Investment Fraud

If your investments have lost value due to broker misconduct, you may be able to recover those losses. As investor attorneys, we are dedicated to helping you recover your investment losses that resulted from broker misconduct.  

Your Ideal Investment Fraud Lawyer

The representation of investors is a niche practice. We have many years of experience in representing investors in disputes with brokerage firms, investment advisory firms, and their representatives. In selecting a lawyer, you should seek out those with substantial experience in this area.

What Is Investment Fraud?

Brokerage and advisory firms, and their representatives have a legal duty to disclose to investors all material facts concerning any proposed investment, including the risks as well as the potential benefits. When broker/advisers fail to make the proper disclosures for the purpose of inducing an investor to buy, sell or continue to hold an investment, the investor may have grounds to recover any resulting loss. 

Investors with potential investment fraud claims would be well advised to consult with an experienced attorney before taking any steps yourself. Our lawyers have many years of experience in fighting on behalf of the victims of investment fraud. We will evaluate your situation and give you our recommendation as to whether and how to proceed at no charge to you.

Different Types of Investment Fraud

Account churning occurs when a broker excessively trades an account to generate commissions. Such quick in and out trading (often day trading) benefits the broker but usually not the investor. 

Margin trading involves trading with borrowed money. The investor can lose not only his or her entire investment but must also repay the loan. Thus the investor can be liable for more than the amount invested.

Failure to diversify is essentially over-concentrating the investments in an account, which increases risk. 

MLP fraud usually involves oil and gas limited partnerships. MLPs are sometimes nothing more than fraudulent Ponzi schemes and are high-risk ventures even if they are not fraudulent.  

Selling away is what a broker does to engage in outside business activities without being supervised by the firm. A broker who wants to trade away typically does not disclose his secondary business activities to the firm. However, the firm must act on any red flags that suggest a broker is selling away.  

A REIT is a real estate investment trust. REITs provide investors a vehicle to gain exposure to real estate without actually owning real properties. Some REITs do not trade on a public exchange. These non-traded REITs are high risk, overly costly investments that most investors should avoid.

What Is Account Churning? 

Churning is excessive trading by a broker that violates the suitability standard and is motivated by a broker’s desire to generate sales commissions.  Churning constitutes fraud under the securities laws. It also violates the conduct rules of securities regulators. Courts have considered various metrics in evaluating churning. They include:

• The number of trades
• The frequency of trading
• The turnover ratio
• The cost-equity ratio
• The commission-to-equity ratio

The turnover ratio is the total cost of purchases for an account divided by the account’s average value during a specific period. There is no bright-line rule about what annual turnover constitutes churning. The SEC presumes that a turnover ratio over 6 is excessive. However, the SEC has also found that much lower turnover levels can be extreme.  A customer’s investment objectives are also critical factors in whether excessive trading amounts to a claim for churning. 

The commission-to-equity ratio is derived by dividing the total commission charges by the average equity in the customer’s account.

The cost-equity ratio is the rate of return an account would have to earn to “break-even” after accounting for all costs and charges. The SEC has taken the position that a break-even cost ratio over 20% is indicative of excessive trading.

What Should I Do if I Suspect Account Churning? 

If you suspect that your account has been traded excessively, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including churning. Call us for a free consultation.

Margin Trading

Margin trading is extremely high risk. It is buying stocks or other securities with borrowed money. Usually, the investor puts up 50% of the purchase price of a security, and the additional 50% comes from a loan from the brokerage firm. 

The typical Margin Agreement gives a brokerage firm a security interest in all of the assets in an investor’s account. In other words, the investor’s account assets are collateral for the loan. 

If the price of the margined stock goes up, the investor makes a higher percentage return on investment than s/he would have if s/he had put up 100% of the purchase price. If, however, the price declines, the investor could lose more than the amount invested because the loan must be repaid even if the margined security drops to zero. 

What Is A Margin Call?

If the value of the margined asset or your account decreases below a predetermined level, the firm may send you a notice demanding that you deposit additional money into the account to restore the value of the firm’s collateral to a certain level. The firm is not required to send you a margin call, however, and may at its discretion sell assets in your account to restore the value of its collateral.

Although margin accounts are not uncommon, they are not suitable for most investors. The bottom line for the investor and the firm is just as you should not gamble with money you cannot afford to lose. It would help if you did not accept more risk and potential liability than you are unable or unwilling to bear by trading on margin.

What Should I Do if I Lost Money in Margin Trading? 

