Summary
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Determining whether you have a case
- Negligence
- Breach of fiduciary duty
- Omissions and misrepresentations
- Unsuitable Investments
- Churning
- Improper recommendations to invest in Ponzi schemes
- Unauthorized trading
- Failure to supervise
I. Negligence
When investors trust their financial advisor or stockbroker with their hard-earned money or life savings, those investors expect honesty and professionalism. They expect their advisor to handle the money carefully and work in the investor’s best interests. Sadly, that doesn’t always happen. While most advisors are honest, some investment professionals and firms commit blunders, investment fraud, and/or are negligent with their clients’ hard-earned savings.
Negligence may arise when an investment advisor fails to consider some important factors before using their client’s money or offering investment recommendations to such clients. Here are some of the factors that should guide an investment advisor or stockbroker when evaluating the suitability of an investment opportunity:
- Age and health status of the investor
- A desire for Safety vs. Risk
- The degree of risk that the investor is willing to accept
- Disabilities
- Retirement Status
- Net Worth and income
- Investment Experience
- Investment Goals
- Employment Status
- Need for Liquidity
- Expenses/Spending
- Liabilities/loans
- Total Invested Assets
- Tax Status
A financial advisor or broker is expected to be skilled and knowledgeable about a client’s needs and the financial markets’ dynamics. For instance, failure to diversify a portfolio or engaging in aggressive trading for a client near retirement can be deemed incongruous, careless, and negligent, depending on a number of factors.
An investor’s financial advisor or stockbroker typically has an obligation to offer proper, honest, and timely investment advice. If advisors have breached that duty through outright fraud, carelessness, or negligence, it can devastate their clients’ hard-earned money and retirement plans, and the clients may be able to recover investment losses by pursuing legal claims for compensation, for any losses they may have suffered.
Establishing negligence before an arbitration panel or jury is typically not a walk in the park. Investors typically need help to navigate legal processes and proceedings. To get legal help, investors should consider getting in touch with a reputable and experienced investor attorney.
The establishment of negligence can involve a review of factors that include:
- The activity in the investor’s account
- The investor’s investment goals
- Misrepresentations or omissions of material facts
- The investor’s lack of adequate understanding of the potential risks surrounding the investment
- What happened to the investments
- The financial advisor’s advice and its compliance with the investor’s stated objectives.
- The investor’s investment experience
- Whether the investor’s resources were sufficient to afford the potential risks of investments made.
- The amount of the loss
Information provided by the broker
II. Breach of Fiduciary Duty
Investment professionals and advisors owe their clients a certain degree of care. That degree of care may vary, and may include the highest standard of care for fiduciary relationships. A fiduciary relationship may exist between an investor and his investment advisor, depending on a number of factors. Whether the fiduciary relationship arises through an oral agreement, a written agreement, conduct by the advisor, a statute, or some other way, if one arises the onus is typically on the investment professional to act in the investor’s best interest and put the investor’s interests above those of the advisor.
If the investment professional has started putting the interests of a third party or their own interests ahead of his or her client’s interests, that may constitute a breach of their fiduciary duty to the client. Hence, the client may have potential claims to recover investment losses against his or her advisor for any losses suffered.
The fiduciary duty of financial advisors, brokerage firms, and investment consultants – when such duty exists – has sometimes been interpreted to include:
- Evaluating the type of investment’s rewards, plan, and risks before endorsing the investment
- Conducting adequate due diligence as to the issuer and/or its management before recommending the investment
- Refrain from self-dealing
- Making personalized recommendations to the investor based upon the investor’s needs, aims, and conditions.
- Give the investors sufficient, relevant information that would help them make informed choices and decisions in the marketplace
- Refrain from misrepresentation or omission of material information
While nobody can predict how the particular investment portfolio will perform in the future, some telltale signs that something is wrong and a fiduciary duty has been breached may appear. If your financial advisor has failed to act in adherence to applicable regulations and laws, your likelihood of suffering financial losses could be significantly higher.
III. Misrepresentations & Omissions
- Fails to notify his or her client that a particular investment is unduly risky—if so, they may have violated their obligation to furnish the client with relevant pieces of information needed to make informed investment choices;
- Misleads their client about the projected future performance of a certain security Presents the client with a recommendation about what seems to be a reputable company to invest in, knowing that the company’s financial position is shaky and may be headed for financial difficulties;
- Exploit elderly clients by failing to disclose all the charges related to an investment—for instance, an annuity—and the client later discovers their retirement resources are locked into an unsuitable investment for a period of time that lasts longer than the investor’s life expectancy.
