Securities Fraud 
FAQs

Investment advisor or stock broker fraud can take several forms. Acts of fraud can include lying, stealing, or the failure to disclose material information about an investment. Malpractice can also include such things as failure to properly diversify an account (for example having too much of your money in a single investment or in a particular type of investment), failure to recommend the account be “rebalanced” as you grow older or market conditions change, recommending investments that are not truly suitable for your circumstances, or “churning” (frequent trading in order to generate fees and commissions for the broker).

When you make investments you place a lot of faith in your advisor or broker to look out for your best financial interests. Sometimes though you may begin to get the sinking feeling your account is being mishandled. Unfortunately, that is all too common these days, from brokers and investment advisors who commit malpractice, either by mishandling your money or even committing downright fraud.

Below we’ve identified several areas of potential concern that can help you determine if further investigation is required, or even when you may need to contact a securities attorney for help when one or more issues are raised.

When you first met with your broker many questions were asked about your current and projected future financial situation, goals and objectives for investment, and current and projected needs, to name a few. A good broker needs to know this information so they can make suggestions and guide you to investments which best suit your individual needs both now and in the future.

When you look at your monthly account statements does the information presented match what you said? Does it correctly list your risk tolerance, investment goals and net worth for example? Do the types and percentages of investments on the statement meet your expectations from instructions and discussions with the broker? If not, then you should investigate further.

Communication With My Investment Advisor

It is in your best interest to review your monthly statements from your broker each month. Make particular note of each trade that occurred. All trades must be marked as “solicited,” meaning recommended by your broker, or “unsolicited.” Are there lots of unsolicited trades? Are some of them mis-marked? If you answered yes to either of these questions, you should investigate further.

In addition, did your investment advisor communicate with you prior to these trades? If trades are occurring without notice to you first, investigate further. Similarly, if you’ve requested to sell something, and your directions were not followed, investigate further. Finally, a big red flag should come up if your advisor calls you with a tip with “inside” information, since this is illegal.

Make sure your investments are not overly concentrated in one or just a few things. Lack of diversification puts your investment at enormous risk, and should be avoided by investment advisors in almost all situations.

When you look at your statements, do you notice an excess amount of trading? Brokers often get a commission for each trade performed, and those investment advisors who commit malpractice often trade excessively to increase their own profits. If you’ve paid more than 5% of your account’s value in a year for commissions you may be a victim of “churning.”

Even if you’ve not noticed any problems in the past with your investment advisor you definitely need to investigate further if you are ever contacted by their boss or the company they work for. Although they may say they’re just contacting you for routine purposes, this is generally an indication they they’ve identified something fishy going on with your account, even if you haven’t. Do not sign anything requested, and don’t try to defend your broker. Instead, in these situations you should contact a securities attorney to determine if you’ve been the victim of investment advisor malpractice or even fraud.

As a securities law firm, Starr Austen & Miller has handled these and many other forms of investment advisor malpractice. If you believe you have been taken advantage of, contact us right away. We can help you know if you have a legitimate securities fraud case.

Some (but not all) investment fraud can cause a “red flag” to be raised that can make an investor suspicious. The investor should be on alert to look for such red flags. The following are a few of the more common things to watch for:

1. In making a presentation to you, your advisor says or does one or more of the following:

• Your investment will have a guarantee not to lose principal and be available for you to withdrawal your money at any time. (This is almost NEVER the case.)
• The investment will increase in value regardless of whether the stock market goes up or down. (Almost never the case.)
• The investment being pitched is “a sure winner,” “a no lose proposition,” or something similar.
• The advisor says you must “act quickly” or “this is available for a limited time only” or some similar claim to act hastily. Never invest hastily.
• The advisor refuses to put his statements in writing to you.
• The advisor has you sign documents without giving you plenty of time to read and ask questions before signing.

2. Examine your periodic statements.

If you are like most investors you take a quick look at your email box or your statement that is mailed to you and move it to your file cabinet without taking a closer look at it. You should examine your periodic statements to see if there are transactions on your statement that you did not authorize. Furthermore, if your account is dropping in value and you do not know why or cannot understand why, this could be a sign that your investment advisor has mislead you. If you can’t understand your statement, your investment advisor may have placed your funds in investments too complicated for you. Most investments carry a risk of loss of principal, which means that they can go down in value. If your advisor did not explain that to you, and you see your account dropping in value, a fraud or malpractice may have occurred. If you review your statement and you don’t understand it, contact someone you trust (your tax accountant, your advisor, a trusted friend, or even us) and have your statement explained to you. If you see things in your statements that don’t seem right, trust your instincts, as it is possible that an advisor may have committed malpractice.

