Most investors understand and accept that investing money is inherently risky.
What most investors do not realize is how common it is for investment losses to occur as the direct result of negligence, misconduct, or outright fraud on the part of financial advisors and stockbrokers.
In fact, in 2017 alone 492 individual advisors and brokers were barred from the financial services by FINRA, and another 733 were suspended.
In addition to that, 20 investment firms were expelled from the financial services industry and another 29 were suspended.
In cases where significant investment losses occur due to the negligent or unlawful actions of a broker, advisor, or investment firm, investors have the right to sue in order to recover their investment losses.
Here the investment loss attorneys of Sonn Law Group have answered the most frequently asked questions from victims of investment loss.
Answers to Common Questions from Victims of Investment Loss
Investment Loss FAQ Table of Contents
- How did I miss the warning signs of investment loss?
- Financial professionals and firms are closely regulated, why check their credentials?
- Investing is inherently risky, shouldn’t I expect losses?
- How can I protect myself from future broker misconduct and fraud?
- Why do so few investors file claims to recover investment loss?
- What tactics do advisors use to discourage investors from filing complaints?
- What legal duties do financial advisors owe their customers?
- What are most common types of broker or advisor misconduct that cause losses?
- How can an investment fraud attorney can help me?
- What are the common types of securities products that result in significant losses?
- I may have been a victim of investment abuse, what should I do?
- Examples of recoveries we’ve secured for investors
WATCH: Investment loss attorney Jeff Sonn answers two critical questions…
How did I miss the warning signs of investment loss?
Unfortunately, broker misconduct and fraud happen every day in the financial world. Even well-informed people become victims. The following are signs your broker may not be totally on the up and up.
- Your broker sends financial account statements that don’t match your records.
- You find unauthorized or unexpected trades on your statement.
- Fees on your statement are different from what was initially disclosed.
- Your broker is excessively trading in your account.
- Your broker has over-concentrated your portfolio in one particular investment.
- Your broker seems to earn large commissions, even when you lost money.
Investors can protect themselves by keeping detailed records, learning how to read your statements and keeping close tabs on what your broker is doing. It is also not a good idea to authorize your broker for unlimited trading in your account.
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Financial professionals and firms are closely regulated, why check their credentials?
It is true, brokers are closely regulated. Most states have their own securities regulators. When brokers manage assets of $100 million or more, national organizations like the SEC and the Financial Industry Regulatory Authority or FINRA get involved. Brokers and firms are also regulated by many federal and state laws.
But fraudsters are sneaky. Some act outside the scope of normal business to get around regulations. They fail to report outside business activities and offer unsecured investments to their customers. Some even claim they are registered even when they are not.
Investors can use the following resources to check the credentials of a broker or firm before trusting them with any money.
- FINRA’s BrokerCheck shows complaints and disciplinary actions filed against brokers or firms. They also list when the broker or firm is no longer registered.
- SEC Investment Advisor Public Disclosure IAPD They compile background information on brokers and broker-dealer firms.
- North American Administrators Association This group lists contact information for state regulators and can be helpful for customers when filing a complaint against a broker or firm.
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Investing is inherently risky, shouldn’t I expect losses?
Losses don’t have to be a fact of life for investors. There are several ways irresponsible broker behavior can expose customers to unnecessary risks.
- Recommending unsuitable investments that don’t match your goals and risk tolerance.
- Churning is when a broker makes repeated trades for the sole purpose of generating commissions for themselves. This practice generates little or no income for the investor. It often happens when investors allow their broker to make discretionary trades.
- Over-concentrating happens when a broker puts a large portion of investment funds into only one investment. This is a risky way to invest. It exposes you to unnecessary risks and serious losses if the investment goes bad.
- Selling away is when a broker sells securities that are not offered or overseen by their member broker firm. This often happens when brokers chase the high commissions offered by risky investments.
Investors can protect themselves from risk by ensuring a broker considers your best interests, not just their commission.
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How can I protect myself from future broker misconduct and fraud?
Investing is a complex business and your broker has an obligation to explain your investment options. If you don’t understand what they are talking about, speak up! Ask questions and insist on answers when you don’t understand.
Rarely will an advisor admit to they made a mistake. Closely following your account and statements will alert you to potential issues as soon as they appear. Keep detailed records of all contacts with your broker and their dealings. If you suspect fraud, details like name and contact information, regulatory registration number, and a timeline of events may be the key to your loss recovery.
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Why do so few investors file claims to recover investment loss?
There is a long list of reasons investors may not seek recovery when they have suffered losses.
- They are too embarrassed to admit they misplaced trust in a dishonest financial professional.
- They think the loss is their fault and chalk it up to the inherent risks of investing when an actually a broker is to blame.
- The investment was too complicated. They didn’t understand it to begin with, so they don’t fully understand their losses.
- They haven’t followed their investments closely enough to notice, don’t understand their statement or the losses were concealed by the broker or firm.
- Advisors often discourage investors from filing complaints, telling customers the losses are only temporary.
Don’t let these misconceptions stop you from filing a claim. An investment loss attorney is well equipped to help you research your options and file a claim. It’s okay to ask for help to determine if your loss is recoverable.
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What Tactics do Advisors Use to Discourage Investors from Filing Complaints?
WATCH: What Tactics Do Advisors Use to Discourage Investors from Filing Complaints?
Answer: I think by and large most investors truly trust their advisors, that they’ve built a relationship over the years, and when they start losing money on an investment, they ask their advisor, “What’s going on?” And the typical response is, “Oh, it’s temporary; it’s just the market; the market goes down; the market goes up; it’ll come back; don’t worry.”
