joined Legg in the
summer of 1999 for a $625,000 signing bonus.

"When I got to Legg they really showed me how the UITs in technology
were good," said McDowell, an apple-cheeked blond with a boyish
Southern drawl. "And they were. Oh, gosh, they were great."

Clients liked unit trusts because they offered the ability to buy a basket of
stocks with one investment but without some of the tax liabilities of mutual
funds. Brokers charged fees, sometimes as much as 5 percent, for selling
the trusts. And everybody loved them when they rose in value.

"Many times I'd be up 50 percent in something like six months. I had 100
percent gains in quite a few of my UITs," says McDowell, who like many
money managers says "I" when he means "my customers." "It was not
unusual to buy a UIT and have it up 10 percent a week later. You looked
like a hero."

Imogene Burns and her husband, Benjamin, shared in the gains. They had
been McDowell's clients at his previous firm and followed him to Legg in
1999, when UITs were "really moving, and that really excited both of
them," McDowell recalled. "Her account was doing exceptionally well."

But as the stock market levitated, the Burnses' life unraveled. Benjamin
was suffering his final illness, and Imogene was "consumed" with caring for
him, she said, and "wasn't paying as much attention as I should have" to
their investments.

Many other McDowell clients got into tech-heavy unit trusts, too.

Tom Anderson is a 77-year-old dairy farmer who lives outside
Spartanburg and said he had about $500,000 in investments with
McDowell before the market imploded.

McDowell said Anderson's portfolio contained UITs, adding that
Anderson was well aware of the risk.

Anderson said he had no idea.

"Don't know what it was," he said. "Don't know the proper name. I never
asked and he didn't say. I didn't know whether they were high-risk or
what. I left that up to George."

The list of Legg's most popular UITs in 1999 and early 2000 seems
almost laughable now, but customers were clamoring to own them.

Legg's top-selling unit trust for December 1999 was Nuveen's Peroni Top
Ten Picks, an unadulterated menu of computer and communications
stocks that included Nextel, Nokia, Sun Microsystems and EMC Corp.,
according to a document McDowell saved.

Other big-selling unit portfolios for Legg focused on fiber-optics,
biotechnology, pharmaceuticals and fuel cells. All were destined to ride
the bubble a few more months and then start a protracted, deep, painful
plunge. A Nuveen Internet trust, for example, was issued in November
1999 at $10, rose to $18 and eventually plunged to $2.

In early 2000, McDowell's boss wrote "Way to go, George!" in a memo.
McDowell ranked No. 1 for unit trust sales in December 1999 and No. 2
for the entire year, even though he had started selling for Legg only in
August.

Trouble began after the market started falling in March 2000. At some
point, McDowell says, he feared a protracted bear market and decided to
advise clients to bail out of unit trusts.

"Everybody would know we were in UITs and everyone would know that
this was the riskiest part of the market," McDowell said. "That's why the
promise that we could get them out was so very, very crucial."

It is possible to liquidate unit trusts before their terms - generally one to
five years - are up. According to McDowell, that's what he told Legg's
Baltimore headquarters he would do - advise all customers' to convert
unit trusts to bonds, sit safely on the sidelines and wait for the market
tumble to cease.

"I said, 'We're getting killed. I'm ready to get out.' "

But he says Legg officials in Baltimore forbade him from urging his clients
to sell. First, McDowell says, he was told by phone not to sell UITs
unless a customer suggested it unprompted. Later in the year, he says, he
was summoned to Baltimore to hear a lawyer read a "no UIT sales" order
to his face.

McDowell's account of these alleged events has varied.

Recently, he has said his blocked move to bail out of unit trusts came as
early as May 2000, when the Nasdaq had fallen from 5,000 to 3,500.
But in an earlier account he said, "Had my hands been untied, I would
have sold every client out of UITs in the fall of 2000," when the Nasdaq
was seesawing between 3,500 and 2,900.

He blamed the inconsistencies on the fact that Legg kept his records and
said further research convinced him that Legg first stopped him from
selling unit trusts in May 2000.

The Nasdaq ultimately touched bottom in October 2002, when it dipped
to 1,114.

Any brokerage might worry about an employee's stated intention to
advise huge, across-the-board stock liquidations. Nobody knew if the
market would pop back or not, for one thing. Also, large-scale trading
can be a sign of stockbroker abuse and might be especially suspicious
with unit trusts, which command big up-front sales fees and are designed
for the relatively long haul.

