Legal Claims We Pursue
Claims We Pursue
Fraud or Misrepresentation: Securities fraud includes a wide range of illegal activities centered around the misrepresentation or omission of information an investor would reasonably want to know and consider before making an investment decision regarding whether to buy, sell, or hold a security.
Unsophisticated and elderly investors are particularly vulnerable to fraud and misrepresentation. Fraud can manifest itself in many ways, including but not limited to the following:
- Failure of a financial advisor to disclose the risks of an investment or strategy
- Failure of a financial advisor to disclose the cost or commission of a transaction at the time of the recommendation
- Failure of a financial advisor to consider and discuss with you the relative pros and cons of buying or selling an investment, or pursuing an investment strategy
- Failure of a financial advisor to disclose financial interests he or his employing brokerage firm may have in the investment being recommended to you for purchase
- Failure of a financial advisor to put your interests in front of his own when recommending to buy, sell, or hold an investment
Investors are afforded protection under both federal and state securities laws. At the federal level, the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) and Rule 10b-5 protect investors against deceptive and manipulative acts in the purchase or sale of securities. Rule 10b-5 makes it unlawful to employ a device or scheme to defraud, to make any untrue statement of material fact or omit to state a material fact not misleading, or to engage in any practice that would constitute a fraud. Similarly, most states have enacted comprehensive statutes to protect investors, known as “blue sky” laws.
Fraud is a complex area of the law. The Wolper Law Firm has extensive experience evaluating and litigating claims involving fraud or misrepresentation. Please contact the Wolper Law Firm for a free consultation if you believe you may have been a victim of fraud.
Breach of Fiduciary Duty: A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary.
In the securities industry, a fiduciary relationship exists between the client investor – and the brokerage firm, financial advisor, or investment advisor. A fiduciary duty can arise through written agreement, statute, or a verbal agreement in which the investor places trust and confidence in another person. Over the years, the legislature and courts have defined the fiduciary responsibility of brokerage firms, financial advisors, and investment advisors to include the following:
- Understand the nature of the investment’s risks, rewards, and strategy before recommending the investment;
- Make only suitable recommendations to the investor based upon the investor’s objectives, needs, and circumstances;
- Furnish information to the investor that would be material to the investor’s decision about the investment recommendation;
- Not misrepresent or omit material information; and
- Refrain from self-dealing.
To the extent a financial advisor or investment advisor directs the trading activity in an account through discretionary trading, enhanced fiduciary duties are owed to the client. These duties include, but are not limited to, warning investors regarding a change in market conditions that may impact the value of their investments.
In the event a fiduciary duty is breached, the fiduciary may be held responsible for the financial harm caused. The Wolper Law Firm has extensive experience handling claims involving breaches of fiduciary duty both in court and arbitration. If you have any questions about whether your investment professional has breached his/her fiduciary duties, please contact the Wolper Law Firm for a free consultation and case evaluation.
Unsuitable Investments: Making suitable investment recommendations is the cornerstone of proper investment advice. All brokerage firms and financial advisors have a duty to recommend suitable investments that are consistent with the needs and objectives of the investor. Brokerage firms and financial advisors must learn all material facts about an investor before making any recommendations and must match all investors with a customer’s stated investment profile. Failure to recommend suitable investments may result in a claim to recover attenuating investment losses.
Classic examples of unsuitable investments are:
- When a brokerage firm or financial advisor recommends an investment or investment strategy that carries more risk than what an investor understands or is willing to assume.
- When a brokerage firm or financial advisor fails to recommend adequate diversification.
- When a brokerage firm or financial advisor recommends that a client borrow money against the value of their securities – either in the form of margin or a line of credit – without adequately disclosing the risks.
The Financial Industry Regulatory Authority (FINRA) has defined the standards in which investment recommendations made by brokerage firms and registered financial advisors are evaluated. The FINRA suitability rule focuses on three fundamental concepts: (1) reasonable basis suitability, (2) quantitative suitability, and (3) customer-specific suitability.
