STOCKBROKER/FINANCIAL ADVISER MISCONDUCT
Stockbrokers and other investment professionals play a very important role in the lives of their clients. Financial matters are arguably the most important issues that you will face in your life. Decisions related to retirement, purchasing a home, paying for your child or grandchild’s college education, or ensuring business continuity are just a few of the issues that depend heavily on making sure that you have a solid financial plan.
Stockbrokers, as well as the firms they represent, generally promote their business on the basis of trust, unity, growth, and security.
If you are like most people, you do not have the time, training, or temperament to manage your financial affairs. As a result, if you are like most investors, you place a significant amount of trust in your financial advisor. 
Unfortunately, stockbrokers and other investment professionals do not always have their client’s best interest in mind. Other times, the broker’s firm has a conflict of interest between clients they are advising on the issuance of securities and retain clients that are sold these securities. While no two cases are identical, the following list reflects many common claims that arise in the context of securities cases:
SECURITIES FRAUD
It is unlawful for a person to sell securities by means of a fraudulent scheme, by making misrepresentations of material facts, omitting to state material facts, or by engaging in any other practice that operates as a fraud or deceit upon the purchaser.
State and federal law generally provides that a person who engages in securities fraud shall be liable to the person deceived. Often these laws also provide that the defrauded victim shall be entitled to recover attorneys’ fees, interest, and the costs incurred in pursuit of their lawsuit.
Securities fraud takes many forms. Sometimes it involves an issuer selling securities under false pretenses, while other times it involves a stockbroker selling a risky investment as “risk free.” Because the investment professional generally possesses more information about a specific investment, it is imperative that all material information be shared with the customer.
When a financial advisor misrepresents or fails to disclose any of these risks or material facts, that advisor and his or her brokerage firm can be held liable for fraud. For example, if a financial advisor tells you that a particular investment is safe and it is not, that misrepresentation can constitute fraud. Likewise, if a financial adviser fails to disclose that a particular investment is risky and leads you to believe that it is safe, that omission can also constitute fraud.
If you feel that your financial advisor committed securities fraud, please feel free to contact us so that you can learn about your rights.
UNSUITABLE INVESTMENTS
Financial advisors have a duty to recommend only those securities which the advisor reasonably believes are suitable for his client, the investor. Before making a recommendation to purchase or sell a security, the broker is required to “Know Your Customer.”
As part of this obligation, a financial advisor should consider the investor's investment goals, financial well-being, risk tolerance, tax implications, other investments, and other relevant information before recommending any investment. Often, however, the financial advisor has other motivations for making a recommendation.
An all-to-common example is where, in an effort to inflate the past performance of a proposed portfolio, an advisor may recommend that a client who needs to preserve their capital invest a significant portion of their money in an aggressive, growth oriented mutual fund. Later, the mutual fund sustains considerable losses, and, as a result, the investor who needed to make sure that their principal was preserved now has a portfolio that is worth one-half of the original amount.
When a financial advisor recommends an unsuitable investment, the investor may be able to recover losses sustained from the investment from the broker or his/her brokerage firm.
If you feel that your financial advisor invested your portfolio in unsuitable investments, please feel free to contact us so that you can learn about your rights.
CHURNING (EXCESSIVE TRADING)
Churning occurs when a financial advisor buys and sells investments, such as stocks, in your account for the sole purpose of generating excessive commissions. The act of churning is a breach of the advisor's duty to recommend suitable investments and investment strategies and is considered to be a form of securities fraud. If you did not intend for your account to be actively traded, but have discovered that there is a high volume of buying and selling in the account, you may be a victim of churning.
A variation of churning, referred to as “twisting,” also occurs in annuity sales. Twisting involves the buying and selling (or surrendering) of annuities in order to generate commissions. Because of the large surrender charges that often apply to annuities, twisting can be very detrimental to an investor’s portfolio.
If you feel that your financial advisor may have churned your account, please feel free to contact us
so that you can learn about your rights.