If you lost money in margin trading, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including margin trading. Call us for a free consultation.

What Is Diversification? 

Diversification is the spreading out of risk. In a nutshell, the principle of diversification says don’t put all your eggs in one basket. 

In theory, diversification lowers the risk of an investment portfolio. For example, a junk (high-yield) bond is risky because of the risk of default. However, a collection of many junk bonds is less risky and may present an acceptable level of risk. 

Diversification is a bedrock principle of modern portfolio theory (“MPT”). According to MPT, over 90% of an investment portfolio’s return is attributable to asset allocation. Asset allocation refers to the broad classes of assets – i.e., the percentage of equities (e.g., stocks), fixed income (e.g., bonds) and cash or cash equivalents (e.g., money market funds) – that makes up a portfolio of assets. 

The asset allocation is the broadest, bird’ s-eye view of a portfolio. As we focus in for a closer view, we look at diversification within each class of assets. For example, investors should own many stocks rather than just one or a few. 

The easiest way to achieve diversification is to purchase a broadly diversified mutual fund, or better still, a group of such funds. Mutual fund companies such as Vanguard and Fidelity make it easy to achieve diversification with a relatively small amount of money. Be careful, though, because not all mutual funds and exchange-traded funds are diversified.

The “suitability rule” holds that brokerage firms and their registered representatives (i.e., stockbrokers) have a duty to only recommend an investment or investment strategy that is suitable for the investor based on the investors’ investment objectives and risk tolerance. A non-diversified portfolio reflects an unsuitable investment strategy for most investors. 

What Should I Do if I Lost Money in an Undiversified Account? 

If you lost money in a non-diversified account, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including failure to diversify. Call us for a free consultation.

What Are Master Limited Partnerships? 

Generally, Master Limited Partnerships (MLPs) are exchange-traded investments. This makes them more liquid or readily sellable than non-traded investments. However, MLPs can become illiquid or difficult to sell. MLPs are generally high-risk investments. They are also not transparent, meaning that complexity and a lack of publicly available information makes them difficult to understand.

MLPs are focused on exploration, development, mining, processing, or transportation of minerals or natural resources such as oil and gas properties and pipelines. MLPs are structured as limited partnerships. Generally, limited partnerships may be attractive to some investors because they offer tax benefits. MLPs generally do not pay federal taxes. Instead, limited partners report on their tax returns their share of the MLP’s income, gains, losses, and deductions, and are taxed at their tax rates. Each limited partner receives annually a Schedule K-1 showing its share of the MLP’s income, gains, losses, and deductions.   

What Are the Risks of a Master Limited Partnership? 

• Fraud: One of the risks is Fraud. Fraud is a deception. Fraud involves the intentional misrepresentation of material facts (i.e., facts about an investment that a reasonable person would consider important). A misrepresentation without the intent to deceive may be an act of negligence, but an intentional misrepresentation is deception.  

The entire “business” may be a fraud. The best example is a ponzi scheme. In a Ponzi scheme, there is no real business (e.g., no oil or gas property generating revenue). Early investors usually receive distributions that comes from purchase money paid in by newer investors. The promoter keeps this up until the house of cards inevitably collapses. Even if the MLP is not a fraudulent scheme, a broker’s sales pitch to investors may be deceptive by misrepresenting or omitting to disclose material facts. 

• Over-concentration: MLPs have concentrated exposure to a single industry or commodity. Most MLPs are an investment in the energy sector. They are therefore sensitive to shifts in oil and gas prices. 
• Conflict of interest: MLPs are controlled by a sponsor – typically a publicly-traded company. The sponsor controls the general partner who manages and operates the business. Investors become limited partners by purchasing units of the MLP. The MLP agreement typically favors the sponsor over the limited partner investors. The sponsor often has interests and goals that conflict with those of the limited partner investors. 
• Market risk: In the absence of fraud, MLPs are still high-risk investments. Investors can lose their entire investment or face lower returns than they were led to expect. Due to decreasing oil prices, MLPs may reduce or suspend their distributions, and many have done so. 

MLP investment fraud has been more prevalent in times when interest rates on safe investments (like CDs) are low. The investor victims are often retirees who are looking for a safe return. Typically they would invest in relatively safe products like certificates of deposit.  However, when interest rates are chronically low, retiree investors cannot earn enough interest on a safe investment to meet their needs. By necessity, they are looking for higher yield. Higher yields mean more risk. Unfortunately, many retirees are vulnerable to sale pitches that minimize or conceal the risk of an investment and emphasize the potential return or yield. 

