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Investing Charlie Sheen Style

Feb 15, 2011 | Updated May 25, 2011

Even die-hard Charlie Sheen fans must have been appalled at news reports that he asked a porn star to babysit his two young daughters. His ex-wife, Denise Richards, expressed the views of most of us when she twitted that "no adult film star will be babysitting our kids."

Don't be too quick to criticize Mr. Sheen's appalling judgment. Most of you are not doing any better when you pick an investment adviser.

Jay Franklin brought home this point in a thoughtful recent blog.

Mr. Franklin finds it odd that you would entrust your life savings to firms with a demonstrated history of ethical and moral (if not literal) bankruptcy. He supports this position with the following examples, which are a modest sampling of the indefensible conduct passing for another day at the office of significant players in the financial world:

1. Merrill Lynch paid $10 million to settle claims it used order flow from its customers to trade and profit for its own account;

2. The Bank of New York allegedly overcharged a Virginia pension plan according to allegations in a complaint filed by the state. It is alleged to have done so by converting $12.5 million of pension money to Canadian dollars at the highest exchange rate and then passing on the proceeds to the pension plan at the lowest exchange rate, and (of course) pocketing the difference. A very slick move, if proven.

3. Similar allegations against Bank of New York are being investigated by the Florida state pension plan. California has commenced its own investigation into foreign currency practices of State Street. The defendants deny all charges.

4. J.P. Morgan must be one of the few winners who dealt with Bernie Madoff. It quietly withdrew $276 million in profits shortly below Madoff's collapse. It is now the defendant in a $6.4 billion lawsuit, filed by the tenacious trustee for the Madoff mess. The lawsuit alleges that J.P. Morgan was "thoroughly complicit" in Madoff's fraud. J.P. Morgan denies the allegations.

I join Mr. Franklin in wondering why investors deal with firms that have conducted business in this manner. It should be enough that they lack the ability to intelligently manage money (their own or others). You would think the total lack of a moral compass -- standing alone -- would cause you to flee from their offices. There is no evidence this is happening.

Before you judge Mr. Sheen, take a hard look at the way you invest.

You may find your judgment is no better than his.

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