3. Changes in suitability.

Your investment advisor or stock broker is suppose to follow your guidelines and make recommendations based on your particular life’s circumstances. For example, if you are 6 years or less away from retirement, your investment advisor should not be placing the majority of your funds in investments that have a significant risk of losing money, since you will not have a work life expectancy long enough to make up for the losses. Even if your investments were suitable at the time you made them, your investments may no longer be suitable for you today based on your retirement horizon, needs, objectives, financial means, and changes in market conditions. Your broker should contact you on average approximately once a year to discuss with you these factors to determine if your account needs to be rebalanced. If your broker fails to contact you each year, you may have grounds to be suspicious.

4. Your broker is supposed to answer all of your questions.

If you have questions, concerns, or even suspicions about your investment account, contact your broker and ask questions. After you have contacted your broker, follow up with a brief written letter or email (and keep copies for your records) repeating those questions asked over the phone. If your broker fails to directly answer any of your questions, (or even worse, ignores your request), you definitely have grounds to be suspicious and concerned. (We have had many clients tell us their investment advisor won’t answer their questions after they purchase an investment, but instead constantly passes them off to someone else in the office. This is a red flag.)

5. Beware of claims of “inside” information or knowledge.

It is illegal for an investment advisor or stock broker to recommend that someone buy or sell an investment based on inside information or knowledge. (You will recall that Martha Stewart went to prison because of this.) This can get you into a lot of trouble. If your broker even mentions inside information or inside knowledge you need to avoid him/her like the plague. This is definitely a red flag for an unscrupulous broker.

6. Solicited and unsolicited trades.

Each time you purchase or sell an investment of any type, you will receive what is called a “confirmation”. Confirmations are always listed as “solicited” or “unsolicited”. When you receive a confirmation check and see how the broker has labeled this particular trade. “Unsolicited” means you called your investment advisor and directly ordered an investment based on your own investigation. “Solicited” means you chose to sell or purchase an investment based on your advisor’s recommendation. If there are more unsolicited trades or the number of these unsolicited trades increase you may have reason to be suspicious. Some unscrupulous advisors label trades “unsolicited” rather than “solicited” even where the advisor has actually recommended the investment to his customer. The “mislabeling” of such investments is an effort to create a paper trail to make it look like the investment advisor or securities broker did not recommend the investment to you. If you see this happening, you definitely have reason to be suspicious.

7. You simply cannot understand what you are invested in.

It is an investment advisor’s responsibility to use his or her very best efforts to make sure you understand where and how your money has been invested. If you don’t have a clue, your investment advisor may have committed malpractice by putting your money in investments that are either unsuitable for you, or too complex for you to understand. Ask questions. If you do not obtain understandable answers, this may be a red flag.

8. Your account has substantially dropped in value.

As discussed earlier, most investments fluctuate in value, which means the investments can lose principal value depending upon what you are invested in, and what the markets are doing. Still, some investments are much riskier and more speculative than other investments. If you anticipated your investments would not go up or down more than 5% or 10% a year, and you see either an increase or drop in value that exceeds 10% for any given year, your investment advisor may have put you into investments that are too risky for your peace of mind. If you are 7 years or less away from retirement and your account drops 10% in value, it is probably not the end of the world because there is a decent chance your account can recover its losses before your retirement rolls around. On the other hand, if you are only three years away from retirement and your account has lost 40% of its value, you have every reason to be concerned and suspicious because there is a good chance you will be wanting to retire before your money has time to recover as a rough rule of thumb. If you see your account has lost 25% or more and you did not think that was possible, you should contact Starr Austen & Miller to see if you have been the victim of possible investment advisor malpractice.

If you believe you have been taken advantage of, contact us right away. We can help you know if you have a legitimate securities fraud case.

Misrepresentations and Omissions

Misrepresentation involves a breach by the broker of his duty of good faith not to misrepresent any “material” fact to the investor in the sale or recommendation of an investment. Material facts include facts that address the nature or quality of the investment and the degree of risk involved. An “omission” is similar, but in that situation, a broker has failed altogether to disclose a fact material to the investor’s decision-making process. (Sometimes brokers will disclose only the benefits of owning an investment but will fail to explain the investment’s downside risks. It is the investment advisor’s job to do BOTH.)

