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In the Matter of Hoffman and Montgomery:
Lessons Learned for Giving Effective Testimony
here is so much to learn from the recent decision dismissing the SEC's charges against a broker (Richard Hoffman) and his compliance officer (Kirk Montgomery) formerly with FSC Securities. As background, the SEC had brought charges against FSC, Hoffman and Montgomery for violating the anti-fraud provisions of the securities laws, unsuitability and "switching" of mutual funds to generate excessive commissions. Notably, FSC settled. But Hoffman and Montgomery fought, and won. An administrative law judge ("ALJ") found no violations. Her decision can be found at www.sec.gov/litigation/aljdec/id158cff.htm.
Apart from the legal analysis, the ALJ's decision is worth reading because of the observations and the considerations that the ALJ made in assessing the credibility of Hoffman and Montgomery as witnesses. Any broker preparing to testify -- not just in a customer arbitration or regulatory proceeding but also in any legal action -- should understand what the ALJ found to be compelling.
First, Hoffman's demeanor. The ALJ liked that Hoffman had a "cautious means of expressing himself - indirect phraseology and passive sentence structure". She also noted that in testifying, Hoffman:
Was subdued, unassuming and soft spoken;
Spoke slowly and was careful to convey completely accurate information; and
Used cautious, hesitant pauses between words even when providing routine information such as the address of his office or the ages of his children.
In sum, the ALJ concluded that Hoffman was the "antithesis of a fast-talking, overbearing, aggressive salesman".
That demeanor, the ALJ found, was consistent with Hoffman's testimony that he "methodically followed a routine in meetings with customers and with customer testimony that he had a low-key approach and did not pressure them in their investment decisions". Second, Hoffman's lifestyle. Several factors weighed in Hoffman's favor, the ALJ noted, including that he:
Grew up on a dairy farm in a Pennsylvania Dutch community and was accustomed to working long hours since childhood, before and after school;
Has resided in the same community for his whole life;
Has made church a big part of his life;
Was elected treasurer of his church and vice-moderator (like vice-president), and has served on the church's finance committee, overseeing the church's endowment; and
Was under no financial pressure, having no mortgage (due to an early pay-off), and a net worth of a few million dollars.
Third, Hoffman's business practices. The ALJ noted that Hoffman had no discretionary accounts and no margin accounts. In his business he had his wife and daughter assist him with administrative and clerical duties. His practice was to call upon customers in their homes or at their places of business.
The ALJ found especially important the fact that Hoffman followed a routine when conferring with his customers. This included a handwritten summary of the meeting. Hoffman also kept "six crates of prospectuses in his car". The ALJ found that his practice was to always furnish prospectuses and to review them with customers. His practice was to leave them with customers so that they could make their own decisions. The ALJ concluded that this "low pressure approach was consistent with his demeanor at the hearing".
It thus is apparent that Hoffman was the polar opposite to the brokers portrayed in the movie, The Boiler Room. That was a critical finding, given the allegations of mutual fund switching to generate excessive commissions, fraud and unsuitability.
The lessons of the Hoffman case are plentiful. To summarize, when testifying, all brokers should remember to include any exculpating testimony concerning childhood experiences, good work ethic, community and church activities as well as sufficient net worth (in churning cases especially). Additionally, remember to discuss the types of accounts that you have, any family involvement in the business, and any routines that you follow in dealing with customers. Finally, remember to testify very carefully and precisely.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment advisor when building and protecting your wealth.
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