Common Claims Brought by Investors

Unsuitable Investments:

Financial advisors have a duty to recommend only those securities which the advisor reasonably believes are suitable for his client, the investor. Before making a recommendation to purchase or sell a security, the broker should consider the investor’s investment goals, financial well-being, risk tolerance, tax implications, other investments, and other relevant information. When a financial advisor recommends an unsuitable investment, the investor may be able to recover losses sustained from the investment from the broker or his/her brokerage firm.

Churning:

Churning occurs when a financial advisor buys and sells investments, such as stocks in your account, for the purpose of generating excessive commissions. The act of churning is a breach of the advisor’s duty to recommend suitable investments and investment strategies and is considered to be fraud. If you find that an account, which you did not intend on being an actively traded account, is showing that there is a high volume of buying and selling, you may be a victim of churning. With regard to annuities, the term “twisting” is used. Twisting involves the buying and selling of annuities in order to generate commissions.

Theft:

In some cases, a financial advisor will outright steal money from his client’s accounts or will divert funds which are to be deposited into an account into his/her own account for his/her own benefit. Outright theft is an obvious red-flag of investment abuse. Theft may not be easy to detect though. For example, our attorneys have handled cases where a financial advisor stole from her clients by opening what is called a master account in the name of her investment advisory firm. Each client had sub-accounts connected to the master account. During the course of a given trading day, the financial advisor traded funds in the master account on behalf of her clients. At the end of the trading day, she would allocate trades into the sub-accounts. What she did not tell her clients was that she opened a sub-account in her own name and allocated the profitable trades to herself and the losing trades to her clients.

Over-Concentration:

Your advisor has a duty to recommend that your account be diversified among different investment classes such as cash, stocks, and bonds. Over-concentration occurs when your portfolio’s investments are disproportionately weighted in one of the above investment classes. In order to minimize risk and avoid excessive loses, your portfolio should be diversified. If, for example, the majority of your portfolio’s assets consist of stock holdings in your long-time employer or in an automotive company or restaurant chain your portfolio is not diversified. Should your broker have recommended an over-concentrated portfolio and you suffer losses as a result, you may have a claim against your broker and their brokerage firm. Further, your advisor should recommend investment among differing industry sectors (such as technology, consumer staples, healthcare, industrials banking/financial, energy), rather than just one sector. An investor’s entire nest egg can be lost should their money be invested entirely or over-concentrated in one sector should that industry suffer a significant event which diminishes its value (i.e. technology stocks in 2000).

Fraud / Misrepresentation / Failure to Disclose Investment Risks:

If you are like most Americans, you trust that your financial advisors and rely on them to act in your best interest. This type of relationship is fiduciary in nature. Financial advisors have a duty to act in your best interest and fully disclose all risks associated with the investments they are recommending. Furthermore, advisors have a fiduciary duty to disclose any conflicts of interest that might have an effect on his or her recommendations. When a financial misrepresents or fails to disclose any of these risks or material facts, that advisor and his or her brokerage firm can be held liable for fraud. For example, if a financial advisor tells you that a particular investment is safe and it is not, that misrepresentation can constitute fraud. Likewise, if a financial adviser fails to disclose that a particular investment is risky and leads you to believe that it is safe, that omission can also constitute fraud.

Breach of Fiduciary Duty:

If you are like most Americans, you trust that your financial advisors and rely on them to act in your best interest. This type of relationship is fiduciary in nature. Financial advisors have a duty to act in your best interest and fully disclose all risks associated with the investments they are recommending. Furthermore, advisors have a fiduciary duty to disclose any conflicts of interest that might have an effect on his or her recommendations. For example, if the brokerage firm wants to promote a certain investment and pays the broker a high commission over other products, the broker has a duty to disclose that conflict of interest. When a financial misrepresents or fails to disclose any of these risks or material facts, the advisor and his or her brokerage firm can be held liable for breach of fiduciary duty.

Selling Away:

Selling away is a term to describe a situation when a financial advisor who is employed by a brokerage firm sells investments to his clients that are not approved by the firm. These types of schemes result from an advisers desire to get paid commissions from a transaction without sharing it with his employing firm. Selling away schemes are particularly dangerous for investors because these cases usually end up with the investors becoming victims of theft. These schemes also often involve the sale of promissory notes. Promissory notes are in essence loan investments. The borrower promises to pay investors high interest rates in exchange for the loan amount from the investor. Once the investor pays the money, the borrower never makes the interest payments and the investor’s investment vanishes.

Brokerage firms have a duty to supervise their financial advisers. As a result, brokerage firms can be held liable if an adviser sells away from the firm.