Unsuitability

An investment advisor’s first responsibility is to know his customer – to acquire necessary information about the investor’s financial situation, investment goals and objectives, future needs, and risk tolerance in order to recommend suitable investments for that individual. Also, the broker must know the history and facts of the recommended investment to ensure a good match between the investor’s goals and the investment’s features, benefits, and downside risks. Indeed a broker will have a duty to refrain from taking orders from a customer if such orders are unsuitable for the investor. Investment advisors are to continuously reevaluate the needs of their investor clients to maintain suitability of recommended investments.

Overconcentration and Failure to Properly Diversify

One of the most important rules of investing is diversification of an investor’s portfolio to provide protection against a decline in value of one particular investment. (An investor should never place all his investment eggs in the same basket.) If an investment advisor concentrates an investor’s funds in any individual investment or type of investment – only high-risk stocks, for instance – then the risk associated with the portfolio is dramatically increased.

Breach of Fiduciary Duty

It is very common for investors to put their complete trust and confidence with a broker based on the broker’s stated expertise and superiority of knowledge in the area of investments and money management. Investment advisors and their brokerage firms always have a duty to deal in the utmost good faith with investor clients. Most courts hold that brokers owe their securities customers a heightened duty known as a “fiduciary duty.” Brokers and their firms can be held responsible for abusing the investor’s trust and confidence and breaching these special fiduciary duties.

Unauthorized Trading

A broker who buys or sells securities in an investor’s account without first getting the approval of the investor has engaged in unauthorized trading. Investors must consent to a purchase or sale of a security in their account, unless they have given the broker written discretionary authority (which is rare) to make transactions on their behalf. Even in the case of discretionary accounts, a broker cannot misuse or exceed that authority and make a commission on trades he or she was not authorized to make. Unidentifiable debits or credits on monthly statements may be an indication that a broker has traded securities without proper authorization.

Fraud or Theft

Believe it or not, we have handled a number of cases where the investment advisor has stolen their clients’ funds. (It happens more frequently than one would think.) An example of theft is where the broker instructs an investor to write a check payable to the broker personally or to a company other than the brokerage firm, and the money never reaches the investor’s account. Another common example is where the broker systematically makes withdrawals from the customer’s account without the investor’s knowledge. Investors should be careful when seeking the assistance of an investment advisor including checking the broker’s and the brokerage firm’s background and credentials.

Churning

Churning occurs when a broker buys and sells securities in an investor’s account with excessive frequency for the purpose of generating commissions. In short the broker is motivated for his own personal wealth rather than helping his customer. If you believe you have been taken advantage of, contact us right away. We can help you know if you have a legitimate securities fraud case.

The biggest issue to most investors is the loss of money. Can you get your money back after being a victim of investment securities fraud or advisor malpractice? Frankly, it depends upon whether your advisor or stock broker has violated the rules and regulations of the brokerage industry or otherwise acted improperly. Investment securities can include anything from stocks, bonds, variable life insurance products, annuities, partnerships, mutual funds, hedge funds, and a variety of other types of investment vehicles.

 If you believe you may have been a victim of securities fraud or broker or investment advisor malpractice, your first step is to hire an attorney. You need to look for a reputable and experienced attorney that has handled a large number of investment cases in the past. Your attorney can guide you through the process after you have your consultation and decide what is best for your individual circumstances.

 There may be time limitations when taking action against your investment advisor and/or their brokerage company. These time limitations vary from state to state and also upon the type of misconduct an investment advisor has engaged in. As a rule of thumb, the shortest time limits available are normally at least 2 years. (Depending upon your individual jurisdiction and the type of claim that your are making, some claims can be made as long as 5 years, 6 years, or occasionally even 10 years after making your investment.)

 Your attorney will know which time limitations apply to your particular facts. Nevertheless, since the shortest time limitations are sometimes as little as 2 years, you should always contact a lawyer as soon as you are suspicious that you may have been the victim of fraud or investment advisor malpractice.

 A claim against an investment advisor, a stockbroker, and his or her employer will typically take one of two separate tracts: (a) FINRA arbitration; or (b) a lawsuit filed in court.

Nearly all national brokerage companies and many larger regional stock brokerage firms require their customers to sign FINRA arbitration agreements as a condition upon you doing business with their company. This means that if you, for any reason, need to sue your investment advisor, stock broker, and/or company for either fraud or investment malpractice, you will not be able to do so in court, and instead must use the FINRA arbitration process and hire a securities arbitration lawyer. In general, the FINRA arbitration process works as follows:

Start an Arbitration

To start an arbitration, the lawyer for the investor (known as the claimant) files a “statement of claim” and other arbitration forms with FINRA. FINRA then serves the claim on the stock brokers or financial advisors (known as the respondents) that are being sued. Respondents