Causes of Action

Breach of Fiduciary Duty

Financial advisors or securities firms often have fiduciary duties to their clients. A fiduciary is obligated to place the interests of the person to whom he owes the fiduciary duty (the investor) above his own interests. Thus, your financial advisor may have a legal duty to place your interests above his own when giving you investment advice. Financial advisors are generally considered to owe fiduciary duties to their clients when exercising discretion or making investment recommendations. Fifty-six percent (56%) of FINRA arbitrations filed in 2010 included a breach of fiduciary duty claim.

Excessive Fees/Churning

The amount of fees to which a financial advisor or securities firm is entitled is typically governed by your contract. However, some investments are inherently unsuitable for most investors because an unreasonable portion of the investment will be consumed by fees. High fees may also present an incentive for a securities firm or advisor to engage in misconduct because they want to make more sales (see fraud/misrepresentation, failure to disclose and self-dealing). Another example of broker misconduct is churning, or causing excessive activity in the investor’s account for the purpose of generating commissions or other fees.

Failure to Disclose

When recommending an investment, a financial advisor has a duty to disclose facts that are important to the investment decision. Failure to disclose important facts can have the same effect as an affirmative misrepresentation, and may give rise to a claim. (see Fraud/Misrepresentation)

Fraud/Misrepresentation

Financial advisors are prohibited from making misrepresentations to investors. While not every misrepresentation gives rise to a claim, if you believe your financial advisor was not truthful with you regarding an investment and the investment has lost money within the last ten years, you should consult an attorney for an evaluation of your potential case. Fraud includes circumstances in which your advisor failed to tell you information about your investment. If knowing the information would have affected your investment decision, you may have a claim for fraud/misrepresentation. Sometimes it is difficult to know what you were not told. If you did not fully understand an investment that was recommended to you, or if your investment did not perform as you were told, you may have been a victim of securities fraud. A securities lawyer can investigate your investment and determine whether important information was withheld from you.

Overconcentration/Failure to Diversify

Modern investment portfolio theory holds that the risk of a substantial decline in a portfolio’s value can be reduced by diversification both within asset classes (i.e., holding stocks in a number of different companies, rather than one company) and over different asset classes (i.e., holding a variety of equities,bonds, cash, real estate, and other investment types). Appropriate asset allocation considers each investor’s circumstances, including net worth, income, financial needs, and age — there is no “one size fits all” approach. Overconcentration or failure to diversify occurs when the investor’s assets (or a large portion of them) are placed into a single investment or investment class (or into a small number of investments or investment classes). Overconcentration or failure to diversify can result in substantial losses that could have been avoided with proper diversification. These losses may be recoverable through a legal, claim for damages.

Ponzi Schemes

A chief attribute of so-called Ponzi schemes is the use of money from new investors (or new investments from existing investors) to repay old investors as though the business is profitable, thus concealing the company’s true unprofitable condition. Unless uncovered sooner, Ponzi schemes eventually collapse when there is no longer sufficient “new money” to repay obligations to previous investors.

We are experienced Ponzi Scheme attorneys

If you have suffered an investment loss due to a Ponzi Scheme, you may be entitled to recover all or part of your investment. To find out more about your potential claims against your broker/financial advisor, investment firm, or securities firm for operating a Ponzi Scheme, please contact an experienced investment fraud attorney

Self Dealing

When a financial advisor or securities firm recommends an investment only because the advisor or firm will make larger fees, self-dealing may occur. A financial advisor cannot take advantage of his position by acting for his own interests and not for the interests of the investor. Certainly, advisors and others involved in recommending an investment are entitled and expected to make fees on the transaction. However, the size and nature of their fees should be disclosed to the investor. Especially with private placements and other non-traditional investments, promoters may have financial interests that are not adequately disclosed to investors or that create incentives that are contrary to the investors’ best interests.

Selling Away

Promissory notes are simply contracts under which an investor loans a specific sum of principal in exchange for the promise to receive interest over the term of the note, plus return of the principal at maturity. Payment of interest and repayment of principal depend on the borrower’s creditworthiness and the security and value of the collateral underlying the note, if any. While promissory notes may sound secure, they can be quite risky.

Trustee Mismanagement

Investment fraud can also occur in the context of a trust or similar situation. Trustees must comply with the trust documents and also act according to their other legal duties, including the duty to avoid waste of trust assets.

Unauthorized Trading

Brokers and securities firms must have authorization from you to make trades on your behalf. Typically, brokerage accounts are “nondiscretionary,” which means each trade must be authorized by the customer before it is made. Investors can enter into written agreements giving their brokers or securities firms “discretionary” authority, which authorizes the broker or firm to make trades in the account as to which discretion has been granted without the investor’s prior approval of each trade . A broker or securities firm cannot exercise discretionary authority over your account without your prior written approval. Unless discretion has been properly granted by the customer, placing a trade without approval in advance from the customer is a violation of law.

