Ben Stein's Diary

Called to Account

A puzzling SEC action against a friend.

By 11.7.13

A great morning at my apartment at the Watergate until I got a call from my bank. I was basking in the glow of doing a truly wonderful event for the Jewish Federation of Greater Philadelphia last night. We had a superb attendance, kind sponsors, a glorious attentive organizing team, and it all was the way life is supposed to be.

Just before I went to bed last night I imagined that I would get a really bad call from my bank and it sent me into a panic. But I was able to sleep anyway. And, as I puttered around this morning making breakfast, I felt happy.

Then I saw the call from my bank. Yuck. A really big overdraft, caused by my own stupidity and carelessness. Luckily, I could easily cover it, but I hated, hated, hated it. Overdrafts make me crazy. You would think that would make me more careful about keeping my accounts straight. It doesn’t. It’s really embarrassing how careless I am about my accounts.

The fact that I can so easily cover these mistakes is largely thanks to the great advice I got over the years from my pal, Ray Lucia. He always advocated maintaining a great deal of liquidity to tide me over rough patches. I listened to him and it paid off in a huge way in terms of peace of mind.

Ray also told people to diversify, to set up their investments so that stocks — usually the most volatile segment — had time to grow and recover from drops.

He gave this advice very largely at his “Buckets of Money” seminars all over the country. I spoke at many of them, not about investments, but about the economy generally. I usually came on stage after Ray, and I heard him give his strategy many a time. I was paid for my time and I became close friends with Ray and his family over a period of years.

Then, about two or three years ago, a lawyer at the SEC started an investigation into whether Ray’s projections about how investors would do with time and inflation used correct inflation data from the past.

I never understood exactly why that was a problem since my recollection of Ray’s remarks was that he was talking about hypotheticals about the future. He assumed a certain rate of inflation and family spending, then talked about how, if various investments returned various amounts, the investors in various categories of securities would do.

I may have missed something, but I do not recall ever hearing any promises. Ray always  — as I recall — talked in hypotheticals and gave warnings about his talks being about hypotheticals.

Nevertheless, the SEC brought a case against him for misstating the past rates of inflation. I was puzzled by this, since it seemed like a small mistake. If Ray were talking about possible future results, past inflation numbers were interesting but not dispositive of anything — as I saw it.

The SEC was relentless, though. It spent money and used up time to make the case that Ray had misled investors, even though — as far as I knew — they did not turn up any evidence of actual losses by investors because of a mistake about inflation rates.

There were interviews. I was interviewed and praised Ray highly. There were briefs filed. Ray had to spend immensely on lawyers.

Then there was a trial. At the end of it, a hearing examiner issued a ruling that stunned me.

He said that he was not really going to bear down hard on the inflation issue. What he thought wrong was that Ray had repeatedly mentioned non-traded REIT’s as a good investment. A non-traded REIT is a real estate investment trust whose shares do not trade regularly but which do pay a dividend, often a good dividend, until they are redeemed, or allowed to be traded occasionally.

This class of investment, said the examiner, was not ideal and thus he would find that Ray had misled investors and would be severely civilly punished.

(This is how I read the ruling. Others may differ.)

The strange parts of this are that if an investor wanted to consider buying non-traded REIT’s, Ray would give him or her full prospectuses with all the data about high commissions and illiquidity and other very real problems with NT-REIT’s… and that NT-REITs are perfectly legal. In fact, they are a super fast growing class of securities.

So, Ray is being disciplined severely for talking positively about a perfectly legal kind of security sold only with full disclosure of its problems.

That, at any rate, is how I read the ruling. Maybe the examiner could explain it better than I can.

But something has gone wrong here, or so it seems to me. I just don’t get what Ray did wrong. Maybe I have missed something, but I did teach Securities Law for years at Pepperdine and I know a bit about it. Just a bit.

Anyway, it’s all being appealed and it upsets me a lot that this has all happened to Ray Lucia, who taught me to maintain a lot of liquidity in case of emergencies and gave conservative, careful guidance that still seems darned good to me.

Well, the day turned out to be good. Bob Noah and I drove to Oxford, Md., looked at the bay, walked the dark sidewalks, heard the church bells. Had crab soup. It was a good day but I feel terrible for Ray and it scares me what the government can do. The sky turned a bright red at sunset over the Tred Avon River but I still feel as if something went haywire over Ray. I am sure the people at the SEC meant well, but I just do not understand this case.

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About the Author

Ben Stein is a writer, actor, economist, and lawyer living in Beverly Hills and Malibu. He writes "Ben Stein's Diary" for every issue of The American Spectator.