- Existence of unusual transactions or investment products that you didn’t authorize on your account statement.
- Inaccurate or absence of contact information on documents sent to you.
- You instructed your broker not to invest in risky securities, he or she assured you that the investment isn’t risky, and subsequently you have suffered severe losses.
- You learn about reports in the mainstream media about fraud or serious impropriety surrounding your investment.
- The investment losses you incurred appear to go contrary to the risk tolerance you communicated to your advisor or stockbroker.
- You discover that some charges and risks to your investment were not revealed.
- You learn from the media that your investment is marred by fraud.
IV. Unsuitable Investments
- Reasonable basis suitability
- Customer-specific suitability
- Quantitative suitability
- Age and health status
- Any other material facts disclosed by the client.
- Other investments
- Risk tolerance
- Financial needs and circumstances
- Time horizon
- Tax status
- Investment objectives
- Liquidity needs
V. Churning
- The investments made are often not suitable and are potentially extremely risky.
- The investor is often times paying exorbitant commissions, far more than what they actually should pay.
- The recurrence rate of investment transactions becomes counterproductive to your investment objectives, leading to hefty commission fees—without noticeable outcomes—over time.
- You are earning less on investments than you are paying in commissions.
VI. Ponzi Schemes
Ponzi schemes are fraudulent arrangements where earlier shareholders earn returns for their investments through investments made by new investors, rather than from real and genuine investment activities or through earnings from financial trading.
An operator of a Ponzi scheme can be a company or individual who lures new investors by enticing them with short-term returns that are often higher than other investment opportunities.
Companies that run Ponzi schemes focus particularly on winning and convincing new customers to invest. They rely on a stream of new clients to be able to continue generating profits for earlier investors. Once they run out of investors, the entire scheme typically crumbles down and collapses.
Signs that an investment opportunity could potentially be a Ponzi scheme include:
- A discrepancy in documents and other correspondence the operator of the scheme provides concerning the investment.
- Individuals operating the investment scheme aren’t dully registered or recognized by any professional body and aren’t industry experts (but note that Bernie Madoff was regarded as an industry expert).
- A security that has an extended period of posting only positive results with no phases of decline.
- If the investment advisor purports to have identified an opportunity that has no risks but offers very high returns.
- Trouble obtaining information from the operators of the scheme.
VII. Unauthorized Trading
A stockbroker, financial advisor, or investment consultant should have formal permission to undertake transactions on behalf of a customer.
If you suffered losses because the person managing your investment account invested your money in trades you never sanctioned, you might have possibly been a victim of fraud, misrepresentation, and/or unauthorized trading, among others, and potentially entitled to recover investment losses resulted from such misconduct. You should consider consulting an experienced investor attorney.
VIII. Failure to supervise
A supervisor has an obligation to ensure brokerage firm representatives do not violate the firm’s in-house sales practice rules, regulatory rules, and securities laws and regulations in their securities business. If you or your loved one suspect that your brokerage house contravened the duty to supervise its financial brokers, financial and/or investment advisors, it is important to act fast and get in touch with an experienced investor attorney. The sooner you act to guard your investments, the better chance you may have to attempt to recover or minimize your losses. Visit our failure to supervise practice area page to learn more.
Brokerage firms typically have a legal obligation to adequately oversee the activities of their brokers, agents, managers, and any sort of investment and financial advisors they hire. Failure to properly supervise staff could be a flouting of FINRA rules. These organizations typically have a duty to ensure that their agents and workers meet the FINRA terms and conditions besides federal and state securities laws.
If your brokerage house negligently fails to reasonably supervise an agent’s conduct, you may be able to recover investment losses by taking action to hold the firm liable for its inadequate supervision. You may be able to bring a negligence claim against the firm, or even sue for investment fraud.
You may also be able to potentially pursue claims against the individual broker or managers for their failure to watch over the broker.
Other cases where investment losses could potentially be recoverable are:
- Margin selling
- Elder financial abuse
- Lack of diversification
- Broker theft
Potential Legal Venues to Seek Recovery of Investment Losses
Although different types of investments typically carry varying risk elements, it’s a different thing altogether to incur losses because of fraud, negligence, and other financial misconducts of stockbrokers and financial advisors.