Reasonable basis suitability requires that a recommended investment or investment strategy be suitable or appropriate for at least some investors. Reasonable basis suitability requires an advisor to conduct adequate due diligence so that he or she can determine the risks and rewards of the investment or investment strategy.
Quantitative suitability requires a brokerage firm or financial advisor with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions – even if suitable when viewed in isolation – is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.
Customer-specific suitability requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile. Among the criteria that a financial advisor must evaluate to satisfy his or her customer-specific suitability obligations include the investor’s:
- Other investments
- Financial situation and needs
- Tax status
- Investment objectives
- Time horizon
- Liquidity needs
- Risk tolerance
- Any other information disclosed by the customer
Suitability claims are perhaps the most common type of cause of action brought in investment recovery cases. The contours of the claim are complex and nuanced. The Wolper Law Firm has extensive experience handling suitability claims. If you have experienced losses in your investments and believe that they are the result of unsuitable investment recommendations, please contact the Wolper Law Firm for a free consultation and case evaluation.
Lack of Diversification/Overconcentration: Financial advisors and investment advisors are trained throughout their career to diversify the accounts of their customers as a means to mitigate risk such that a customer does not place all of his or her eggs in a single basket. To this end, brokerage firms encourage their financial advisors to construct portfolios that are diversified in many different types of investments, sectors of the market, asset classes, and geographic regions. Because the financial markets are cyclical, often times certain stocks, bonds, or investment products will appreciate in value while non-correlated securities will decline. A well-diversified portfolio may still decline in value. However, it will be less volatile than a concentrated portfolio.
You may be dealing with broker misconduct if your financial advisor has recommended that you:
- buy or hold a concentrated position in a single security,
- implement an investment strategy that lacks diversification across sectors of the market or asset classes, and
- you have experienced resulting losses.
If this is the case, please contact the Wolper Law Firm for a free consultation and case evaluation to determine if this is the result of broker misconduct. If so, you may be able to recover all or part of your investment losses.
Unauthorized Trading: Before executing a trade, the law requires that your financial advisor obtain prior authorization from the account owner or his or her written designee. Failure to obtain prior authorization may provide you with a claim to recover any attending losses and a return of all commissions charged. Financial advisors who engage in unauthorized trading often do so in order to generate a commission. Passive investors who do not regularly review the details of their account statements are more susceptible to being victimized by unauthorized trading. It is important for you to review your account statements and trade confirmations each month and monitor all transactions made in your accounts.
The Wolper Law Firm has extensive experience handling claims involving unauthorized trading. If an unauthorized trade is placed in your account, please contact the Wolper Law Firm for a free consultation and evaluation of any potential claims you have against your brokerage firm or financial advisor.
Broker Theft: Unfortunately, there are many financial advisors that engage in criminal activity under the auspices of providing legitimate financial advice. Broker theft has become more pronounced in accounts owned by elderly clients. The most common example of broker theft occurs when a financial advisor withdraws money from a client’s account for his or her own personal use. Often times these withdrawals are accompanied by false promises to repay the monies owed at a point in the future.
It is strictly prohibited for a financial advisor to borrow money from a client or, worse yet, steal money from a client without his or her knowledge. It is critically important to review your account statements and confirmations each month to monitor unusual checking, deposit, or withdrawal history. If you believe that you or a loved one has been the victim of broker theft, please contact the Wolper Law Firm for a free consultation and case evaluation.
Churning: Excessive trading or churning refers to the practice of a financial advisor recommending or placing trades for the purpose of generating fees or commissions. It is the classic example of a financial advisor putting his or her interests in front of the client’s interests. The Financial Industry Regulatory Authority (FINRA) requires that financial advisors uphold the highest degree of commercial honor and just principles of trade. Engaging in churning or excessive trading violates that requirement.
In situations where a financial advisor has engaged in excessive trading or churning, it is not uncommon for the financial advisor to tout the performance of the account on an annualized basis. However, the measure of performance must take into account the cost of transactions throughout the same time period.
