Stockbrokers can harm clients in numerous ways, especially in they engage in:
- Excessive trading to generate more commissions for the broker (called “churning”)
- Giving a client false or misleading information that induced the client to trade
- Trading without the client’s authorization
- Sending the client a confirmation of sale (known as a “wooden ticket” in this scenario) when the client has authorized the sale beforehand
- Recommending excessively risky investments for the client’s circumstances
- Forgery or theft
- Distributing misleading investment documents
- Making negligent or unsuitable recommendations
What Can I Do If My Broker Mishandled My Account?
If an investor decides that their account has suffered losses due to a broker or advisor, they may choose to begin legal proceedings. Investors can pursue legal action against their broker by filing a claim or lawsuit if they feel their losses directly resulted from the stockbroker’s actions. However, simply losing money in an investment isn’t grounds for a claim.
Filing a claim against a stockbroker entity will require you to go through arbitration. Entities like mutual funds regulated by the SEC use the court system. Common claims against brokers include unsuitability, churning, and negligence.
If you have a complaint against your broker concerning how your account was handled, there are several preliminary steps you can consider to resolve your complaint:
- Talk to your broker and explain the problem: Try to determine where the fault occurred and why
- Put your complaint in a letter addressed to the broker and the broker’s branch manager: Be sure to keep a copy of your letter and proof of mailing
- Write to the compliance department at the firm’s main office: If your broker or branch manager is unwilling to resolve the problem to your satisfaction, then you may want to consider doing this. Explain your issue clearly and state how you want it fixed. Also, ask the compliance officer to respond to you within 30 days. Keep a copy of all correspondence and proof of mailing.
In your lawsuit, two paths are available to you: arbitration and the court system. The claim process differs between the two venues, but the preparation and time commitments are similar. The regulatory agency overseeing the financial company will likely determine the legal path your case will take.
Stockbrokers and brokerage firms are pursued via arbitration. Even though brokers can use titles like “financial advisor” or “planner,” they are still regulated. Disputes with mutual funds or trust companies regulated by the SEC or the state will go through the court system, and the customer will pursue the dispute as a plaintiff.
What Should I Do Before Filing a Claim?
Before filing a claim, you should exhaust all avenues with the company involved in the dispute. Evaluate your claim for validity. During your evaluation, you should note that merely losing money in an investment is not always grounds for arbitration, mediation, or litigation.
Investors historically experience investment losses over time. Your legal team will most likely retain an expert witness to look for clues. The expert witness, usually an analyst with an accounting and financial background, will look for signs of unsuitability, churning, failure to supervise, or negligence. Finding at least one of these violations is essential to building a valid case. Expert witnesses are important in determining the recovery and setting forth damages.
What Is the Basis of My Claim?
The most common cases brought by arbitration claimants or securities-fraud plaintiffs are common law fraud. Violations of the Securities Exchange Act of 1934 are also common.
Claimants typically seek out-of-pocket losses or rescind the actual transaction as a resolution. Both avenues can lead to similar settlements. Consider hiring a legal team to guide your path for you.
What Is Unsuitability?
Unsuitability is one of the most common allegations in securities fraud cases. Unsuitability is difficult to prove due to its subjective nature. A plaintiff alleging unsuitability alleges that the broker or advisor knew or should have known that their trading patterns or type of security were inconsistent with the planned objectives. A significant amount of qualitative information must be evaluated during unsuitability claims.
Evidence in unsuitability cases dates back to when the account was opened. The account-opening documents may contain a risk profile defining the customer’s risk tolerance and investment timeline. These documents are detailed in order to profile customers.
It’s common to rank a customer’s risk preference from one to five. A rank of five designates a high level of risk tolerance. If unsuitability is pursued and a substantial amount of money has been lost in risky investments, it would be best for plaintiffs if their profile had a low number. A customer claiming unsuitability who had a risk tolerance profile of five would have difficulty proving that his investment loss was a legitimate complaint.
What Is Churning?
Churning is one of the strongest allegations a customer can make against an investor. Churning implies that an account was traded excessively. To be found liable for churning, a broker must have had a significant level of control over the funds. Proving that an account was traded excessively alone is not sufficient evidence, especially if the customer instigated the trades.
Churning is most common in transaction-based or commission-based relationships. Excessive trading can be claimed separately when commissions accumulated during the trading are requested as a recovery or in conjunction with other claims where losses and commissions are the targets of recovery. Churning is calculated by using basic math and is typically well-understood by courts and arbitration panels.
The formula used to calculate churning divides the total amount of buys and sells by the unleveraged account market values over a monthly or annual time period. Monthly calculations are typically more accurate. There are differing opinions on how much trading is considered excessive, but four to six times turnover has been recognized as excessive in many cases.
When pursuing the churning approach, remember that the defense will present contrasting evidence. If you were making money during a previous time period, the defense will present your trading patterns during that time and contend that your gains offset your losses.
Should I Pursue a Class-Action?
In some cases, class-action lawsuits can occur simultaneously with individual suits. There are benefits to pursuing claims with class actions, but if your situation is unique, pursuing an independent claim may provide better control over the proceedings. Individuals may exclude themselves inadvertently by filing a class-action suit first. C
lass-action filing papers provide a clear reference to this issue and offer opt-outs for parties that plan to pursue their claims independently. Courts may also have long waiting times for class-action proceedings.
Do I Need an Attorney?
If negotiating with your broker and complaining to his branch manager has not resolved your problem, you should contact an attorney to help with the problem. A financial attorney experienced with securities law can advise you whether you have a claim and inform you of your best course of action.
Legal proceedings in securities law are best approached with a strong team. Hire a professional attorney and expert witness early on in the process to steer the direction of your case in a positive direction. Use LegalMatch’s services today to find a lawyer near you.
