The most important aspect to any securities controversy is determining if you have the basis for an action against the broker and/or brokerage firm. No one has the right to commence a case accusing a broker or a firm of wrongdoing unless you can demonstrate that you have been wronged by the intentional or unintentional conduct of a broker or firm. This evaluation phase should not be taken lightly. In order to complete the evaluation you should 1) analyze the documents and 2) know your chance of success.
Loss Recovery Center can do this for you, at no cost to you. Here’s what you need to do:
- Gather your monthly statements, trading confirmations, account agreements, correspondence with your broker or firm, and literature about the firm.
- Draft a detailed narrative of events. Be sure to include dates and a description of how you met the broker.
- Contact Loss Recovery Center to discuss your situation.
- Send your documents and written narative to Loss Recovery Center.
KNOW YOUR CHANCE OF SUCCESS
The following are the most common cases brought by investors and one case usually involves more than one of these issues:
- Unsuitability
- Misrepresentations and Omissions
- Unauthorized Trading
- Breach of Fiduciary Duty
- Order Failure
- Churning
- Failure to Supervise
- Unregistered Broker or Security
- Margin Accounts and Over-Leveraging
- Forgery
- Selling Away
Unsuitability
When an investment was inconsistent with the customer’s investment objectives and the broker knew or should have known that is was inconsistent, the issue is suitability.
For example:
* The client’s investment objective was contrary to the type of investment solicited and transacted by the broker (e.g. a speculative trading strategy for a client whose investment objective was safety of principal).
*You didn’t know or understand the risks of loss involved in a particular investment. Again, examine in-depth your investment background; recall what inquiries you made of the broker with respect to risk. Many people plead ignorance when an investment goes sour. Given your educational and investment background, together with your general level of sophistication, assess the likelihood that a neutral party will be convinced that you were truly in the dark with respect to the risks involved in the investments.
*You didn’t have the financial ability to bear the potential risks. The 87 year old widow whose only means of support is social security and who lost the proceeds of her husband’s $20,000.00 life insurance policy to an unscrupulous broker will gain far more sympathy from an arbitrator than the doctor who was suckered into losing $10,000.00 on options. A broker has an obligation not to recommend securities that are unsuitable for a particular investor. A customer also has an obligation to be truthful in providing information to the broker at the time the account is opened. More than once, a customer has overstated his net worth or income in an effort to convince a broker that he is a valuable customer or suitable for a particular investment, only to have those misrepresentations thrown back at him during an arbitration.
* The purchase of low priced (“penny”) stocks for anyone but the most speculative investor. There have been a number of arbitration cases brought by investors against “boiler room” operations that push low priced stocks in which the broker-dealers make a market. The sales tactics of these companies generally prey on the greed of the potential customer. Often, these brokers will promise huge returns in short periods of time and pressure investors to make immediate purchases. These tactics should, of course, raise a red flag to anyone.
* The purchase of certain corporate bonds (“junk bonds”), may provide high returns but involve a high risk. Since interest rates have been lower in recent years, investors who previously relied upon investments in Certificates of Deposit to provide interest income have, in many cases, sought higher returns than the CD’s could provide.
* The purchase of illiquid partnership interests for an individual who requires liquidity. If a customer has limited liquid assets, the purchase of partnership interests for which there may or may not be a secondary market, may be deemed unsuitable. Often, the sale of partnership interests, results in higher commissions to the selling broker, creating significant motivation to induce his or her customers to invest.
Under the rules of the Financial Industry Regulatory Authority (FINRA), a broker recommending the purchase or sale of a security to a client is required to have “reasonable grounds for believing that the recommendation is suitable for such client upon the basis of the facts, if any, disclosed by such client as to his or her other security holdings and as to his or her financial situation and needs.” [NASD Manual].
The New York Stock Exchange’s (NYSE) “Know Your Client” rule requires members to use due diligence to learn the essential facts relative to every client. [NYSE Rule 405].