Churning can be difficult to detect and often times requires an analysis of the “turnover ratio” in the account, which measures the total value of securities that have been purchased and sold in a defined period of time. A higher turnover ratio can be indicative of churning. An alternative test to detect churning requires an evaluation of the cost ratio of the trading activity. For example, if your portfolio has an annualized return of 5% but the financial advisor has charged fees and commissions of 5%, there has been no value added by the financial advisor.
Another example of excessive trading occurs when a financial advisor recommends selling one security (oftentimes a mutual fund) and purchasing another mutual fund offered by a different mutual fund issuer within a short period of time. The transactions, which are commonly referred to as “Swaps” or “Switches,” may not present any benefit to the client and may only present a financial benefit for the financial advisor.
The Wolper Law Firm has extensive experience with claims involving churning and excessive trading. If you believe that your financial advisor has engaged in churning or excessive trading, please contact the Wolper Law Firm for a free consultation and case assessment to determine if a viable cause of action exists.
Elder Abuse: Elder abuse has become a focal point for state and federal regulators in the securities industry. Many states have formed task forces and enhanced existing anti-fraud statutes to address the concerns attendant to the exploitation of an aging “baby boom” population. Elderly clients are particularly vulnerable to financial misconduct and crimes. Elder abuse may involve unsuitable investment activity, unauthorized trading, breaches of fiduciary duty, excessive trading, or broker theft. It is critical that you closely monitor your account statements and confirmations for unusual or unauthorized trade activity.
The Wolper Law Firm has extensive experience handling claims involving elderly clients. If you or a loved one believes that they have been victimized by a financial professional, please contact the Wolper Law Firm for a free consultation and case evaluation.
Failure to Supervise: Brokerage firms are responsible for the activities of their employees and financial advisors when acting within the course and scope of their employment. The Financial Industry Regulatory Authority (FINRA) requires that all brokerage firms implement a reasonable system of supervision that is designed to detect unsuitable investment activity, unusual withdrawals, account losses, or portfolio concentration. It is the responsibility of brokerage firm management to ensure that the account activity is consistent with the needs and objectives of the investor. If “red flags” are (or should have been) detected, the brokerage firm has a regulatory responsibility to take corrective action in order to protect the investor.
Brokerage firms are also responsible for monitoring the outside business activities of their financial advisors. For example, if a financial advisor is involved in a privately held business outside of the normal course and scope of his or her employment, the brokerage firm is responsible for ensuring that the financial advisor does not involve customers of the brokerage firm in any such outside business activity whether it be for investment purposes, lending, etc. Such conduct is referred to as “selling away” and is strictly prohibited by FINRA rules and the internal policies of brokerage firms.
The failure to effectively create and implement a reasonable system of supervision violates FINRA rules and may form the basis of a cause of action. The Wolper Law Firm has extensive experience handling cases involving failed management supervision. If you have experienced losses in your investments, please contact the Wolper Law Firm for a free consultation and case evaluation so that we may determine if failed management supervision was a contributing factor in your investment losses.
Margin: Most brokerage firms allow customers to borrow money using margin. The customer is permitted to use margin to purchase securities and will pay interest to the brokerage firm on the borrowed amount. This receipt of margin interest becomes another source of profit for the brokerage firm. The purchase of additional securities using a margin loan also becomes an additional means for generating commissions.
The amount of money borrowed is collateralized by the investments held in the account. While using margin carries the potential to enhance an investor’s return, it also magnifies the risk in the account. If the securities that collateralize the margin loan decline in value, the investor may experience a margin or maintenance call. In the event of a margin or maintenance call, the investor must either deposit additional assets into the account or liquidate securities to reduce or altogether eliminate the margin balance.
Similarly, non-purpose loans and lines of credit have also become commonplace at brokerage firms. Financial advisors often recommend that their clients secure lines of credit to finance outside business interests or the purchase of real estate. However, financial advisors fail to adequately disclose that these non-purpose loans or lines of credit are also collateralized by their investments. Any decline in the value of the investments may result in calls for additional collateral.
There are significant risks inherent in the use of securities backed lending through margin or lines of credit. The Wolper Law Firm has extensive experience handling matters involving securities backed lending. If your financial advisor has recommended a strategy that involves the use of margin or lines of credit, and you have experienced losses in your investments, please contact the Wolper Law Firm for a free consultation and case evaluation.
