Do I have a claim against my investment advisor?
March 3, 2016 — Investors who have lost their life savings, retirement, or a substantial sum of their investment are often confused on how this occurred and wonder how they can recover their losses. Your ability to recover your losses will depend greatly on the particular facts of your relationship with your investment advisor, stock broker, or brokerage firm and what they did or failed to do.
Below are list of possible claims that you might be able to bring against your investment advisor, stock broker, or brokerage firm.
“My broker just didn’t take my needs into account when recommending stocks and other investments. He didn’t make recommendations that were right for me or my family.”
If this is the case, you might have a Suitability Claim. Investment advisors, stock brokers, and brokerage firms are under an affirmative duty to get to “know their customer” and to make investment recommendations that are suitable for you given your family circumstances, investment objectives, age and experience in the market, tax bracket, risk tolerance, sophistication, and financial ability to bear the risk inherent in the investment. Failure of the investment advisor, stock broker, or brokerage firm from fulfilling this obligation and recommending unsuitable investments violates both federal and state law, as well as the rules established by the Financial Industry Regulatory Authority (“FINRA”).
Usually, the failure of an investment advisor, stock broker, or brokerage firm to diversify your portfolio over several securities or types of investments is a sign that you might have a Suitability Claim. Also, evidence that an investment advisor, stock broker, or brokerage firm uses virtually an identical investment strategy for a broad range of customers is also a sign.
“My stock broker keeps buying and selling stock all the time for no apparent reason.”
If this is the case, then you might have a Churning Claim. Stock brokers have a built-in conflict of interest in that they wear two hats: one of an investment advisor and one of a salesperson. Unless the stock broker is managing a set fee account, he only makes money when he is buying and selling stock. The pressure for a stock broker to increase production is tremendous.
Churning occurs when, to obtain commissions or other benefits, a stock broker causes securities in a customer’s account to be bought and sold with a frequency too great in light of the customer’s financial needs, resources, and investment objectives. When a broker makes a buy or sell recommendation for an account, that broker should have the investor’s best interests based on their investment objectives in mind. If the broker makes excessive buy and sell recommendations for the purposes of generating commissions for the broker, that broker is churning the account.
The size of the turnover ratio, the size of the annualized commission-to-equity ratio, and any indication of day trading are often the signs of churning.
- Unauthorized Trading.
“My stock broker is buying and selling stocks in my account without my permission.”
If this occurs, you may have an Unauthorized Trading Claim. Generally, an investor can have two kinds of an account, non-discretionary and discretionary. In a typical non-discretionary account, the broker must consult with and obtain the consent of the investor prior to making a trade in the account. Unauthorized trading occurs when trades are executed in a non-discretionary account without the customer’s prior permission or contrary to the customer’s trading instructions.
Claims regarding unauthorized “Margin Trading” are another type of unauthorized trading. Margin trading involves borrowing money from the brokerage firm to purchase securities greater in value than the equity in an investor’s account, using the securities in your account as collateral. Margin trading is a high-risk strategy that can yield a huge profit if executed correctly and can yield greater losses if executed incorrectly. If a stock broker trades on the margin without the knowledge or consent of the investor, the investor may be able to recover the losses resulting from the wrongful conduct.
- Order Failure.
“I told my broker to sell a stock and he didn’t do it. When he finally got around to selling, it was too late.”
If this occurs, you may have an Order Failure Claim. A stock broker is bound to follow the direction of his principal, the investor. A stock broker undertakes and agrees to purchase at once the stock indicated, and to sell the share upon the order of the customer. While it is the stock broker’s responsibility to advise the client where they believe the client’s judgment is in error or involves an inordinate amount of risk, the stock broker is not allowed to override the investor’s instructions. If the stock broker is found to have disobeyed the customer’s order, the broker is required to restore the customer to the position he or she would have enjoyed if the order had been obeyed.
- Securities Fraud.
“My investment advisor told me that this stock ‘couldn’t miss’ and that I needed to get in on the ground floor while the prices were low. When I asked him about the investment risks, he assured me that it was a safe investment and that it is appropriate given my investment objectives. Now, the stock is garbage and I have lost nearly all of my investment.”
If this occurs, you might have a federal or state securities fraud claim. Indeed, most of the claims on this list are subsets of federal and state securities fraud claims.
Securities fraud occurs when an investment advisor or broker makes false statements to an investor or fails to advise the investor of certain important facts regarding the purchasing or selling of security. If this happens, the investor may be able to recover losses incurred resulting from this fraud, as well as attorney’s fees.
- Ponzi Scheme Investment Scams.
“My broker advised that I invest in this new company where I would receive a return on investment of 3-4% every quarter for five years. At first, everything was going great. I received a 4% return on my investment for the first two years. But recently, I have not received any statements or dividend returns from the company or my broker. Also, it has been very difficult getting in touch with my broker.”
If this occurs, you might be the victim of a Ponzi scheme. A ponzi scheme is a complex investing scam in which an investor is promised high rates of return over a period of time with very little risk. The ponzi scheme generally uses the proceeds from recent sales of the investment vehicle to pay promised returns to the earlier investors. Very simply, the company or investment manager is robbing from one group of investors to pay another group of investors. The problem with prosecuting the ponzi scheme is that it actually yields the promised returns to earlier investors and will continue to do so as long as there are new investors joining the scheme. As such, by the time new investments stop and the ponzi scheme collapses, the statute of limitations on claims that an investor might have may have elapsed.
Therefore, it is important for you to immediately seek legal action when you feel that you have been a victim of a ponzi scheme. (For more information regarding statute of limitations in securities cases, please see our earlier post titled, Act Quickly When Victim of Securities Fraud).
Investment advisors and stock brokers who sell ponzi scheme fraudulent investments may be found liable for securities fraud, the sale of unregistered securities, selling unsuitable investments, negligence, and other violations.
Obviously, the legal requirements necessary to prove the claims above are not completely laid out and this list is not an exhaustive list of all the legal claims that one can bring against their investment advisor or stock broker. There are various other claims, such as negligence, breach of contract, breach of fiduciary duty, and failure to supervise, as well as other FINRA claims that one may be able to assert. Please contact our securities lawyers for a free consultation if you believe your investment advisor, stock broker, or brokerage firm may be liable under one of the above claims or for other wrongful conduct.
By Jordan McKay, Attorney
This website is informational only and is not intended to give legal advice or create an attorney-client relationship.