Securities Fraud FAQs

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One FAQ we often receive from our clients is how they can tell if they are victims of a type of securities fraud called stockbroker fraud. Stockbroker fraud is a term that can be used to broadly define the abuse of a customer’s investment portfolio by a stockbroker and/or broker-dealer. Examples are overtrading of the account (churning), overconcentration (purchasing only a few stocks or stocks all in one financial sector), and the sale of unsuitable investments (non-traded REITs, oil and gas limited partnerships, annuities, Unit Investment Trusts). A related FAQ we receive about this form of securities fraud is whether the loss amount is necessarily a sign of fraud. Significant losses do not necessarily prove broker wrongdoing-they could merely be the result of market forces. It can be difficult or almost impossible to tell if you’ve been defrauded unless you consult with an attorney. Here are some warning signs:

• Your broker fails to return your calls.
• You don’t understand the transactions on your statements.
• Your broker fails to disclose important information regarding an investment purchase.
• Your broker begins trading in high-risk and speculative investments.
• You are paying capital gains taxes when your account value is decreasing.
• You find transactions on your account statements that you did not previously authorize.

Whenever The White Law Group responds to FAQs concerning this type of securities fraud, we typically provide these guidelines: If you are retired and have lost more than 15% of your account in a single year or have suffered significant losses in a single security, you should have someone review your account to determine if the investments selected by your financial professional are in keeping with your investment objectives.

Investment brokers, advisors, and analysts may commit investment or brokerage fraud to control the market, lure business, or maximize commissions. Much like stockbroker fraud, The White Law Groups receives FAQs from clients about how they can detect this form of securities fraud. The following activities may be considered investment fraud:

• Offering separate clients contradicting advice.
• Advising clients to continue an imprudent risk.
• Advising out of a conflict of interest (because the advice is motivated by profit).
• Giving unfounded advice.
• Giving biased investment advice.

For many of our clients, seeing a simple list of what brokers can and cannot do is helpful. It is often included in our responses to FAQs we hear about securities fraud. Under the guidelines of ethical conduct, your broker cannot:

• Given your age, financial situation, investment objectives, and investment experience, make recommendations for purchasing or selling a security that is unsuitable for you.
• Purchase, sell, or remove securities in your account without notifying you first. Switch you from one mutual fund to another for no legitimate reason.
• Intentionally misrepresent or fail to disclose material facts concerning an investment. Charge a customer excessive mark-ups, markdowns, or commissions.
• Guarantee your stock will not lose money or make specific price predictions.
• Engage in a private securities transaction with you or other customers.
• Use any manipulative, deceptive, or other fraudulent tactics.

One of the most essential FAQs the attorneys at The White Law Group hear from clients unrelated to securities fraud is what they are entitled to as clients. Stockbrokers and brokerage firms owe their customers a duty of care and loyalty. The broker must use the standard of care and diligence to protect the customer’s interest. Failure to fulfill that duty may constitute negligence or malpractice by a broker. The duty of loyalty requires that the broker refrain from self-dealing and place the customer’s interests first. 

Many of the FAQs we receive concerning broker behavior and securities fraud are about how brokers should disclose and handle conflicts of interest. These conflicts of interest may arise given the brokers’ typical method of compensation through commissions on sales. This may tempt some brokers to overtrade or churn the account to generate commissions. A broker also must follow the customer’s instructions and execute orders promptly at the best available price. One FAQ securities fraud attorneys often receive is how clients can tell whether the broker is authorized to make trades without their discretion. Unless the customer has given the broker written discretionary authority over the account, the broker may trade only after receiving prior authorization from the customer. The stockbroker must disclose all material facts relating to proposed investments and not make any misrepresentations. In particular, a broker must disclose the risks of any proposed investment. 

A related FAQ that securities fraud attorneys often encounter concerns what factors brokers should consider before making an investment recommendation. A broker is responsible for learning about the customer’s profile and the recommended investments and recommending only securities suitable for the particular customer, considering the customer’s investment objectives, financial circumstances, level of sophistication, and risk tolerance. A brokerage firm must also reasonably supervise its brokers to enforce compliance with securities laws and prevent violations.