Ponzi Schemes: A ponzi scheme is a fraudulent investment scheme whereby the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading. Operators of Ponzi schemes can be either individuals or corporations, and grab the attention of new investors by offering short-term returns that are either abnormally high or unusually consistent.
Companies that engage in Ponzi schemes focus all of their energy into attracting new clients to make investments. Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart.
Many investors are unaware that they have invested in a ponzi scheme until it is too late. Investors should look for the following red flags:
- If the investment is said to offer high returns with very little or no risk
- If the investment has a track record of positive performance over an extended period of time without periods of decline
- If the operators of the investment are not industry professionals or are not registered financial advisors or investment advisors
- Difficulty getting information from the investment operator
- Inconsistency in documents and other paperwork provided by the operator regarding the investments
The Wolper Law Firm has extensive experience handling cases involving ponzi schemes. If you believe that you have been a victim of a ponzi scheme, please contact the Wolper Law Firm for a free consultation and case evaluation. There are potentially several avenues of recovery when a ponzi scheme is uncovered and we will help you evaluate your best options.
Selling Away: The Financial Industry Regulatory Authority (FINRA) strictly prohibits financial advisors from selling securities and investments to clients that are not offered by the brokerage firm with which they are employed. For example, it is illegal and a violation of industry rules for a financial advisor to recommend or even suggest that a client invest in the financial advisor’s own business or a business operated by his or her friends or family. It is not necessary that the financial advisor earn any compensation for recommending an outside investment.
The purpose behind this prohibition is to ensure that a financial advisor only offers to sell securities that have been vetted by his or her employer brokerage firm through a rigorous due diligence process. Most brokerage firms have an approved list of investments, products, and research that can be provided or made available to clients. Any deviation by the financial advisor from the approved product list may constitute selling away.
If you have concerns that a financial advisor has recommended a private securities transaction, you should first carefully review your account statements and trade confirmations. In most instances, every investment you have purchased through a brokerage firm will be reflected on your account statements. If you have not received any account documentation from your brokerage evidencing the purchase, sale or market value of the investment in question, it is possible that your financial advisor has engaged in selling away.
The Wolper Law Firm has extensive experience handling matters involving private securities transactions and selling away. If you believe that your financial advisor has engaged in such conduct, please contact the Wolper Law Firm for a free consultation and case evaluation.
Labor and Employment Disputes: In the securities industry, it is commonplace for brokerage firms to incentivize financial advisors to switch their place of employment by offering large, lump sum payments. These large, lump sum payments are typically structured as Employee Forgivable Loans (EFLs). The terms of the EFL typically require the financial advisor to remain employed by the brokerage firm for a defined period of time. If the financial advisor remains employed for the prescribed period of time, the loan is forgiven, and the financial advisor is only responsible for paying the taxes. Conversely, if the financial advisor leaves the brokerage firm prior to the prescribed time period, the financial advisor is obligated to repay all or part of the loan to the brokerage firm.
EFLs are a frequent source of litigation between financial advisors and brokerage firms. Sometimes, as part of the employment recruiting process, financial advisors are given assurances that they will be able to pursue certain lines of businesses, continue to service certain clients, or have infrastructure and support staff at their disposal. Upon arrival, the financial advisor is faced with a different reality. In other words, the rules of the game are changed, and the financial advisor is contractually bound to remain employed at that brokerage firm unless he/she is financially willing and able to repay all amounts owed under the EFL agreement.
Financial advisors have certain defenses that can be raised to avoid enforcement of the EFL agreement, including:
- Breach of contract
- Illegal contract
- Misrepresentation or omission
- Fraud in the inducement
In addition, financial advisors may pursue claims of their own that could negate some or all of their financial exposure, including:
- Constructive discharge
- Wrongful termination
- Violation of state and federal employment laws
The Wolper Law Firm has extensive experience handling matters involving labor and employment matters in the context of the financial service industry. If you have questions regarding your legal rights pursuant to an EFL agreement, please contact the Wolper Law Firm for a free consultation and case evaluation.