As the market deteriorated, so did McDowell's relations with his bosses
and customers. He claims he told Legg officials several times that they
would be responsible for all his clients' losses after the date of the alleged
trading ban. It was a threat.

But why didn't he tell clients or regulators about the alleged ban on selling
UITs?

He couldn't, McDowell said, because Legg had muzzled him. His bosses
forbade him to raise the subject of UITs and sometimes checked with
customers afterward to make sure, he said.

So why didn't he quit?

By staying, McDowell said, he thought he could be a "thorn in the side" of
Legg and force the firm to repay his customers.

"I was there until they gave back to my clients what they caused my clients
to lose," he said. "I thought that was going to work. And it should have."

There was also the matter of McDowell's own wallet. If he left Legg, he
would have had to repay a substantial portion of his $625,000 signing
bonus - although he says that was not his main reason.

McDowell eventually was fired.

In August 2002, he said, he responded to regulators inquiring about a
customer complaint by writing a letter detailing allegations of a UIT trading
ban.

Legg officials ordered him to change the letter, he said, and terminated
him when he refused. The Nasdaq stood around 1,300 at the time

These days, McDowell sells resort properties across much of the South.
His avocation of speaking before church groups and his plans to become
a minister, he believes, are jeopardized by the blow his reputation suffered
at Legg.

"Nobody's asking me to speak anymore because of the cloud that's
hanging over me," he said.

A cloud hangs over his former customers, too, as well as stock markets
generally.

In many ways McDowell and his clients were both typical causes and
victims of the 1990s bubble, financial experts say.

"Most examples of bubbly tech stocks were driven by individual trading" -
not institutions, said Harrison Hong, a professor of economics at
Princeton who studies financial psychology.

And those individuals, he added, were not behaving rationally.

"Once this stuff gets started, when markets do well, it sucks in a lot of
naive traders who shouldn't be there," he said. "People didn't want to miss
the party."

Meanwhile, McDowell has taken on what amounts to another full-time
job: Trying to interest law enforcement officials, journalists, former clients
and Legg's board in his claims of wrongdoing.

He has all but invited former clients to sue him and Legg, offering to be a
witness. About 20 of his former customers have settled with Legg for
small fractions of what they lost, McDowell says, because they don't
know the full story.

"They were done wrong," he said. "They don't know they were done
wrong. I've got to get my reputation back."

South Carolina lawyers even tell of McDowell referring his former
customers to them - so they can sue George McDowell.

Legg declined to comment on the litigation or say how many former
McDowell clients it has settled with, although it says in legal documents it
may seek to recover at least $1.5 million in settlement costs from the
former broker. Arbitration records at the National Association of
Securities Dealers, where much investor litigation is handled, are private.

McDowell has sued Legg for alleged wrongful dismissal; Legg has sued
McDowell to recover a portion of his signing bonus.

The probes by the attorneys general of Maryland and South Carolina
appear to be focused on memos, trading records and other relevant Legg
documents as well as present and former Legg employees who might have
known about alleged trading restraints.

Monk, Legg's outside investigator, says trading tickets show that
McDowell sold customers out of at least 2,000 unit-trust positions after
May 2000 and that only a handful were unloaded at the client's direction.

But McDowell says his assistants forgot to note on many slips that clients
initiated the sales. He claims Legg has another set of more-complete
records that backs up his version.

The truth will come out, he says. Former customers who lost so much
money will thank him one day.

Dairy farmer Tom Anderson, says he lost $194,000 by investing with
George McDowell, but he says there may be something to his story.

"I still think a lot of George," he said. "We've talked several times since
then. George says he's willing to stand up and testify that he was not
allowed to move that money out."

Imogene Burns, 73, feels differently.

"I'm not sure that George is totally rational," Burns said. "I'm wondering if
he is in a bad state emotionally since all this came around."

McDowell came by her home to try to explain, she said, but the visit was
brief. "I just spoke to him," she said, "and sent him on his way."

"I promise you Imogene will love me when it's all over with," McDowell
said.

http://www.sunspot.net/business/bal-bz.mcdowell07dec07,0,1878764.story?coll=bal-business-headlines

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