While it may seem challenging to recover monies lost to Ponzi schemes, fraud, theft, and other scenarios where you have experienced problems with your investment, there may be legal ways to recover investment losses. They include:
1. Financial Industry Regulatory Authority (FINRA) Arbitration
Usually, the account opening documents when investors open a brokerage account include provisions telling investors that in case they have disputes with their financial advisor or their brokerage firms, they are required to resolve such disputes through FINRA arbitration.
FINRA is a self-regulatory body mandated to enforce securities laws and rules. FINRA also runs an arbitration or mediation system to resolve disputes, register broker-dealers, and representatives, and supervise securities industry members.
When an investor files a dispute with FINRA, it can take one to three arbitrators to hear it, typically depending on the amount of money involved. The arbitration panel’s award is usually final. Parties to the dispute may only be able to appeal it in limited circumstances. FINRA arbitration is normally less expensive and faster than litigation, although each case is, of course, different, and litigation may be more appropriate for certain cases.
For FINRA to consider a matter, the claim must be eligible for arbitration.
Arbitration can sometimes be a less complex, as well as less expensive and potentially confidential option to pursue in order to recover investment losses. Nonetheless, investors may want to hire an experienced investor attorney to represent their interests in arbitration proceedings, and offer advice and direction. Such proceedings typically involve filling fees. Still, investors may potentially seek a FINRA financial hardship waiver when justified.
How FINRA Arbitration Works
Shortly after FINRA receives a properly-filed Statement of Claim from an investor, it prepares and issues a list of potential arbitrators to parties in dispute to rank. An experienced investor attorney will typically conduct extensive research and evaluate prospective arbitrators on the list. After all parties have submitted their arbitration ranking forms back to FINRA, the process to choose one to three from the listed arbitrators begins.
The FINRA rules typically require investors and brokerage firms that are parties to a FINRA arbitration to provide certain specified documents. Clients will typically need to produce, among others, statements of account for accounts in dispute, other investment statements, any material communications (for instance, emails, texts, recorded phone calls) with the brokerage firm.
The brokerage firm is typically required to produce , among others, all communications with the investor, brokerage account statement, and internal communications relating to the client’s investment account. A FINRA arbitration rarely allows depositions.
How FINRA Conducts Arbitration Hearings
An arbitration proceeding is a somewhat informal trial. An arbitrator may consider the rules of evidence in evaluating the admissibility and/or strength of presented evidence. A typical FINRA hearing begins with opening statements from both parties. The brokerage firm’s lawyers may cross-examine witnesses. Once a client finishes presenting his or her case – typically through their chosen attorney – the brokerage house presents its own evidence and witnesses.
Normally, the hearing ends with closing arguments. Thereafter, the arbitrators adjourn the hearing and reach a verdict. A court is typically unlikely to reverse a FINRA arbitrations decision, except in a narrow set of circumstances, making such decisions typically final and binding.
FINRA Enforcement Actions
Both the SEC and FINRA are authorized to take enforcement actions that may include financial compensation for investors.
FINRA is authorized to enforce certain types of actions, which may include financial restitution for aggrieved clients. FINRA staff, the brokerage house itself, a court or FINRA-appointed third party can administer the distribution. A challenge of such action is sometimes the fact that brokers who are ordered to pay restitution may not have the financial ability to do so.
Customers eligible for recovery of assets may receive a communication from the appointed third party or the regulatory body before any resource distribution.
Be conscious that impostors may impersonate the Financial Industry Regulatory Authority or other government bodies to build trustworthiness with unsuspecting investors they target to swindle.
2. Potential Recovery Options Through SEC Action
As an investor, you should be alert and take note of Ponzi schemes’ red flags, outright theft, and/or fraud. Sadly, investment misconduct by advisors, brokerage firms, or other financial industry participants is a real concern. The SEC —Securities and Exchange Commission—reveals that thousands of investors in the United States lose their assets to swindlers and other violations of securities rules, regulations, and laws.
Under the SEC rules and regulations, the SEC may take several types of actions to seek restitution for investment losses, although such actions are often times limited by the wrongdoers’ ability to pay. These options typically include:
Disgorgement Funds and Fair Funds
When the Securities and Exchange Commission pursues an enforcement action against brokerage firms, individual brokers, financial advisors, and other parties suspected of defrauding investors, it can order disgorgement of illegally obtained monies. It can also impose extra monetary fines. In some situations, funds collected in an SEC enforcement action may be released back to aggrieved investors.
Fair funds and disgorgement funds are both financial reparations awarded to victims from the wrongdoer’s own resources – if any.
