Our offer to conduct a free case evaluation and intake process will help you identify all of the potential parties that might be responsible for all or part of your investment losses and we will help you come up with a strategy to recover those losses, which may include initiating formal action – typically, an arbitration claim.
In most cases, the firm(s) your advisor is/was associated with is a broker-dealer firm registered through the Financial Regulatory Authority (FINRA) or registered with the Securities and Exchange Commission (SEC) as 1940 Act Registered Investment Advisory firms. As a result of their conduct, the applicable laws, rules, and regulations, one or more of those firms may be financially responsible for your investment losses caused by the negligence or misconduct of their employees or contractors.
As experienced investment fraud lawyers, we will research these issues thoroughly in an effort to help you maximize your recovery of any investment losses and damages. For example, FINRA rules include Rule 3110, which requires all broker-dealer firms to “establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations.” Any negligent effort by that firm to implement and enforce reasonable supervisory and compliance rules will expose the firm to potential liability.
As a part of the research and analysis we do during the intake process, based on our experience previously defending brokerage firms, we know that as part of their supervisory system, most broker-dealer firms utilize have electronic supervisory tools that allow them to monitor certain activities in your accounts. That that monitoring effort is typically designed to flag transactions or events that might need to be reviewed more closely such as activity resulting in concentration issues (at the product, asset class, sector, or industry level), suitability (i.e., where a transaction is not consistent with your stated investment objectives and risk profile), high commissions or fees, significant losses or declines in value. In some cases, we find the failure of the system to flag for certain events to be a problem. In other cases, it is the opposite, where the accumulation of red flags did take place but it was simply ignored, or not addressed in a reasonable manner. Either way, it could be a basis for a claim of negligent supervision in your case.
Other supervision issues relate to the history or track record that the financial advisors might have in the securities industry. In some cases, violations of firm policy, violations of laws, rules or regulations, a history of customer complaints or disputes, as well as tax liens, bankruptcy filings, or other financial events that could place pressure on that financial advisor all may result in supervisory issues for a broker-dealer firm that hired and retained the employee or independent contractor with that type of history or experience on his/her resume. This is often another area that we investigate thoroughly on behalf of our clients.
The Market Goes Up and Down, How Do I Know If I Have A Claim?
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This is a question we get quite often. As experienced investment fraud lawyers, we do not conduct our research and analysis in a vacuum that ignores the surrounding facts including the market conditions. Of course we recognize that the market can go up, and the market can go down. We also recognize that most investments inherently carry some degree of risk. Ordinary market volatility is generally expected and is not a basis for a claim, but everything from how your investment goals and objectives are recorded by the firm, to how your investments are positioned, the supervision over all of that activity and the individuals involved, as well as what is or is not done as changes may occur over time are all areas that we are going to thoroughly research to determine (1) what did the firm do wrong, and (2) what are the corresponding damages.
The securities laws, both at the state and federal level, as well as the applicable rules and industry regulations, along with the firm’s own policies and procedures must all be followed from the beginning to the end of your relationship with your financial advisor and the firm he/she is working for – any negligence or impropriety that fails to adhere to the laws, rules, regulations, policies and procedures, may very well form the basis for a claim, whether the market itself is up or down.
For example, as experienced investment fraud lawyers, we will review your account records as your financial advisor is obligated to only recommend suitable investments for you. In order to do so, we will investigate (among other things) whether or not the broker-dealer firm records were filled out properly and accurately, and were they followed with regard to your investment objectives, goals, and risk tolerance. Did your financial advisor learn all material facts about you as an investor before making any recommendations of individual investment holdings as well as your overall investment strategy? The FINRA suitability rule focuses on three fundamental concepts: (1) reasonable basis suitability, (2) quantitative suitability and (3) customer-specific suitability. Part of this investigation further has us researching whether or not a firm and the financial advisor conducted adequate and reasonable due diligence before recommending an investment or investment strategy.
In terms of quantitative suitability, did a financial advisor with discretion, or exercising control over your accounts to have a reasonable basis for believing that a series of transactions (even if individually suitable) was potentially excessive and unsuitable overall when taken together? We investigate issues referred to as churning, the turnover rate, the cost-equity ratio, or in-and-out trading as such improper activity (and negligent supervision for the firm responsible for monitoring same) may form the basis of a claim.