It is incumbent upon a broker to elicit information concerning the client’s investment objectives and financial needs. Under the Rules of Fair Practice, a broker must recommend only those securities he believes, after investigation of the issuer, to be consistent with the client’s objectives and needs.
Misrepresentations and Omissions
This is one of the most common issues in securities arbitration. Misrepresentation may be intentional or unintentional. A broker may be held liable for misrepresenting the risks of an investment or for failing to disclose the risks when the broker knew or should have known that the customer would rely on what he said or failed to say regarding the risks of the investment. The misrepresentation or omission must have been made “in connection with” the customer’s decision to buy or sell the security.
Whether or not a client should rely on oral misrepresentations when he was provided with accurate written disclosures presents the question of reasonable reliance. The following factors will be examined in determining whether or not the client reasonably relied upon the broker’s misrepresentations or omissions:
- The Claimant’s sophistication in financial and securities matters;
- The duration of personal or business relationships involved;
- The availability of relevant information;
- The presence of fiduciary relationships;
- The concealment of, and the opportunity to discover, fraud;
- Which party initiated, or wished to expedite, the transactions; and
- The relationship between the client and the broker, the nature of the misrepresentations or omissions, and the client’s ability to fend for himself in evaluating the investment vehicle must all be examined in order to determine whether the client justifiably relied on the misrepresentation or omission.
Unauthorized Trading
Rule 408 of the NYSE states, in part:
“No member, allied member or employee of a member organization shall exercise any discretionary power in any customer’s account or accept orders for an account from a person other than the customer without first obtaining written authorization from the customer.”
A broker may test a client, by making one or two unauthorized trades, waiting to see if the client objects. If he gets away with the “test” he may make more unauthorized trades.
Breach of Fiduciary Duty
A fiduciary relationship may exist between a broker and a customer based upon the nature of the relationship itself or may be inferred by the professional status of the broker. Some jurisdictions recognize the customer-broker relationship as fiduciary in nature; in others, it will be necessary to demonstrate that a fiduciary relationship existed by virtue of the nature of the relationship.The degree of control exercised by the broker over the account will influence this determination.The more a customer relied upon the broker, the better the chance of demonstrating a fiduciary relationship.
Churning
The broker’s compensation system presents a potential for conflict in that the broker is compensated on the volume of transactions conducted for the customer. When a broker puts his own interests ahead of the interests of the customer by effecting trades for the customer that are “excessive in light of the objectives and resources of the customer’s account”, the broker is churning the account.
There are three elements necessary to establish a cause of action for churning:
- The trading in the customer account was excessive in light of the customer’s investment objectives;
- The broker in question exercised control over the trading in the account; and
- The broker acted with the intent to defraud or with the willful and reckless disregard for the interest of the customer.
Failure to Supervise
When a firm or supervising broker (branch manager) fails to enforce internal compliance or regulatory rules, there may be a failure to supervise.
Unregistered Broker or Security
Every state has laws regarding the registration of any person or entity acting as a broker or broker-dealer. In some jurisdictions, in the case of non-registration, customer losses may be fully restored, together with fees and costs, even where the customer fully understood the risks involved in the security and was willing to accept them.
Margin Accounts and Over Leveraging
In order to trade on margin, a firm must obtain a written margin account agreement executed by the customer. This agreement gives the firm the right to liquidate the customer’s securities in the event of a deficiency, without giving further notice to the customer.
Margin agreements are sometimes signed by customers as a matter of course, and without the customer’s full understanding of the consequences of the agreement.
Forgery
It is extremely rare to find that a broker has forged a customer’s signature to accommodate an outright theft, such as converting customer funds from the account to the broker’s own use. In these unusual circumstances, the firm will generally provide immediate restitution to the customer upon adequate evidence of the theft.
Somewhat more common is the broker signing a customer’s name to new account forms, margin account forms or options disclosure statements. Although such activity does not reflect well on a broker, the issue is whether or not the client was damaged as a result of the forgery.
Selling Away
When your stockbroker is selling investments not approved by the firm.