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Do You Have a Case Against Your Stock Broker or Financial Consultant?
Listed below are brief descriptions of several of the more common abuses that may give rise to a claim against your broker, financial consultant, or brokerage:
Unsuitable Investments
When making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer's risk tolerance, needs, and investment objectives. A broker has a legal duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, if the investment is not in line with the investor's financial needs, or if the customer does not know or understand the risks associated with certain investments. Should a broker breach this duty and make unsuitable recommendations to a client, the broker may be guilty of investment fraud and held liable for the client's losses. Proper asset allocation and proper risk management is an essential ingredient of the broker's suitability analysis before a stock or an investment is recommended to the customer.
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Retirement Planning
Early retirement is an alluring prospect. When faced with a pitch that promises that you can cash in your company retirement savings in your 50's, reinvest the money, and live comfortably off the proceeds for the rest of your life, how can you say , "no"? Investor alerts have been recently issued because many employees have been misled and financially harmed by flawed and fraudulent early retirement schemes. One common scheme recommends that investors retire earlier than they ordinarily would have, opt out of their company retirement plan (usually cashing our of the 401k or taking a lump payment from the company pension plan), open a traditional individual IRA account with the broker and his firm, and then invest in variable annuities, Class B & C mutual fund shares, and exchange-traded fund shares that are substantially more risky than the 401k or fixed benefit pension that they just gave up.
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Variable Annuities/Variable Universal Life Insurance
Variable annuities are essentially contracts that offer clients future payments on their investments. These payments fluctuate in response to the rise and fall of the value of mutual funds and other managed funds. Recently, a number of brokers and corporations have been accused of variable annuity fraud. Some of the most common methods of such investment fraud include churning of accounts to increase profits, charging exorbitant fees, false disclosures (such as failure to expose risks or the misrepresentation of benefits), and preferential treatment.
Variable Universal Life insurance policies are another investment vehicle subject to tremendous abuse at the expense of the customer/investor. Variable universal life insurance combines features of universal life insurance and variable life insurance. A policyholder has discretion in choosing the mix of investments the policy offers. The insurance company does not guarantee investment returns and your cash value will fluctuate. Unfortunately, the "fixed premium" schedule can also change and, when it does, the investor may find himself in a position of being unable to pay the annual premium, especially if he is retired and living on fixed income. Forced to allow the insurance policy to lapse due to non-payment of premium, the investor is then out his premium dollars, and he or she may be unable to buy life insurance from another company because of the non-payment of premium.
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Misrepresentation and omission concerning risk
When a broker fails to disclose important information about a stock or recommends that you buy it without disclosing that important information, he is committing an act of misrepresentation or omission. For example, perhaps the broker knows that you are a conservative investor with very little appetite for risk, yet he recommends that you buy substantial stock position without telling you what he knows to be the case, that the stock carries a moderate to high degree of risk with it. This would be considered a material misrepresentation by omission because, had you known the true nature of the stock's volatility (risk), you would not have followed the recommendation to buy it. Failing to properly disclose or discuss risk is a common area of broker misconduct and/or negligence.
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Risk Profile Change
If you notice that the investment objective or risk profile ("aggressive" "moderate" or "conservative") on your monthly account statements has changed without your input, a red flag should go up. A red flag should also go up if you receive documents from your broker which do not reflect your investment objective or profile. You may find that you now hold stock positions that are "aggressive", consistent with the change you never authorized.
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Hedge Funds
Hedge funds are an alternative form of investment that pool investors' money, and then re-invest it in a variety of markets or investment products with hopes of yielding a positive fund. But unlike many other types of investments, such as mutual funds, hedge funds are not regulated by or registered with the Securities and Exchange Commission (SEC). As such, hedge funds often escape any type of meaningful regulation. In some cases, hedge fund managers have lied to investors about the value of the funds and their histories of success. Others have gone as far as to steal the investors' money and produce phony account statements for the investors to conceal the theft. To avoid hedge fund investment fraud, follow these tips: be sure you understand the fund before you invest, research the backgrounds of the hedge fund managers, and don't be afraid to ask questions. If you have been defrauded and lost money on a questionable hedge fund, we may be able to help you.
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Mutual Fund Switching
There are many choices when it comes to mutual funds and competition for that business can be fierce. As a result, major brokerages and their brokers often push certain mutual funds that may give them higher compensation. Unfortunately, "switching" to a new or mutual fund may not be suitable for a particular investor given their investment objectives and tolerance for risk, and may not be in the client's best interest. Nevertheless, Brokerages and their brokers commonly engage in the practice even if it costs the customer more money in transaction costs, fees, and/or penalties.
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Employee Stock Options
When it comes to employee stock options, dishonesty, misrepresentation, and outright fraud have become serious problems. Backdating stock options by the company is a current practice and problem that is going on within major companies. Regulators and investigators have also found that many companies have lied to their employees about the value of their stock options and about the potential for the shares' value to skyrocket. While senior executives worked hard to ensure the value of their own shares, they failed to inform their employees about how they could do the same. As a result, employees have lost an estimated 1.5 billion in just the past few years. Interestingly, fraud related to stock options may also occur in your brokerage account. If you have received substantial blocks of stock options from your employer, have sought advice from your broker or financial consultant with regard to what to do with them, and have lost most or all of their value because of following your broker's advice, we may be able to help you.
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Use of Margin
A margin account is an account in which a customer purchases securities on credit extended by a broker/dealer. The use of margin accounts is strictly regulated by the Rules of the Federal Reserve Board and NASD. Generally speaking, they are an aggressive investment vehicle that can enable the investor to leverage his or her stock positions and make money when stock prices are going up, and cause an investor to get wiped out if prices fall and the investor is not in the financial position to meet margin calls. Margin accounts are not for everyone, and their substantial risks must be carefully explained to the investor. Commonly, margin account risks are downplayed by the broker and the customer has no meaningful understanding of the margin account, its risks, and why the customer continues to lose money, why their stock has to be sold to meet margin calls, and why they have to pay interest to the brokerage house. If all or a substantial portion of your investment has been lost because of the use of margin, we may be able to help you.
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Activity Letters
Customers occasionally receive letters from their brokerage. In the typical case, the brokerage firm sends you what is known as an "activity letter". Such a letter advises of large losses, high stock turnover in your portfolio, high commissions, or high margin levels in your account that are not consistent with your instructions to the broker and not consistent with your stated investment objectives and risk tolerance. Receipt of such a letter should be a red flag, and you should investigate the matter immediately.
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Unauthorized/Excessive Trading
If you notice that buys and sells are occurring in your account without your prior permission or knowledge or any contact from your broker, these trades may be unauthorized. If your broker is excessively trading or constantly turning over your account, for the purpose of generating sales commissions, he or she may be engaging in excessive trading or "churning", as it is sometimes called. This practice is virtually always detrimental to the customer and results in the customer paying excessive fees and/or commissions to the brokerage and their broker.
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If you have been a victim of any of
these unethical practices, please contact
our law firm today.
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