In terms of customer-specific suitability, that is research we do that is more focused on comparing closely the recommendations and transactions in your accounts compared to the investment profile maintained in the firm’s records. As an investor profile, considerations include (among other material issues), your:
- Other investments
- Financial needs and circumstances
- Tax status
- Investment objectives
- Time horizon
- Liquidity needs
- Risk tolerance
- Any other information disclosed by the customer
As your lawyers, our typical investigation generally goes well beyond just suitability issues as we investigate your case at the intake stage, but the above gives you a good sense that the issues we are investigating really are not impacted by ordinary fluctuation or volatility in the market.
How Do You Calculate My Losses or Damages in a FINRA Claim?
We often get this general question along with related questions about whether or not interest or dividends are taken into account or is just principal losses. Additionally, many clients question whether or not interest, costs, attorney’s fees as well as their investment losses can be made part of the damages.
The answer is: it depends on the claim and the unique nature of each case.
As most cases a customer dispute claims in a FINRA arbitration, the formal approach to damages found in case law applicable in state or federal court cases may be quite different. In fact, the arbitrators who sit as a judge and jury on these claims are trained by FINRA on several different potential approaches to damage calculations, but they are not required to follow any particular approach or theory, and their ultimate charge in an arbitration claim is to reach a just and equitable result based on the facts and evidence presented.
With that backdrop and explanation, here are three common methods of calculating damages in FINRA arbitration claims. In addition, while these methods may serve as a starting point for arbitrators, they are free to enter a final award in which they elect to enhance a damages award by adding interest, reimbursing costs, including attorneys’ fees, or considering potential punitive damages. Finally, it should also be noted that in most cases presenting damages to either a mediator in course of a settlement conference or to arbitrators at a final hearing will involve the parties presenting multiple calculations and damage/loss scenarios.
Net Out-Of-Pocket (NOP) Damages
Net out-of-pocket damages or NOP calculations are generally taking into consideration everything in, and everything out from a starting date to an ending date and measuring the net principal losses incurred after a reduction based on any income you received. Some arbitrators view this calculation as a practical approach that helps put an investor with losses back in the same position they were in prior to making the investment.
While this method is simple on its face, it often requires an experienced investment fraud lawyer to help you present these losses in the most effective manner. Most broker-dealer firms favor this calculation method as the last 10+ years of a bull market generally enable them to show overall net positive results, and they will try to de-value your claim based on those calculations and analyses. Strategic decisions will need to be made by you and your lawyers on how to counter those calculations and analyses. We often investigate the nature of the relationship between the parties and demonstrate that the negligence or impropriety involves a specific event or set of events and then try to identify the damages or losses directly resulting from those issues. How we do that for you, or how we direct a potential damages expert to perform a specific calculation, analyses, or back-up for presentation to arbitrators is often a material issue in these claims.
Trading losses reflect the actual principal loss realized by you. Similar in some respects to the above, it seeks to present damages as investor losses incurred and does not offset the damages by the income or dividends you may have earned or received.
Well-Managed Portfolio Damages
In cases ranging from issues of high fees or commissions, to negligent or improper recommendations, a well-managed portfolio damages calculation is another alternative that can be used to demonstrate damage or loss based upon a hypothetical return the investments could/should have generated for the investor had the investments been properly asset allocated and reasonably well diversified (ie “well-managed”).
For example, if your investment strategy was over-concentrated in a limited number of investments, a comparative analysis of a well-managed portfolio damages model that hypothetically assumes a more suitable asset allocation.
Interest, Costs, Attorneys’ Fees, and Punitive Damages
In FINRA arbitration, arbitrators have discretion to include in an arbitration award interest, costs, and punitive damages. The interest may represent the “loss of use” of your money during the time period the unsuitable investments were held. The arbitration panel has the discretion to determine the beginning and end point for the assessment of any interest component. Costs are also within the discretion of the Panel and they can range from filing fees, to expert witness fees and costs, to administrative expenses.
Punitive damages are not common, but in can be an issue in cases where the facts and evidence demonstrate that the conduct at issues was truly egregious or reckless, such as intentional misrepresentations, theft, or misappropriation. The arbitration panel typically needs to be convinced that what happened was not only wrong, but that an award of punitive damages that may represent a windfall to you the aggrieved investor, is needed as it will serve to deter the broker-dealer firm from engaging in similar misconduct in the future.
With respect to attorneys’ fees, the issues can get a bit more complicated. While arbitrators have discretion in an award, most jurisdictions adhere to what is referred to as the “American Rule” where arbitration panels award attorneys’ fees only if there is an agreement between the parties that provides for prevailing party attorneys’ fees, or if there is a statute or law provides for prevailing party attorneys’ fees. In most FINRA arbitration claims, no agreement or contract exists between the parties, and there is further no contract wherein the parties agreed to submit the issue of attorneys’ fees to the arbitration panel. As a result, you are typically limited to state or federal laws that permit the recovery of attorneys’ fees. In many jurisdictions, the state securities laws (typically the investor protection act in each state) provide for the recovery of attorneys’ fees. As these statutes are often prevailing party awards of attorneys’ fees, these are significant risks and strategic considerations that you will want to discuss in more detail and consider based on your specific case.