UNAUTHORIZED TRADING and FAILURE TO FOLLOW INSTRUCTIONS
Unauthorized trading occurs when your financial advisor purchases or sells a security in your account without first obtaining your permission. In some instances, a financial advisor has “discretion” to trade in an account; however, before the advisor has this authority, you must first sign a formal agreement granting discretion to manage your account without seeking prior approval for each transaction. If no such agreement exists, your advisor must adhere to strict rules that are designed to assure that you have approved each transaction.
For starters, an advisor must complete an order ticket that operates as a contemporaneous note setting forth all the details related to the transaction. The advisor must also provide you with confirmation that the transaction occurred and must notify you of the price, number of shares, and the capacity in which the advisor’s firm acted in the transaction. Unauthorized trading can occur for many reasons. It often occurs in combination with churning where the advisor is has an incentive to generate commissions, or to meet commission goals or quotas.
A tangential claim to unauthorized trading is “failure to follow instructions.” Your advisor has a continued duty to obey your instructions related to your accounts. Even if you have granted discretionary authority to the advisor, the duty to follow instructions remains. This most typically occurs where you instruct your advisor to buy or sell a security and your advisor fails to do so in a reasonable time, or fails to execute the trade entirely. If the failure causes you to sustain losses, you may be entitled to recover those losses from the advisor and/or his firm. Alternatively, you may have instructed your advisor to sell a security, but your advisor persuades you to retain the security in your account. If you subsequently sustain losses in the value of the stock, you may be entitled to recover those losses from the advisor and/or his firm. The losses sustained in both of these instances can be significantly magnified if your account was also utilizing margin. Regardless, it is a good idea to make a note any time you instruct your advisor to take any action in your account.
If you feel that your financial advisor engaged in unathorized trading, or if your advisor failed to follow your explicit instructions related to your account, please feel free to contact us so that you can learn about your rights.
OTHER COMMON SECURITIES CLAIMS
With the complex array of investments that are available in the marketplace, investors have many decisions to make.
In addition, the complex nature of many of the investments in the marketplace often cause confusion. As a result, investors rely heavily on their financial advisors. Financial advisors know that their clients rely on their professional advice. In fact, most advisors encourage their clients to trust them.
This level of trust occasionally leads to advisors taking advantage of their trusting clients. This breach of trust often constitute the basis for legal claims in arbitration and litigation.
Other than securities fraud, churning, unauthorized trading, and unsuitability, the following claims are common in securities cases:
Breach of Fiduciary Duty
The relationship between a financial advisor and his client is fiduciary in nature. Your financial advisor has a duty to act in your best interest and fully disclose all risks associated with the investments they are recommending. Furthermore, your advisor has a fiduciary duty to disclose any conflicts of interest that might have an effect on his or her recommendations.
For example, if the brokerage firm wants to promote a certain investment and pays the broker a high commission over other products, the broker has a duty to disclose that conflict of interest. When a financial advisor or other investment professional misrepresents or fails to disclose any of these risks or material facts, the advisor and his or her brokerage firm can be held liable for breach of fiduciary duty.
Negligence
Like any professional, stockbrokers and other financial professionals have certain duties to their clients. Some of these duties are based upon statute or regulation, while others are based upon standards of practice. If a stockbroker or other financial professional breaches the duties they owe their clients and, as a result, the client is harmed, he (or she) may be liable for the harm.
Each state has its own law related to negligence and it is possible that an investor may lose his or her claim if he or she was also negligent (this defense is referred to as contributory negligence). Therefore, it is important to consult with an attorney if you feel your stockbroker or financial professional was negligent in managing your investments.
Breach of Contract
Each person who opens a brokerage account completes an application or other agreement with their stockbroker (or other financial professional), and/or the broker-dealer or investment advisor that the stockbroker represents. This agreement is a legally binding contract and requires the investor, the stockbroker, and the firm to comply with its terms.