Unregistered Securities

Federal law and the laws of most states and nations, govern whether a security must be registered. The sale of an unregistered security in violation of the law may give the investor the right to rescind the sale, i.e., to require the seller to repurchase the security for the amount invested (less any income received from the investment), plus interest. Private placements and other non-traditional investments (including notes, limited partnership interests, viaticals and oil and gas investments) are types of investments that should be reviewed by a securities lawyer for possible unregistered securities claims.

Unsuitability

Before recommending an investment, an advisor must have a reasonable basis to think the investment is appropriate (“suitable”) for your financial circumstances and investment objectives. The recommendation of unsuitable investments is one of the most common types of advisor misconduct.FINRA reports that more than one in three arbitration cases that are filed include allegations of unsuitability.

Stockbroker Misconduct

Stockbrokers and investment professionals owe their clients certain fiduciary duties, most of which are apparent and obvious, including the duty not to lie, steal or cheat, or to place their interests or those of their employers ahead of their clients financial interests.

Specifically, the federal securities laws declare it unlawful to make any material misstatement or omission of fact in connection with the purchase or sale of securities. Misstatements include mischaracterizations or false statements made with respect to a particular security, the issuer, or the exaggeration of facts concerning a company, its business prospects, or to guaranty against losses.>

Omissions include the failure to disclose a fact or set of facts, which would render other statements materially misleading. Omissions include such things as the broker’s failure to disclose that they are receiving more compensation from the sale of a particular security than another security, or the failure to disclose that the broker or brokerage firm failed to conduct any meaningful due diligence with respect to the recommendation to purchase a particular security.

A statement is material if it assumes actual significance in the deliberations of a reasonable investor. A half truth is still a whole lie.

There are other forms of stockbroker misconduct, which are actionable under the law including the federal securities laws, including claims for the sale of overly risky or otherwise unsuitable securities, breach of fiduciary duty, fraud in connection with the sale of mutual funds or structured products, the sale of unregistered securities, and variable annuity fraud.

Brokerage firms are also responsible for the misconduct of their agents under the common law, as control persons under the federal securities laws and based upon the failure to supervise the conduct and activities of the stockbroker, which for a variety of reasons, may have been intentionally ignored.

Stockbroker Theft

Sometimes financial crime is simple: Stockbrokers just steal money. They may remove it from a customer’s account or divert funds from a customer’s account into their own account for their own benefit. Though such theft is often accomplished through old fashioned means – forgery, for example – it is not always easy to detect.

Brokers may resort to forging customer’s checks or transfer instructions, or they may actually remove money from a customer’s account by check or wire transfer and then place it into an account that they control. Broker theft is also called conversion.

• A broker borrows money from a customer and never pays it back;
• A broker recommends a non-existent security and pockets the purchase price;
• The customer receives a mystery check from a brokerage account and calls the broker to inquire. The broker claims it was a mistake and asks the customer to send the check directly back to the broker, who then deposits it into another account upon receipt.

The sums can be substantial. For example, the Financial Industry Regulatory Authority, or FINRA, settled charges in January 2012 against a broker who wrongfully converted $187,000 in customer funds to her personal use.

According to FINRA disciplinary records, over a year-long period ending in early 2010, this broker forged the signature of a customer on IRA distribution request forms to authorize the transfer of funds to an outside bank account that she controlled. The broker, who worked for LPL Financial Corp. at the time, eventually reimbursed the victim of her theft and was barred from the industry.

Theft and the misappropriation of customer funds appeared to be on the rise in 2011. FINRA’s disciplinary-action database revealed at least 50 disciplinary actions involving misappropriation or conversion of funds in 2011, up from about 20 in 2005.

In August 2011, FINRA announced a $500,000 fine paid by Citigroup for its failure to supervise a registered broker in its Palo Alto, Calif., office. Over an eight-year period this broker misappropriated about $850,000 from at least 22 Citigroup customers, including elderly and infirm customers.

According to FINRA, this broker “used her knowledge of Citigroup’s lax supervisory practices at the branch to take advantage of some of the firm’s most vulnerable customers, including the elderly. Citigroup had reason to know what she was doing and could have stopped her.”

Such conduct is not new, and brokerage firms that discover their brokers are stealing money or obtaining unauthorized loans from customers often seek to conceal these acts from regulators and customers for fear that they may have to pay the customers back, or that they are legally responsible for the conduct of the brokers.

In one case, a broker forged about 20 illegal transfers through which he stole hundreds of thousands of dollars from customers. His firm told regulators that the broker was fired because of “signature discrepancies.”

While brokers who steal money are often judgment proof or on their way to jail, the brokerage firms who employ them are liable for the acts of their registered representatives, even though they did not “authorize” them to outright steal from their customers. Their liability arises from their unequivocal duty “to establish, maintain and enforce an adequate supervisory system to detect and prevent misconduct.”