Disgorgement Funds—after a fruitful enforcement action, the SEC may direct the party at fault to surrender the funds obtained fraudulently to be given back to affected clients.
Furthermore, the Securities and Exchange Commission may order a monetary fine to be awarded on top of disgorgement funds.
Receiverships
When warranted, SEC recommends the appointment of receivers in some federal lawsuits. Receivers are disinterested and neutral officers of the court appointed in court cases where an entity has been accused of securities fraud or other securities law violations. Receivers typically act as liquidators. Receiverships are proceedings typically somewhat similar to a bankruptcy.
A receiver’s main role is to try and recover any defendant’s assets related to the alleged fraud or misconduct. The courts often times freeze such assets and monies until they make a final decision on the matter.
If the court finds the defendant liable for a violation of the state or federal securities laws or regulations, the court may order the distribution of those assets put under receivership to investors.
Notably, though, the SEC also cautions, “It is vital to realize that not all injured depositors will be able to recover their losses. Clients who win their claims may get considerably less than their damages. Furthermore, even when affected customers can recover losses, the process for allotting the money to injured investors may take some time.”
3. SIPC (Securities Investor Protection Corporation) Protections (When Available)
The SIPC is a non-government and non-profit oriented membership body, financed by affiliate broker-dealers. SIPC offers some degree of protection to financial investors somewhat similar to the FDIC deposit protection program for bank depositors. More specifically, if a court of law has declared a clearing firm (a company that clears securities trades) insolvent, it is the role of SIPC to ensure the client’s monies and securities are refunded, within parameters stated by law.
The Securities Investor Protection Corporation may protect investors if:
- The brokerage firm firm that has failed is a SIPC member.
- The investor maintains an investment account at the brokerage firm.
- The client has funds in the investment account for buying and selling securities.
- SIPC only steps in if the brokerage house has filled in using its internal dispute resolution mechanisms to resolve the issue.
The Securities Investor Protection Corporation typically does not involve itself in matters where:
- The dispute involves a non-member brokerage firm
- Claims arising from normal market loss
- Assurances of investment performance
- Futures and commodities contracts except under certain warranted conditions
SIPC may also cover introducing firms— businesses that sell bonds and stocks to the public. The SIP’s coverage may consist of limited protection against churning losses, particularly those arising from unsanctioned trading in clients’ investment accounts.
The coverage often includes unauthorized trading by representatives of the introducing company and may be available even if the clearing firm is not bankrupt—not the introducing firm, though.
SIPC offers no protection against risks arising from market fluctuations, for instance, when a security’s value declines.
Again, watch out for fraud. SIPC has cautioned on its Fraud Alert page that fraud is a real concern. Fraudsters may try to impersonate it in their attempts to defraud innocent investors.
Because of limitations on the financial loss-recovery options that SIPC and SEC offer, it might be more sensible to hire an experienced lawyer to evaluate pursuing FINRA, AAA, or JAMS arbitration, or take the matter to court. By engaging a skilled and experienced investor attorney to represent your interests, you can obtain professional legal advice and assistance to recover your investment losses.
4. AAA (American Arbitration Association) and JAMS (Judicial Arbitration and Mediation Services) Arbitration
Clients with account agreements with investment advisory firms may have to arbitrate their investment-related disputes with such firms in in AAA or JAMS-coordinated arbitration. AAA stands for American Arbitration Association. Both AAA and JAMS make available arbitration fora for private parties to arbitrate their disputes, as an alternative to court litigation. Just like FINRA arbitration proceedings, one to three arbitrators can attempt to settle the matter, depending on the amount in question, among other factors.
JAMS and AAA have distinct procedural requirements, but they both arrive at a verdict (“award”) that’s usually final, and a court is typically unlikely to overturn it, except in narrow circumstances.
Investor claims against insurers, issuers of stocks, and other securities-market players can be typically litigated, although this also depends on a variety of provisions and agreements that the investors may enter into at the purchase time or subsequently. An experienced investor attorney should be able to quickly determine the appropriate forum and applicable law.
Often times, FINRA arbitration can be less costly than AAA and JAMS arbitrations. However, depending on the contractual provisions and sometimes the forum’s own determination, the investment advisory firm may be required to carry the lion’s share of the costs involved in the arbitration dispute. This could also depend on whether the dispute is characterized as a “consumer” dispute or a “commercial” dispute.
What is a Consumer Dispute?
According to JAMS, a “consumer” is typically a person who obtains or seeks products mainly for personal consumption, including the banking, credit, or insurance transactions related to those procurements.
