By Stephen J. Dunn
Sergei Fedorov is generally regarded as the greatest defensive forward in the history of the National Hockey League. He led the Detroit Red Wings to Stanley Cup championships in 1997, 1998, and 2002, and won a Hart Trophy as the league’s most valuable player in 1994.
But like many high-profile athletes, it appears that Fedorov has been the victim of an unscrupulous financial advisor. In 2009, Fedorov sued financial advisor Joseph P. Zada, of Grosse Pointe, Michigan. Zada did not answer the Complaint, and the Wayne County Circuit Court entered a default judgment exceeding $60 million in Fedorov’s favor against Zada. Court records evince vigorous effort to collect the judgment in the four years since it was entered. According to the Detroit Free Pressnothing has been collected on it.
$60 million represents Fedorov’s annual player’s salary at the height of his playing career, $10 million, for six years. Fedorov is 43 years of age and retired as a player. It is unlikely that he will make the kind of money in his post-playing career that he did as a player. That train has passed.
On September 6, 2013, a Federal grand jury in Miami indicted Zada on 27 counts of getting money under false and fraudulent pretenses, mail fraud, and wire fraud. The Indictment charges that, from 1998 to 2009, Zada embezzled over $20 million from 28 investors, among them Sergei Fedorov; that Zada attracted wealthy investors by projecting an image of great wealth, portraying himself as a successful businessman with connections to Saudi Arabian oil ventures; that Zada hosted extravagant parties, drove expensive luxury automobiles, and maintained expensive homes in Wellington, Florida and Grosse Pointe, Michigan; that Zada financed his lavish lifestyle primarily with investors’ funds; that Zada told investors that the offered investments would result in large profits within a short time; that Zada provided investors with little specifics concerning his purported investments, beyond claiming that the money would be invested in oil ventures; that investors had only a brief “window of opportunity” to invest with him; and that he was being groomed to replace his mentor as a member of a secret board of directors that controlled billions of dollars in investments, or, alternatively, that Zada was a member of the board of directors of a company that bought and sold oil.
The Indictment alleges that investors’ money would be pooled with Zada’s own money to receive better rates of return and a larger share of profits. Does this make sense?
The Indictment avers that, rather than investing investors’ money in oil ventures, Zada used it to support his lavish lifestyle, and to make purported return-on-investment distributions to investors who required them.
The Indictment asserts that, in addition to investing money with Zada, Fedorov also loaned Zada money when he claimed he was having cash flow problems. What investment advisor has cash flow problems? It’s not like they need funds to buy inventory.
It appears that Zada perpetrated a Madoffian scheme, and that in falling victim of it Fedorov broke just about every rule of using a financial advisor:
Use A Large, Well-Established Brokerage Firm. A large, well-established firm is likely to have hiring standards, and to make sure that its brokers are appropriately licensed, trained and supervised. Most importantly, a large, well-established firm is likely to be able to pay a claim for its broker’s misconduct, and to have insurance coverage for such a claim.
Perform Due Diligence on the Broker. Solicit broker referrals from trusted sources. Before using a broker, inquire among your advisors as to the broker’s reputation. Meet the broker in person, and determine for yourself whether the he is honest, ethical, and competent. Inquire of complaints against the broker or his firm with the Securities and Exchange Commission, the Financial Industry Regulatory Authority, Inc., and your state’s securities regulators. State securities regulators’ contact information is available at the North American Securities Administrators, Inc.’s website.
Keep It Professional. Don’t invest in a “secret deal” or as a partner with your broker. Your broker should not be your buddy or your partner, but a professional you hire, and whom you may have to sue at some point.
Don’t invest in partnerships or in unregistered securities. Stick to publicly-traded stocks and bonds. If you invest in real estate, be sure to obtain an opinion as to the value of the property from an independent real estate broker, and to have a real estate attorney ascertain that you are acquiring clear title to the property.
Perform Due Diligence on Investments. Review a prospectus for a proposed investment, and have your CPA review it. Google GOOG -0.03% the company for current news reports. Review research and news reports on proposed investments, such as that available from brokerage firms, Vanguard, Fidelity, or The Wall Street Journal.
Monitor Investments. Once an investment is made, review annual and quarterly reports on it promptly upon receipt. Review current news reports and research on investments.
Larger portfolios should be confirmed at least annually directly with the issuer that securities issued by it are being held by a broker for you as of a given date. Your CPA can do this.
Require Monthly Statements. You should receive a monthly statement on each investment. You should review the statements promptly upon receipt, and have them reviewed by third parties, such as another investment advisor, your CPA, and your attorney.
Don’t Put All of Your Eggs In One Basket. Divide your portfolio among two or three brokers.
Be Tenacious. If you have a question for a broker, ask it. If you have a doubt, raise it. Where there’s smoke, there’s fire. It’s your money. If you don’t look after it, who will?