Securities and Investment Litigation and Arbitration
With few exceptions, stockbrokers, investment advisors, and insurance agents act as fiduciaries for their clients. Therefore, they are required to place the interests of their clients ahead of their personal goals. When individuals are harmed by the misconduct of their financial or insurance professionals, they may have grounds for a breach of fiduciary duty claim or other legal claims arising from their advisor’s conduct.
Common Types Of Securities And Investment Misconduct
Unsuitable Investments
If a stockbroker makes an affirmative recommendation to buy or sell a security, that recommendation must be suitable for the client. In determining whether a recommendation is suitable, the stockbroker must consider various factors, including the client’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance.
A client who suffers investment losses as a result of their broker’s failure to recommend suitable investments may have a claim against the broker as well as the brokerage firm.
Failure to Diversify Investments
Churning or Excessive Trading
Churning, or the practice of engaging in frequent purchases and sales of securities within an investment account, can be devastating due to the fees, costs, and commissions generated by the excessive activity. Generally, the broker’s motive for churning is to generate commissions for him or herself, without regard to whether the excessive activity is beneficial to the client’s needs and investment objectives.
Investment Fraud and Misrepresentation
Brokerage firms, stockbrokers, and financial advisors who are advising an investor on the purchase or sale of a security have a responsibility to not make any statements or representations of important facts that are known, or should have been known, by the financial professional to be untrue. Additionally, this type of fraud can also occur for an omission, or the failure to reveal important facts that would have been important to the investor in making the investment decision.
In order to have a basis for a fraud or misrepresentation claim, the investor must prove he or she acted in reliance upon the untrue fact. If this critical piece of information would have made a difference in the investment decision, then a claim for fraud or misrepresentation may exist.
Brokerage Firm's Failure to Supervise Brokers
Federal and State securities laws and regulations require brokerage firms to establish and maintain systems to supervise their brokers, so as to assure compliance with and prevent violations of the securities laws. The brokerage firm, and those individuals within it who are responsible for supervising brokers (generally Branch Managers, Compliance Officers, and those in similar positions), may be liable to their investor clients if their lack of adequate supervision resulted in the client’s financial losses.
Among the supervision requirements, brokerage firms must:
- Review a broker’s history, including any customer complaints, before hiring
- Review account opening documentation, to assure it is complete and accurate
- Monitor a broker’s investment recommendations to clients
- Monitor account activity, to assure suitability of investments, proper diversification, and appropriateness of fees and charges (such as margin costs)
- Monitor communications with clients, including emails, websites, and social media
- Assure that representations to investors are accurate and truthful
- Review outside business activities to assure that the broker is not using the firm to engage in unauthorized securities business outside of the firm (such as encouraging customers to invest in a business venture in which the broker is involved)
- Investigate and respond to customer complaints
Improper Variable and Equity Indexed Annuities
Variable Annuities, Equity Indexed Annuities, and Indexed Annuities are complex, high-cost products that are aggressively sold, but are usually suitable for only a small minority of investors. These types of annuities pay some of the highest commissions to insurance agents, stockbrokers, and financial advisors, leading to abusive, misleading, and inappropriate sales to investors.
Variable and equity indexed annuities are often pitched to investors through investment seminars promising estate planning, retirement planning, or tax planning. Rarely do these sales presentations reveal the substantial surrender penalties, fees and unfavorable tax treatment for annuity withdrawals and distributions. In most cases, these investments are suitable for those who are prepared to lock up their money for a substantial amount of time and have used all tax deferral options available to them.
Private Placements - Unregistered Stock, Warrants, Limited Partnerships, Private REITs Promissory Notes, and Similar Securities Not Offered to the Public
Generally, stocks and bonds that are offered to the public for sale need to be registered with the SEC or state regulators before being offered for sale. While this registration does not mean the regulators have investigated or approved the investment, the registration ensures the paperwork and disclosures required by the applicable securities laws have been filed with the SEC or state regulators.
Certain investments do not require this registration. These private placements are often offered as unregistered stock, warrants, limited partnerships, promissory notes, or other types of investments, and they often carry high levels of risk. Intended for accredited investors whose net worth and experience suggests they have the knowledge and ability to evaluate the risks of the investment, some brokers and financial advisors nevertheless offer private placements to investors who are not qualified to fully appreciate and withstand such levels of risk.
Ponzi Schemes and Other Fraudulent Investment Schemes
There are a myriad of investment schemes designed to take advantage of individuals’ desire to achieve above average returns on their investments.
Ponzi schemes have become one of the more common forms of investment schemes. These schemes are characterized by the promoter of the investment using money from recent investors to pay the returns promised to earlier investors, creating the illusion that the investment does generate the generous returns as promised. As Ponzi schemes rarely have any legitimate investments and require a constant flow of funding to continue to operate, the fraudulent investment will eventually collapse and the investors will often suffer significant losses.
Consult with an Experienced Attorney
The attorneys of Gaslowitz Frankel have years of expertise in handling the complex issues surrounding securities and investment misconduct and disputes. For trusted legal guidance, consult with the attorneys of Gaslowitz Frankel.