Another FAQ potential clients of securities fraud firms often ask is whether they should resolve the issue through their broker before seeking legal counsel. Many clients have met with brokerage firm representatives before engaging our services to resolve their problems. We have also seen many instances where clients first corresponded with their brokerage firm’s legal department before engaging our services. Our impression from these clients is that they feel that those efforts and the time expended were wasted. 

Among clients who have not yet reached out to their brokerage about a securities fraud concern, we often get an FAQ about what actions the brokerage will actually take. Usually, these brokerage firms conduct an “investigation” and then report to these clients that they have determined that the brokerage firm did not misbehave based on their investigation. Just because the brokerage firm decides they acted appropriately does not necessarily mean you do not have a case. You should still consider having a professional review your investments and particular situations to determine whether you have a claim.

Of all the FAQs The White Law Group sees, perhaps the most common is how we prioritize securities fraud claims. Each case is considered on its own merits. Significant factors are:

• Age
• Amount and type of prior trading experience
• Sophistication of the investor or lack thereof
• The health of the investor
• The amount of the loss as it relates to the investor’s liquid net worth (“nest egg”).

We evaluate each case to determine the suitability profile of the potential client, the amount of money lost, and the solvency of the broker-dealer in question. There is no charge to speak with the Firm about your case to determine if further analysis is warranted.

A separate yet nearly as popular FAQ we often get is if and when they should hire a securities fraud attorney. If you think you have a claim, consult a knowledgeable attorney with experience representing investors. Many lawyers offer free consultations without any obligation. If you decide to pursue your claims in court, you should hire a lawyer to represent you. Most attorneys have handled hundreds of cases and have a good perspective of which cases will succeed and what it takes to win.

A critical FAQ related to securities fraud concerns the timing of the claim. Yes. Filing your claim sooner increases your chances of recovery because information and witnesses are more available, and recollection of the events is often better. Furthermore, and significantly, if a case is not filed promptly, the broker gains certain legal defenses that could bar your claim. These defenses are commonly referred to as Statute of Limitations defenses, and while FINRA jurisdiction can extend for as long as six years, some causes of action are as short as one year. Our response to this FAQ is that clients should immediately contact a securities fraud lawyer about their claims.

Virtually every brokerage firm in the country includes what is referred to as an “Arbitration Provision” on the back of the forms you sign on the day you open your account. Generally, this provision provides that if you dispute your account, including any claim for damages for losses, you waive your right to go to court and further agree to arbitrate your disagreement before either FINRA or one of the exchanges, like the NYSE. 

This leads to a FAQ we often receive from clients filing securities fraud claims: Which is preferable, court or arbitration? FINRA Arbitration is generally faster and less costly than court litigation. Most arbitration panels comprise three members, two of which are deemed public arbitrators and one considered an industry (typically, the industry arbitrator is a current or retired financial advisor or branch manager). 

For clients in the middle of FINRA arbitration, an FAQ that inevitably emerges is what happens after the panel rules on their securities fraud claim. After your case and the defense have presented it, the arbitration panel will decide if you are entitled to any recovery and, if so, how much.

Many securities cases are settled. Sometimes, the parties agree to mediate their dispute before the arbitration hearing. A common FAQ among clients whose securities fraud claims move to mediation is what the mediation process entails. Mediation is a voluntary process utilizing the services of an independent third party who attempts to facilitate a settlement between the parties by analyzing the strengths and weaknesses of each party’s case and offering their opinion on the eventual outcome at arbitration.

Mediation is a settlement conference held before trial. Both sides and their lawyers appear before a mediator, who is typically a retired judge, lawyer, or expert in the securities field. 

A FAQ The White Law Group often receives concerns about how mediators reach a ruling in securities fraud claims. The mediator’s role is to hear both sides of the argument and attempt to resolve the conflict between the two parties. Mediation is voluntary, and all information divulged during the process is confidential. It is an opportunity to try to resolve the dispute voluntarily before leaving it up to the arbitrators to decide.

Of course, clients have other obligations outside of arbitration hearings. An FAQ we often receive concerns how long a client should expect to wait before their securities fraud claim is resolved. While this can vary from case to case, cases are resolved 12-18 months after filing.