How Do I Know If My Investments Are Suitable?
If you were dealing with a financial advisor that was serving as a registered investment advisor who had a fiduciary duty to you, there is a higher legal duty and higher standard of care applicable to the handling of your accounts, above and beyond the FINRA suitability rule. Be sure to discuss the details of your professional relationship between you and your financial advisor. Were they serving as mere stockbrokers for you, or was there more to it? Did they take discretion over your accounts either formally in writing, or by way of de facto control? Were they simply there to execute trades or were there ongoing duties and recommendations in an advisory type relationship? What credentials, experience, licensure did your financial advisor have, and did it change at any time?
The FINRA suitability is Rule 2111 and it provides that a financial advisor must have a reasonable basis for recommending a transaction or investment strategy to a customer. In simple terms, it means that if you are a conservative investor that is primarily seeking income and safety of your principal, your financial advisor should not be recommending aggressive growth securities. Similarly, if you are an investor who needs liquidity, you should not be buying variable annuities or non-tradeable REIT products. This is another area of thorough investigation that we provide before coming up with a strategy for our clients to recover their investment losses.
FINRA Rule 2111 apply to recommendations buy, sell, or to “hold” securities. Whether you should make changes to your accounts or your portfolio from an overall investment strategy standpoint are some of the key considerations that are reviewed.
An investment is suitable when it is consistent with your stated investment objectives and risk tolerance and when it is reasonable given your age, your other investments, and after considering other factors including your employment or retirement status. Easy examples include older investors should not typically make investments that carry a high degree of risk, because recovering from an investment loss will be difficult, if not impossible, and they do not have as long-term of a time horizon to consider compared to younger investors.
Suitability may also be an issue from the overall investment strategy as opposed to the individual transaction. Another easy example for illustration purposes is a possible review of the investor’s asset allocation. Older retired or elderly investors should weigh their portfolios toward low-risk investments that do not pose a significant risk to principal.
Keep in mind, suitability can also change over time either because of changes in the investor’s circumstances, or because of material changes in the features of the particular investment(s). A negative turn of life events, a medical diagnosis, an unexpected need for liquidity or income, can change things from the investor perspective. Alternatively, if an investment decreases or completely ends its income stream and the nature and features of the investment or product materially change, what may have once been suitable or a borderline call, may no longer be suitable.
What Do I Need To Do To Recover My Investment Losses?
Call our office. We will walk you through the process. We will cover some basic information during an initial inquiry call. Some of that information might cover the financial advisor, the firm, the investment strategy or products at issue, the nature and scope of the loss or damages.
At the same time, one of our experienced investment fraud lawyers will be determining other issues including potential strategic decisions with respect to possible choices of forum or venue. Is there a FINRA arbitration agreement, is the case better off getting filed in a particular forum, or in a different region for any reason, what are the options available. Below is an outline of some of the discussion points, and then what happens if we agree to accept your claim.
Step 1 — Initial Case Evaluation
You have nothing to lose by calling our office. An experienced investment fraud lawyer will review the preliminary issues with you at no charge, and as a public service, we offer a portfolio review at no charge. We do not provide investment advice, but any potential legal or regulatory issues will be outlined for you in a follow-up call.
In addition to a call and a follow-up to review your account records during the evaluation process, your lawyer will be thoroughly reviewing the transactions, products, investment strategies, fees and commissions, the financial advisor, the firm, the trading patterns, etc. and your follow-up call will include a discussion with a preliminarily assessment of the strengths and issues of your potential claim. As part of this process, we will start by reviewing whatever relevant documents and information you have easily accessible.
Step 2 — Case Intake and Filing
If we agree to accept your claim after the initial case evaluation, we will review the potential specific claims or causes of action, and any options with respect to forum or venue. This is essentially where do we file (with FINRA, or in state or federal court) and where should we file the claim. As FINRA is the primary regulator with a dispute resolution forum available for resolving securities disputes, it is often a primary option. It is likely that when you established a relationship with your financial advisor or brokerage firm, you signed an arbitration agreement requiring arbitration before FINRA.
