A Lesson on Understanding Bank Sales Pitches

At 94, Ruby Rosenthal seems an unlikely champion. Her eyesight is slipping. Her hearing impaired. The pain medication she’s taken due to a recent fall makes it hard for her to talk. When she needs to go somewhere, her “young nephew,” age 80, drives her around.

But, outspoken and sharp as a tack, Rosenthal says she was wronged. She thinks others were too. What she decided to do about it could cause the $3.7-trillion U.S. banking industry--which is fighting for broadened powers--to take note.

Rosenthal sued. But unlike dozens of similar suits filed each year, her lawyer has a copy of a “script” used by some salespeople that provides a compelling illustration of how banks may have abused customer trust after winning the right to sell mutual funds, insurance annuities and other products that are not covered by federal deposit insurance.

Her experience also provides a lesson to consumers, who doggedly persist in believing that all products purchased in bank lobbies are safe and federally insured. Banks are increasingly offering non-traditional, uninsured products. The bank employees who sell them are no more, nor less, trustworthy than employees at your local insurer or brokerage. Thinking otherwise can cost you dearly.

Rosenthal’s story starts in a Santa Monica branch of Great Western Bank, where she invested $60,000 from a certificate of deposit into a bond fund. Rosenthal says she was misled into believing that the “government securities” she bought in a fund were virtually identical to the government insured deposits she’d had before.

They weren’t. She lost $8,000 when the bond market tanked last year. It was the first time she realized her principal was at risk, Rosenthal says. Furious, she called an attorney friend, who agreed to try to settle the dispute with Great Western. The attorney, Michael Linfield of Pasadena, thought Rosenthal would be able to recover about half of what she lost.

But the bank didn’t settle. Great Western says it did nothing wrong. There was no misrepresentation, Great Western maintains. Rosenthal knew what she was buying and Great Western has the documents to prove it, a bank spokesman says.

Rosenthal did, indeed, sign a pile of paperwork, including a disclosure statement that says that the account was not FDIC insured. She signed an arbitration agreement, too, that should have precluded her from taking the case to court. She says she relied on verbal assurances about the investment and paid little attention to the documents.

Still, she would have had a run-of-the-mill customer’s-word-against-the-bank’s suit had her attorney not decided to call a press conference and had he not invited a lauded consumer advocate to participate. The press conference drew about a dozen reporters, who wrote short stories last October about Rosenthal’s plight.

Within days, Linfield’s nondescript, one-man law firm received hundreds of phone calls from other bank customers who felt similarly taken. Also important, some former Great Western securities brokers volunteered information, training materials and “scripts” used to sell securities.

Rosenthal’s case became a class-action suit, with two dozen named plaintiffs. It recently spurred a separate federal suit, as well, which involves another half a dozen alleged victims.

Exhibits filed with the court now include a declaration from one former Great Western employee who claimed securities salespeople were never to use the term “mutual fund.” Instead, they were told to use more bank-like euphemisms “program” and “account.” And they include a document that, Rosenthal’s lawyer says, teaches securities salespeople to deceive, by bending questions and the truth.

This document--a “script”--titled “Some common objections to the close,” was written by a Great Western employee. But the company says it doesn’t know who. It was distributed to other employees. But the company doesn’t know how many. The document was never “authorized” by management nor reviewed by Great Western’s compliance department. Anyone who used it did so in violation of company policy, says Great Western spokesman Ian Campbell.

Nonetheless, in eight pages of text, it describes how securities salespeople should overcome customer objections to buying Great Western’s proprietary “Sierra” mutual funds.

Structured in question-and-answer format, it gives salespeople a series of responses to commonly asked questions. First and foremost among them: “Is it FDIC insured?”

“That’s important to know!” starts the first recommended response. “I take it . . . that you wish to know if this investment program is safe, right? Yes, it is and the reasons why are . . . “

A second response to the same question says the fund is not covered by the same insurance. But, by carefully excluding some pertinent details, the response gives the impression that the investment warrants the same government backing.

Only a handful of suggested answers in the document are outright lies.

“Is this untruthful?” Linfield asks rhetorically. “Maybe not. Is it deceptive? Unquestionably.”

At a time when the U.S. banking industry is increasingly selling non-traditional investments in their branches, the Rosenthal case calls up troubling questions.

Great Western, like most banks and thrifts, has published guidelines on how funds should be sold. The official guidelines are clear, says Campbell.

They instruct employees to unequivocally state that only deposits are federally insured.

Nearly every bank that sells securities stresses that employees should explain the difference between securities investments and deposits. They all provide written disclosure statements emblazoned with the words “Not FDIC insured.”

And yet, time after time, consumers claim they were misled.

In the Rosenthal case--and the related federal lawsuit--litigant after litigant swears that what they were told was in stark contrast to the bank’s official policies and the written documents. They were led to believe that the federal government was standing behind every dollar, says Roy Stephenson, another litigant.

Worse yet, one after another, these victims say they signed the disclosure statements. But, in many cases, they relied on the salesperson’s word that the disclosures were unimportant--”standard new account documents”--and not worth reading. Victims maintain they didn’t bother to read the bulk of what they signed.

If the Rosenthal litigants are right, bank procedures designed to warn investors of the risks are being ignored. And consumers, possibly dulled by years of relying on federal deposit insurance, are blithely ignoring the written warnings.

“Having a policy isn’t enough,” says Gail Hillebrand, co-director of Consumers Union in San Francisco. “Banks have to make sure their policies are being followed.”

And consumers have to heed the written warnings. They have to read what they sign. When it comes down to it, neither regulators nor bank executives nor relatives can protect you if you fail to protect yourself.

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Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kristof@news.latimes.com on the Internet.