Retiring Early

Sunday, May 13, 2007

Easy come, easy go.

Lottery winner sues a investment adviser and accounting firm over bad advice. It's partially another dot-com bust story, but it's also a story about the need to really understand what is happening with your money. Trust and money don't go together.

He won about $5.5M and decided to take an "immediate lump sum - in his case, about $2 million - that he could roll into investments. He'd just live off the earnings and interest." This is where the real trouble started:

He alleges that within a few months, the Smith-Barney advisers had 98 percent of his money invested in individual stocks, substantially technology companies.

The year was 2000, which would prove a spectacularly bad time to sink one's entire fortune into tech stocks. Cicero's lawyer has alleged the advisers were "breathtakingly irresponsible" to put a lottery winner's windfall wholly into individual stocks.

"Fifty to 80 percent of their income ought to be in bonds and other fixed-income investments," Stoltmann said.

The court and financial-arbitration filings tell the story in flat terms, claiming Cicero lost $600,000 or more in bad investments. And he ended up paying $240,000 more to the IRS for penalties and interest after he learned the hard way that a lump-sum lottery buyout doesn't count as capital-gains income. There was also a divorce.

"You want to talk about a sob story, he's it," Stoltmann said.

So, not only did he get screwed by Smith-Barney and an incompetent tax accountant, but he also wound up in divorce court? I really do feel sorry for this guy because my guess is that he thought he was trusting real professionals that knew what they were doing.

The lesson? Even so-called professionals need to be scrutinized and double-checked.

(Photo courtesy of: Lazy_Lightning)



  • At 5/14/2007 9:36 PM, Blogger StealthBucks said…

    Who is so goofy to tell someone that income is subject to capital gains; not income tax. In addition, I believe 60 to 75% equities is not inappropriate as long as the equities are heavily skewed to dividend producers. Smith Barney will settle though as tech stocks and losses on that scale are not defendable given the sketchy details this article suggests. The accountant will probably get off clear.

    I'd also put another spin on this. Since the guy went to big bad Barney, he has someone to sue as opposed to an independant or unknown company.

    The one thing that smells bad is why only $2 million from the total. $98K per year is a better deal. You can only withdraw about half that from $2 mil investment pile and hope to grow the takeaway with inflation. Someone got a huge payday on this deal and it wasn't the accountant or advisor. Look to the company who bought out the payment plan. Why are they not going after them?

  • At 5/15/2007 7:07 PM, Blogger fin_indie said…

    Actually, I missed that point. The payout company did make out like a bandit, didn't they?

  • At 5/15/2007 8:31 PM, Anonymous finance girl said…

    Good point SP re: dividend stocks, since they are likely staid utilities, cos like J&J, real stable stuff.

    Dang though, seems like a slam dunk to go conservative when the goal is income and preservation.

    Shoot, even I know that!

    (PS I am not a Smith Barney fan, from personal experience, but that's just me)


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