AAA defines a consumer dispute as a conflict that revolves around a consumer agreement—a contract between a company and an individual buyer. The company has a systematic and standardized use of arbitration clauses with clients.
Since in AAA or JAMS-arbitrated consumer claims, the firm bears most of the arbitration expenses, it could be to the investor’s benefit, if possible, for his or her claim to be categorized as a consumer dispute.
An experienced investment loss recovery attorney can help investors determine whether or not they may be able to file their case as a consumer dispute, elucidate all options clearly, and assist the investor in choosing the appropriate course of action.
5. Corporate Bankruptcy Proceedings
If your brokerage firm has violated securities rules and laws and you suffered losses as a result, you may be able to recover investment losses, at least partially, depending upon the circumstances of your matter. If a company has filed for corporate bankruptcy, its reorganization or liquidation plan or subsequent court filings will likely contain details about the amounts investors and creditors may be expected to receive.
6. Brokerage Account Protection
If your investment advisory services firm serves you through compliant broker-dealers, your money may be protected in certain circumstances. According to Customer Protective Rules, broker-dealers must segregate their assets from those of their customers. The rules are intended to protect investors from losing their funds in the unfortunate event that the dealer has incurred extreme losses and can no longer continue to stay in business. The investor’s money typically should not go to the broker-dealer.
7. Suing Your Investment Advisory or Stockbrokerage Firm
Investors have the right to expect that their brokerage firm or investment advisor safeguard their financial interests according to the rules applicable to each of those types of financial service businesses Investors who suspect their broker or financial advisor has engaged, or is engaging, in violations of the securities rules, or are otherwise mismanaging the investor’s money, may be entitled to recover investment losses and seek compensation.
An attorney experienced in handling investor disputes against financial industry members should review the investor’s factual situation to determine the available legal options and the appropriate course of action.
Seeking to Improve Your Odds of Recovering Investment Losses You Suffered
If you suspect that you or your loved one has suffered investment losses at the hands of a stockbroker or investment advisor, an investor attorney with experience in these types of disputes can help you determine whether fraud, misconduct, negligence or any other type of misconduct may have been at play.
Investors may take some proactive measures to help recoup life savings they worked tirelessly to accumulate. Such measures may help strengthen the investor’s claim in case he or she needs to hire an investor attorney.
Gather paperwork
Gather your annual and monthly investment account statements. You may also need to collect any other document related to your dealings with the broker or investment advisor, including pamphlets, private placement memoranda, other offering documents, and sales correspondences.
Gather all pertinent evidence that fraud may have ensued
Any proof that your brokerage firm acted contrary to specific investment laws and guidelines, and your wishes could help solidify your case. This could include:
- Notes
- Text messages
- Emails
- Letters
- Recorded calls (if permitted under the applicable laws)
Investors should also collect and save any other evidence suggesting that they may have been furnished wrong or inaccurate information, there were omissions and misrepresentation of facts, and that the investment advisory firm failed to act in the investor’s best interest.
Gather financial statements
Financial statements may be very useful for an experienced investment misconduct lawyer to be able to determine whether any improper conduct occurred.
Consider Avoiding Writing Complaint Letters to Your Broker Before Consulting with an Experienced Attorney
Although a client’s first instinct could be to settle the inconsistency directly with their broker, such moves may jeopardize their claim. Anything the investor sends to this or her broker, whether by text message, a mailed letter, a social media conversation, or email, could potentially be used against the investor in a legal proceeding. Investors should strongly consider consulting with legal counsel before taking action, as such action could potentially hurt the investor’s claims or ability to seek compensation.
The Bottom Line
While investment opportunities carry with them an element of risk, not all losses suffered arise from such risks materializing. Stockbrokers and financial advisors sometimes fail to live up to their professional duties in a variety of ways. In some cases, investor lawsuits and arbitration claims involve allegations of mismanagement of funds, improper advice or transactions, or outright misappropriation or misuse of investor money.
In other instances, customer arbitration claims and suits arising from allegations of negligence, misrepresentations, Ponzi schemes, and churning.
Other cases involve the breach of fiduciary duty, unsuitable investments, unauthorized trading, and failure to supervise a broker’s improper investment of a customer’s hard-earned savings into risky, inappropriate, and unsuitable financial products that generate high commissions but could result in substantial losses for the investor.
To recover investment losses can be time-consuming and challenging.
Whether through arbitration or litigation, an experienced attorney can offer much-needed counsel and advice to help navigate these complex legal matters.