Over the last several years, the popularity of annuities has grown enormously. This is because the broker receives one of the highest selling commissions of all financial products when selling a variable annuity. A FAQ The White Law Group often hears from clients in securities fraud cases whether the broker had their best interests at heart when recommending they invest in a variable annuity. Before investing in an annuity, a broker should determine whether or not the investment is suitable given the customer’s age, investment needs, station in life, and risk tolerance. 

For instance:

• Did you need access to cash?
• Did you have income needs?
• Were you risk-averse?
• Did your heirs need a death benefit?
• Did you already have adequate life insurance coverage before purchasing the annuity?

When responding to FAQs regarding whether a broker’s recommendation constitutes securities fraud, our typical response is that if you answered yes to any of these questions, a variable annuity may not have been a suitable investment for you.

Before purchasing B shares in a mutual fund, your broker should analyze carefully to determine whether Class B shares are in your best interest. In response to FAQs about whether a recommendation to invest B share mutual funds amounts to securities fraud, The White Law Group usually asks clients whether their broker asked them the following:

• How long do you plan to hold the fund?
• What is the size of your investment?
• What expenses will you pay for each different class of shares?
• Whether you qualify for commission discounts?

While Class B shares do not impose front-end sales charges, they charge investors higher expenses in the form of 12b-1 fees and other charges assessed over the lifetime of the investment compared to Class A shares. 

A second component of our response to FAQs about whether recommending investing in B-share mutual funds could be considered securities fraud concerns withdrawal fees. Class B shares impose a withdrawal fee, which the investor pays if the shares are sold within a certain number of years (this fee is between 4% and 7%, depending on the fund family). Accordingly, B shares may be inappropriate if your investment objective is to maintain liquidity for a future purchase or income.

A FAQ we receive from prospective outside of the United States regarding securities fraud claims is whether they should file their claim with FINRA or a separate agency. FINRA (formerly NASD) Rules governing the jurisdiction of brokerage firms require international clients with brokerage accounts with a FINRA-registered firm to submit to jurisdiction in the United States.

Unsurprisingly, clients want to know whether pursuing a FINRA arbitration securities fraud claim will be worth their time, which is why The White Law frequently fields FAQs related to the matter. According to the Securities Arbitration Commentator, a periodical publication that has studied the statistics of securities arbitration cases, 80% of all customer cases settle in favor of the investor before an arbitration award is rendered, and over half of the remaining 20% that do not pay before arbitration result in an award to the customer.

Selling away is a complex concept in securities fraud and is a FAQ The White Law Group receives from clients. Selling away occurs when a broker or financial advisor solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities violate securities regulations. Typically, when a broker is “selling away,” the investments are private placements or other non-public investments, and often, these are investments in which the broker has some pecuniary interest. 

A follow-up question to this FAQ is why the government is considering selling away securities fraud. Such an investment generally violates securities rules because the brokerage firm has not researched the risks of the investment or approved it for sale to its clients, and the broker is selling the investment without the knowledge of his employer. Nonetheless, a broker-dealer can be held liable for a financial advisor’s “selling away” because it failed to adequately supervise its employees and protect its clients.

The White Law Group receives a final securities fraud FAQ about Unit Investment Trusts (UITs). A UIT is a US investment company offering a fixed (unmanaged) portfolio of securities with a definite life. A sponsor assembles UITs, which are then sold through brokers to investors. A UIT portfolio may contain one of several different types of securities: stock (equity) trusts and bond (fixed income) trusts. 

Unlike a mutual fund, a UIT is created for a specific time and is a fixed portfolio, meaning that the UIT’s securities will not be sold or new ones bought. UITs are also among the highest commission products financial advisors sell. UITs can be inappropriate if your investment objective is present income because any income is paid at the end of the UIT investment. A UIT can also be unacceptable in volatile markets because (unlike mutual funds or managed money) the assets that comprise the UIT are not bought or sold but remain constant throughout the life of the UIT. Accordingly, in a volatile market, a UIT is at the mercy of the market and its volatility, and it is difficult, if not impossible, for the investor to adjust their investments to account for the changed investment climate.