Selling away is a phrase used to describe the inappropriate practice of an investment professional (financial adviser or stockbroker) offering investments outside or away from the firm; implemented, the brokers sell those that his/her firm has approved for sale to the public.
The investments are not on the employing firm’s approved investment product list, nor are the transactions typically recorded in the formal books and records maintained by the employing firm. As a result, these are typically sold as private deals or side deals and the customer/investor may be unaware of the fact that the firm is completely unaware of such activities or recommendations and that those deals typically include no formal risk disclosure material and the firm’s compliance department has never reviewed or approved the proposed investment. These unapproved and unsupervised deals typically fail to include formal risk disclosure material or compliance review.
Selling away often involves a private placement or other private (non-public) deal, though it sometimes does include stock or a purported fund or investment or business strategy that is marketed as a pooled investment for a group protect investors. Sometimes a transaction may not be an obvious or apparent ‘investment’ or security. Selling away is often associated with a former investment securities broker’s or adviser’s other (“outside”) business activities (those businesses or activities that a broker/adviser conducts outside or separate from his/her securities brokerage activities.)
Selling away securities industry often involves a direct or indirect compensation arrangement for the broker/adviser. Selling away schemes are particularly dangerous for investors because they usually end up becoming victims of theft, fraud, or other loss related to the investment. These selling compensation schemes also often involve the sale of promissory notes which are essentially loan investments wherein the borrower promises to pay investors high interest rates in exchange for the loan amount from the investor.
If The Investment or Deal is Away From the Firm, How Do You Recover Your Losses?
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Generally, selling away is a violation of the securities laws and regulations and the firm’s compliance procedures by which its brokers/advisers must abide. Further, such “outside” investments may be in themselves fraudulent. The regulatory basis for selling away cases is found in NASD/FINRA Rule 3040, FINRA Rule 3270 (formerly NASD Rule 3030), FINRA Rule 3280. Rule 3270 provides that a brokerage firm adviser may not engage in any outside business activity unless he has provided prompt written notice to his or her brokerage firm. Rule 3040 provides that without prior notice, a brokerage firm adviser must not engage in private securities transactions (that is, selling away) and states the procedures that a brokerage firm must follow to approve of such investments. Once approved, the brokerage firm must supervise these private securities transactions.
As a result, an experienced securities attorney could help demonstrate how selling securities, investments, or side deals without processing the order through the same firm’s list and without the broker’s firm name’s permission or knowledge is a violation of FINRA rules. Even products that you may not consider to be securities, such as real estate investments, leasing arrangements or promissory notes, may be defined as securities under federal or state law.
Usually the firm has no knowledge of such sales and activities. The question then becomes whether the brokerage firm “should have known” of the outside sales and activities, and that is where the assistance of an experienced securities attorney can really be helpful. If presented properly and effectively, the brokerage firm’s compliance department must demonstrate that the firm has a reasonable supervisory system in place, and that it implemented its procedures in a reasonable fashion. In addition, the firm’s clients, may also need to demonstrate that it properly investigated any red flags, which would have suggested any irregularity or unusual activity, including other prior client complaints etc.
An experienced securities attorney will be able to assist an investor in potentially recouping losses from a firm by helping you demonstrate that the firm essentiallyfailed to properly establish and/or failed to implement reasonable supervisory procedures, or that member firm failed to properly follow-up on red flags.
Five Typical Examples of Selling Away
- Private Placements or Private Side Deals: A private placement or private side deal may be the sale of an unregistered security to a private investor, instead of through a standard public offering. Ordinary retail investors are not eligible to participate in a private placement. These are typically risky securities transactions only open to qualified investors. Sometimes such private deals are offered only to the top or best customers, or special family and friends only. These are tell-tale signs that you should contact an experienced securities attorney if these are the types of representations that were made relating to these investments.
- Promissory Notes: A promissory note is a type of debt or loan arrangement that individuals or businesses sometimes use as a way to raise funds. These are typically private, non-public investments, and the material risks and other important details may not be readily apparent to you as an investor. In addition, these types of investments often involve elements of fraud or Ponzi schemes as funds from new investors are sometimes used to pay interest, dividends, or to return principal to previous investors.
- Private Real Estate Deals: Many investors assume that real estate-related investments are safer than other types of investments. While that may be true in some cases, often times selling away involves private real estate deals that do not necessarily involve the type of safety or security that is being represented at the time of sale. Sometimes these are group or pooled asset deals and the details are not always consistent with the verbal representations made by the broker/adviser, or those the investor is referred to by the broker/adviser.
- The Guarantee: No legitimate investment is guaranteed to produce a return. If the representations relating to the private deal or side deal is supposedly a guaranteed winner, or a no-lose proposition, or a can’t miss opportunity red flags should be going up.
- Unusually High Returns:If the strategy or product is too complex for you to understand or comprehend, if the rate of return is unusually high or unusually consistent, such that it seems too good to be true, and you are wondering why nobody else knows about it or understands it, red flags should be going up.
What Steps to Take to Attempt to Recover Your Losses
First, it is important to contact an experienced securities attorney to investigate the details of proposed transaction thoroughly.
Many investors believe that because it was a private deal, a side deal, private company, or an investment separate from or away from a traditional brokerage firm that there is no potential for recovery of any losses incurred in securities transaction. That is not always the case.
You will need to take action. Depending on the facts and circumstances, this could involve a lawsuit, or it could involve filing a clam through FINRA’s Office of Dispute Resolution. Your potential for recovery may be direct against a bad actor, or it could be indirect potentially through the broker/adviser of account statements or the brokerage firm’s, that he/she worked for during the time of the investment.
Selling away cases can often be especially complex. To hold the responsible broker or his/her firm liable for your damages, you will need to research the full extent of the broker sells brokerage firms potential misconduct or negligence. In most selling away cases, victimized investors actually have several different underlying legal claims, and an experienced securities attorney can assist you in considering all of your potential sources of recovery.
Holding a brokerage firm liable in a selling away case can be challenging, as broker-dealers will usually counter that they should not be be held liable or responsible for the undisclosed misconduct of the individual. However, there are ways to hold broker-dealer firms and registered representatives liable in these types of claims. Depending on the facts of your case, your attorney may be able to establish vicarious liability or may be able to hold the broker-dealer firm responsible for its failure to supervise and control their representative.
Contact Our Attorneys to Discuss Your Selling Away Case
At Haselkorn & Thibaut, P.A. d/b/a The Investment Fraud Lawyers our top-rated investment and securities fraud, attorneys have extensive experience handling selling away cases nationwide. If you lost money because your broker or adviser sold purchase stock away from their registered brokerage firm, call us today at 1-800-856-3352. We are standing by, ready to help you recover your investment losses.
To schedule a free, no obligation review of your case, please contact us today at 1-800-856-3352 or reach out to us directly online. We typically handle selling away cases on a contingency fee basis, that means we do not get paid unless we help you recover your investment losses.