While there are pros and cons, in most cases, for most investors, FINRA arbitration represents a preferable option to resolve disputes. It is less expensive than litigating in court and is generally more efficient and faster in terms of reaching a resolution of claims. The FINRA arbitration process is initiated by filing a Statement of Claim. This is not a formal pleading like the one that might be filed in state or federal court. We prepare the claim for your review and approval. The opposing side will be served through FINRA, and they will have an opportunity to file a Statement of Answer or a responsive pleading. If your case is going to proceed in state or federal court, the process is similar at this stage but the initial pleading is referred to as a Complaint.
From your perspective there may appear to be a lull in activity in your claim at that point, but your lawyers are working on a number of important things related to your claim. From this point forward the process in court (state or federal) will be quite different. If your claim is a FINRA arbitration, the FINRA case administrator assigned to the case will be processing the case and providing the parties with arbitrator ranking lists. Your experienced investment fraud lawyers will be analyzing and reviewing every one of the potential arbitrators along with every prior arbitration award they were involved in. A form ranking the proposed arbitrators will be submitted to FINRA and after an initial prehearing scheduling conference call scheduling final hearing dates and other deadlines, the parties will begin the discovery phase of the case.
Step 3 — Standard Discovery Process
Both parties exchange certain categories of documents and information to fully evaluate the case. FINRA has several standard lists and guidelines that the parties must adhere to in most cases. Keep in mind, there are no depositions in FINRA arbitration, so there is an emphasis on the exchange of documents. That said, if you do not have the records to produce, you are not required to create any records.
Step 4 — Settlement Negotiations
Although your experienced team of investment fraud lawyers are typically preparing your case for a final hearing or a trial from the very beginning, the statistics show that the majority of cases do get settled voluntarily by the parties. While a case can get settled at any time, the parties are typically going to conduct most if not all of the material discovery so that each side can fully evaluate the claims and defenses at issue in your case. It is customary that parties engage in settlement negotiations. Sometimes, these negotiations are informal discussions over the telephone between the lawyers, and in many cases mediation (a settlement conference) has become a common and successful means of resolving investment related disputes. Mediation and arbitration may sound similar, and both are considered forms of alternative dispute resolution, but they are very different in this context. Mediation is a structured settlement conference between the parties with a third-party neutral unbiased professional mediator hired to assist the parties in reaching an amicable settlement. The mediator will meet privately with both parties and help facilitate a meaningful discussion regarding the settlement of your claims. Arbitration by contrast is the final hearing or informal FINRA version of a trial in your case.
Step 5 — Final Arbitration Hearing
In the event that a satisfactory settlement agreement cannot be reached, your claim will proceed to a final arbitration hearing. During the final arbitration hearing the parties will make opening statements, present fact and expert witness testimony, and submit documentary evidence to the arbitration panel before making closing arguments. At the conclusion of the proceeding, the arbitrators will enter an Award which sets forth the amount of monetary compensation to which you are entitled.
What Are the Common Signs of Misconduct?
Misconduct (either intentional or negligent) as it relates to financial advisors and investment accounts comes in many forms. Sometimes it is obvious, other times it begins with just a gut feeling, and it something much more subtle. Some common signs of intentional or negligent investment misconduct are:
- An unexpected dramatic drop in the value of your investment(s), particularly if it is not consistent with the performance in the overall market.
- Your financial advisor is recommending an investment strategy with a higher degree of risk than you are comfortable.
- Portfolio concentration in a single security, sector, industry, product, or asset class.
- Your financial advisor’s answers to your questions are unclear, or seem evasive.
- You are told any investment is risk-free or guaranteed.
- You have transactions or activity in your accounts without your authorization or approval.
What Are The Most Common Issues?
Negligence or impropriety by financial advisors or the firms responsible for them can take many forms. An experienced investment fraud lawyer can help you identify the issues, potential claims and damages.
- Unsuitable Recommendations. Investment products or strategies that are not suitable or appropriate for the customer.
- Material Misrepresentations or Material Omissions. The facts related to an investment including a fair and balanced description of the potential risks and potential returns, the material features of the investment, investment strategy, or investment product. Whether an affirmative representation, or a deliberate material omission.
- Unauthorized Trading. Account activity or transactions without permission from the investor.
- Churning. Buying and selling, switches, in and out trading, and turnover that is inappropriate.
- Unlicensed or unregistered securities sales. Financial advisors must be properly licensed and securities investments must be properly registered.
- Negligence. In many instances the financial advisor or firm are not intending or deliberately attempting to defraud anyone, but for one reason or another there are mistakes, carelessness, or failures. It could be in the press of business, or in the supervision.