Oftentimes, fiduciaries merely glance at an account statement or portfolio value and see that the investment has lost value and in some cases may not actually know that the investment has lost value. The automatic assumption is that any decline in value is simply a function of market performance. In recent years many investors have been shocked to find out that their investments have lost over 90% of their value when they go to sell them because they are non-traded.
What may further complicate the matter is that in many instances, the investment management responsibilities have been delegated to a professional investment advisor or securities broker who was known, recommended, or who otherwise appeared to be experienced and knowledgeable.
Haselkorn & Thibaut can help. As an independent, unbiased third party with 45 years of experience, our attorneys can quickly review the investment portfolio and identify any issues or red flags for you and your client. Doing so is entirely confidential and does not require any involvement by the investment advisor or securities broker, or his or her firm.
The majority of financial services and investment professionals perform their duties in accordance with best practices while providing a high level of service to their clients and referral sources. Unfortunately, a decline in value (realized/sold or unrealized/still held) in an investment portfolio or segment of an investment portfolio can be a red flag signifying there is trouble lurking below the surface.
What are the types of investment fraud?
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Investment fraud typically fall into one of two general categories: (a) intentional fraud that involves fraudulent investments, Ponzi schemes, and/or outright theft in some manner; and (b) negligence or impropriety either involving a mistake or malpractice on the part of the financial professional or his or her firm.
The five common red flags (in addition to a realized or unrealized loss or decline in value) include the following:
Was the loss or decline due to any misconduct?
As an estate planning lawyer, trustee, or fiduciary, you may not be entirely clear on what to look for, and you also may have a professional relationship with the investment advisor or securities broker such that you prefer not to be in the middle here, notwithstanding any potential concerns you might be harboring.
As a fiduciary who has delegated the investment management responsibilities to someone you believed to be a qualified and experienced professional, you are not expected to have a complete working knowledge of securities law and regulatory structure, or be thoroughly versed in how to identify and file any securities claims.
You do have a duty to follow up on any red flags, and it is crucial that you do not ignore a realized or unrealized loss or any other red flag that could be a telltale sign of misconduct. Has the investment portfolio lost value or lagged market indices or benchmarks are there segments, sectors, or accounts that do not appear to be performing in line with the market or client’s investment objective/risk tolerance. Are you familiar with the names of the underlying investments, the asset classes, the types of investment products? Are there concentration issues in a particular security, product, sector, asset class, etc?
From an activity standpoint, do the number, types, and frequency of transactions appear to make sense, or is there a high level of activity in a commission-paying account? Are the individual investments as well as the overall investment strategy consistent with the client’s investment goals and objectives?
Misconduct and, for that matter, the definition of securities fraud can come as a result of a lot of different types of actions and inactions.
Was the loss or decline due to a breach of duty?
Just as you share a relationship of trust and confidence with your clients, a securities broker or financial advisor managing client investments also shares a relationship of trust and confidence with his or her client. In some cases, it rises to the level of a fiduciary relationship, but that will often turn on a number of factors including the specifics of the relationship, the functions being performed, the controlling law, etc.
In cases where investments are being handled on a discretionary management basis, as compared to a non-discretionary transaction-by-transaction basis, the duties and obligations are often higher, and the duties are often continuing in nature. That said, even in non-discretionary transactional accounts, there are duties to (among others) only recommend suitable transactions for the client and execute those transactions after receiving approval and in that process:
(a) recommend only investments that have been sufficiently studied and reviewed;
(b) perform the transactions in a manner best suited to the customer’s needs and interests;
(c) inform the customer of risks involved in the transaction;
(d) refrain from self-dealing; and
(e) not misrepresent any material facts relating to the transaction.
The securities laws, industry regulations, as well as firm rules and procedures, are all potential areas where an individual or firm may have fallen short and breached his or her duties. Furthermore, in many instances, the firm and/or the management within a firm have supervisory responsibilities over the client accounts, the activities, and the individuals. The firms and/or managers may have breached a duty to properly supervise.
Was the loss or decline due to unsuitability or overconcentration?
While these issues often fall under other categories including misconduct or even securities fraud, these include red flags that can sometimes be spotted by the client, trustee, or fiduciary. A losing or underperforming security, account, or manager will stand out, but assessing whether or not it is a market decline or a red flag signaling something more problematic will often require a closer review. Are the size of any individual positions, holdings in any sector, products, or industries disproportionate or out of balance?
In recommending only suitable investments, and a suitable overall investment strategy, the industry rules require a host of considerations be taken into account. A lack of diversification or an improper recommendation may appear as a market decline, but it could also be the indicia of an unsuitable recommendation, or unsuitable or overconcentrated improper investment strategy. If that is the case, there are typically a number of laws, rules, regulations, and firm rules and procedures that were likely violated in the process.
Was the loss or decline due to churning and unauthorized trading?
In some situations, a securities broker buys and sells securities for a client’s account without regard for the client’s interests and for the purpose of generating commissions. Typically, there will be a securities broker who is exercising some degree of control in the relationship, and there will be an overall excessive level of activity in the portfolio. It is important to note that churning can take place even if an account increases in value.
Unauthorized trading can in some cases also form a basis for a fraud claim. In other cases, it can simply be a matter of not having written discretionary authorization, which could be a violation of regulations and/or firm rules and procedures. Was the securities broker or investment professional granted discretion? If not, was every transaction approved by the client prior to the purchase or sale?
Was the loss or decline due to misrepresentation or omission?
Misrepresentation or omission of material fact may be a foundation for a claim of negligence, fraud, or other legal cause of action. Did the individual or firm misrepresent themselves or itself to the client? Was research or due diligence done in a careless manner? Were misrepresentations or omissions used to deliberately to induce a client to act or not act in a particular manner?
We Can Help You Review Any Red Flags
The estate planning attorney, trustee, or fiduciary reviewing the client’s investment portfolio for any reason cannot and should not ignore any red flags. Having the power to delegate the investment management responsibility to a securities broker or investment advisor does not allow you to ignore red flags or otherwise fail to find and pursue what could be a claim to recover any unnecessary investment losses. Be alert, and if there is any question, or if there is any concern, you should call for an independent unbiased (confidential) review. This is especially the case if you know the financial services professional or have a professional referral relationship with the securities broker or investment advisor. You can fulfill your duties to your client with the help of an independent third party.
If you have any issues or questions, please contact the Investment Loss Recovery Group at 1-800-856-3352 for a no-cost, confidential consultation and review, handling cases nationwide, no recovery-no fee.