What Should I Do if I Lost Money in an MLP?  

If you lost money in an MLP investment, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including master limited partnership investments. Call us for a free consultation.

Selling Away

Selling away is the inappropriate practice of selling securities not held or offered by the firm with whom the broker is affiliated. Brokers may engage in selling away to obtain commissions or products that have not been approved by the broker’s firm. Selling away schemes often involve high-risk private placements or promissory notes.

FINRA Rule 3270

This rule provides that “[n]o registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm….” FINRA Rule 3040 adds that: “[n]o person associated with a member shall participate in any manner in a private securities transaction except by the requirements of this Rule….”

Selling away cases often raise issues of failure to supervise and vicarious liability. Brokerage firms often argue that they cannot be liable for failing to supervise a broker that failed to disclose his outside business activities to the firm. 

Selling away cases typically turn on whether the firm adequately supervised the broker. If the firm knew or should have known about the broker’s conduct, then success on this claim is more probable. 

Examples of Selling Away

An egregious example of selling away cases involved a broker who sold his elderly widow client interest in a car dealership. Naturally, the brokerage firm was not in the business of selling private investments in car dealerships. The broker failed to disclose this outside business activity to his firm in order to circumvent the firm’s supervisory procedures. 

The firm argued that it could not be held responsible because it had been duped by the broker just like the client was. However, there were enough “red flags” that the broker was engaged in outside business activity to put the firm on “inquiry notice.” There was enough going on under the firm’s nose as it were that the firm had a duty to inquire into what the broker was doing and put a stop to it. The firm failed to do so and was liable to the client for her losses.

What Should I Do if I Suspect I am the Victim of a Broker’s Selling You Investments Away From the Firm? 

If you suspect that your broker has sold you investment away from the firm, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including selling away. Call us for a free consultation.

What Are REITs? 

A REIT is a real estate investment trust. The trust is a company that owns and operates real estate or real estate-related assets that generate income. For example, REITs may own leased buildings or mortgages. REITs typically specialize in a single type of real estates, such as office buildings, retail space, apartments, medical buildings, and industrial properties. Some REITs are publicly traded with a ticker symbol on an organized exchange. Others are non-traded REITs.

What Is the Difference Between Publicly-Traded REITs and Non-Traded REITs?

An investment in a non-traded REIT involves a higher risk than an investment in a publicly-traded REIT. The risks associated with non-traded REITs include:

• Lack of Liquidity: Publicly traded (or exchange-traded) REITs registered with the SEC and are listed on an exchange such as the NYSE or NASDAQ. They file reports and disclosure documents with the SEC. Exchange-traded REITs are easily sellable and transparent insofar as disclosure documents filed with the SEC are readily available online. Investors can easily see the share price at which the REIT is trading on the exchange.

In contrast, non-traded REITs are not listed on an exchange and are not publicly traded. Non-traded REITs are illiquid. They cannot be sold readily in the market.  

Investors are led to expect that the non-traded REIT will eventually list its shares on an exchange or liquidate its assets to achieve liquidity. However, these liquidity events may not occur until more than ten years after your investment – if they occur at all. Investors may be able to redeem their shares early, but these share redemption programs are typically subject to significant limitations. 

They can be discontinued at the discretion of the REIT without notice and may require that shares be redeemed at a discount from the purchase price so that investors will suffer a loss. Thus, non-traded REITs are unsuitable for investors who may need to sell to raise money quickly.

• High Costs: Non-traded REITs are also high cost, high commission products. They typically charge high upfront fees – up to 15 percent of the offering price. High fees lower the value and return of the investment and leave less money for the REIT to invest.  In addition to the high upfront fees, non-traded REITs may have significant transaction costs, such as property acquisition fees and asset management fees. 

Why Choose Us As Your Investment Fraud Lawyer?

We have substantial experience representing investors in securities arbitrations and litigation. We have to handle hundreds of cases filed with the Financial Industry Regulatory Authority (FINRA) as well as situations in both the state and federal courts.

At The Doss Firm, LLC, our attorneys have recovered millions of dollars for our clients against significant investment and security firms. We handle our cases on a contingency fee basis, meaning our attorney’s fee is a percentage of any recovery (usually one-third). No recovery means no attorney fee. There are costs such as a filing fee and expenses of litigation that must be paid separate from the attorney fee – the client typically pays such costs and expenses. However, these costs are usually less than $2,000.00.

If you have any question about your investments, feel to contact us for a free consultation.