These agreements often state that the stockbroker and his or her firm agree to comply with all applicable laws, as well as all rules, and regulations of the SEC and/or self-regulatory organizations (SROs), such as the Financial Industry Regulatory Authority (FINRA). If the stockbroker and/or firm fails to comply with these laws, rules, and/or regulations, they have breached their agreement with their customer and, if the breach causes the investor to be harmed, may be liable for that harm.
Theft
In some cases, a financial advisor will outright steal money from his client's accounts or will divert funds which are to be deposited into an account into his/her own account for his/her own benefit. Outright theft is an obvious red-flag of investment abuse. Theft may not be easy to detect though.
If you are concerned that your advisor has stolen money from your account, you should contact an attorney immediately.
Over-concentration
A financial advisor generally has a duty to recommend that your account be diversified among different investment classes such as cash, stocks, and bonds. Over-concentration occurs when your portfolio's investments are disproportionately weighted in one asset class, or where a disproportionate amount of your portfolio is invested in a small number of securities.
In order to minimize risk and avoid excessive loses, your portfolio should be diversified. If, for example, the majority of your portfolio's assets consist of stock holdings in your long-time employer or in an automotive company or restaurant chain your portfolio is not diversified. If your advisor fails to recommend you diversify your portfolio, or alternatively, if your advisor recommends you concentrate your portfolio in one asset class or a small number of investments, and you suffer losses as a result, you may have a claim against your advisor and/or his firm.
Another example of over-concentration is where your advisor recommends that you invest a large amount of your portfolio in one sector (such as technology, consumer staples, healthcare, industrials banking/financial, energy). Proper diversification includes investments in multiple asset classes, as well as investments among differing industry sectors. Many investors suffered significant losses after 2000 because their portfolios were over-concentrated in technology
stocks. In addition, many investors suffered losses in 2008 as a result of having an over-concentration of investments in financial services companies in their portfolio.
Selling Away
Selling away is a term to describe a situation when a financial advisor who is employed by one brokerage firm sells investments to his clients that are not approved by that firm. Selling away typically results from an advisor’s desire to receive a commission on a transaction without being required to share it with his employer. Selling away schemes are particularly dangerous for investors because these cases usually end up with the investors becoming victims of theft. These schemes also often involve the sale of promissory notes. Promissory notes are in essence loan investments where the borrower promises to pay investors a high rate of interest in exchange for the loan amount from the investor. Once the investor pays the money, the borrower never makes the interest payments and the investor’s investment vanishes.
Failure to Supervise
Brokerage firms have a duty to supervise their financial advisors. As a result, brokerage firms can be held liable for failing to supervise their advisors. if an adviser commits any of the acts discussed in this web site, the firm may be liable for failing to supervise. In addition, the firm may be liable for the advisor’s actions where the advisor is an agent, representative, or employee of the firm.
If you feel that your financial advisor engaged in any of the acts discussed herein, please feel free to contact us so that you can learn about your rights.
Most Investment Fraud cases are filed in arbitration. It is important to hire an attorney who understands the rules of FINRA arbitration.
Because most financial services firms have incorporated pre-dispute arbitration clauses in their account agreements, investors are generally contractually obligated to file these claims in arbitration. The most common forum for securities arbitration is provided by the Financial Industry Regulatory Authority (FINRA). If the investment professional and/or their firm is not a broker-dealer, investors may be required to bring their claim in an alternative arbitration forum, such as The American Arbitration Association. If there is no pre-dispute arbitration clause, an investor may generally file their claim in court. Navigating this issue alone is often difficult and time consuming and, in some cases, the investor does not discover the document containing the pre-dispute arbitration clause until after a claim or case is filed.
The Kueser Law Firm has experience representing investors in arbitration. In addition, the firm has experience with the internal operations of financial services firms. If you think that you are the victim of financial advisor misconduct, please contact us to discuss your situation.
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