So they trust their advisor and they don’t think anything about it, and they hold on. But in reality, the advisor doesn’t have anybody else to turn to to ask that question. Most general, family attorneys or the attorney they generally might go to simply don’t know this area of law, so they can’t counsel the client that arbitration is available to them to recover their losses, and I think that’s why most investors don’t act.
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What Legal Duties do Financial Advisors Owe Their Customers?
WATCH: What Legal Duties Do Financial Advisors Owe Their Customers?
Most financial advisors are covered by the suitability rule, and other investment advisors are covered by the fiduciary duty rule. Under the suitability rule, most financial advisors, which we used to call stockbrokers, have a duty to make recommendations that are reasonably suitable for the investor based upon their age, their tolerance for risk, their time horizon to retirement, their investment objectives (like they need income or they’re looking for growth) and any other factors that might make the investment recommendation suitable for the investor.
Now, that standard is lower than what I call the fiduciary duty. The fiduciary duty of a financial advisor is in common law in many states that says that the financial advisor must act in the best interest of the customer. So, the main difference between the fiduciary duty rule and the suitability rule is that when you’re acting in the best interest of the customer under the fiduciary duty rule, you can’t sell the customer products where you or your firm have a conflict of interest.
But under the suitability rule, as long as the investment is suitable, the firm might have an undisclosed conflict of interest, and that’s simply wrong. I think today, with the fiduciary duty rule being proposed, but being delayed by the Trump Administration, a lot of investors are being harmed because they think that their advisor is mandated to act in their best interest at all times, but until that becomes a permanent rule, many investors simply don’t know there’s a lower standard of care under the suitability rule.
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What are most common types of broker or advisor misconduct that cause losses?
Investment fraud comes in a wide range of different forms. If you have been the victim of fraud or negligence, it is imperative that you seek guidance from an investment fraud attorney who can review the specific circumstances of your individual case.
According to data from the Financial Industry Regulatory Authority (FINRA), some of the most common types of investment fraud are as follows:
- Breach of Fiduciary Duty: Registered investment advisors (RIAs) have fiduciary obligations to their clients. A fiduciary duty requires a professional to act in the best interests of their client. Notably, brokers have no such duty. If your RIA breached their fiduciary duty, you should contact an investment fraud attorney immediately.
- Unsuitable Investment Recommendations: While stockbrokers may not have a fiduciary duty, they are subject to FINRA’s suitability rules. Brokers must ensure that they are recommending investments and investment strategies that are appropriate for the unique needs, circumstances, and objectives of their customer. If you sustained losses due to unsuitable investment advice, you may be entitled to compensation.
- Material Misrepresentations or Omissions: Financial professionals must refrain from making material misrepresentations, including misrepresentations by omission. All information that is material to an investment should be disclosed.
- Failure to Adequately Supervise: Brokerage firms are responsible for the actions or inactions of their individual representatives. A brokerage firm that does not conduct adequate oversight may be held legally liable through a failure to supervise
- Selling Away: Selling away occurs when a financial advisor offers securities that are not approved or overseen by their member firm. This type of misconduct can put investors at considerable risk. If you sustained losses due to a broker selling away, you should speak to an experienced investment fraud attorney.
- Unauthorized Trading: Sadly, in some cases, brokers and financial advisors engage in unauthorized trading. You should not be held financially responsible for losses sustained in trades or transactions that you never approved of in the first place.
- Churning (Excessive Trading): Churning occurs when a broker makes an inappropriate amount of trades on a customer’s account. Excessive trading can result in huge losses for an investor, all while the broker receives illegitimate commissions and fees.
- Lack of Diversification: Your financial advisor should ensure that your investment holdings are appropriate for your individual circumstances. This includes making sure that your eggs are not all in one basket. If you lost money due to a lack of diversification in your portfolio, it is strongly recommended that you consult with a skilled securities fraud attorney.
- Elder Financial Abuse: Elder financial fraud is a growing problem in the United States. This specific type of fraud can occur in many different ways. Sadly, unscrupulous financial advisors, companies, and scammers will often target vulnerable elderly people as part of their fraud schemes.
- Ponzi Schemes: A Ponzi scheme is a complex form of investment fraud where money is simply shuffled around from new investors to the original investors. Innocent people are lured in with false promises, but ultimately every Ponzi scheme comes crashing down.
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What are the Common Types of Securities Products that Result in Significant Losses?
Any type of security or financial product may be used to defraud an investor. Though, there are certainly some factors that make investments more risky. In general, financial products or investment opportunities should be considered especially risky if they are complex, illiquid, opaque, speculative, or offered outside the bounds of a registered brokerage firm.
Still, any type of investment could be used for fraudulent purposes in the wrong hands. The Financial Industry Regulatory Authority (FINRA) reports that some of the most common securities at issue in customer claims include:
- Common stock or mutual funds;
- Exchange traded funds (ETFs);
- Leveraged and inverse ETFs;
- Municipal bonds, such as Puerto Rican bonds;
- Real Estate Investment Trusts (REITs);
- Variable annuities and other structured financial products; and
- Promissory notes and other debt-based products;
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How Can an Investment Fraud Attorney Can Help Me?
If you suffered serious investment losses, you should consult with an investment fraud attorney immediately. The legal options available to you will depend on many different factors.
Your securities fraud attorney must conduct a comprehensive investigation into your individual case. Some of the key issues that your investment fraud lawyer will review include:
- The financial documents and records that you have in your possession;
- Your relationship with your financial advisor or brokerage firm;
- The promises that were made to you and your family; and
- The total losses you sustained due to the possible fraud/negligence.
With full information in hand, your attorney will be able to determine exactly what actions you need to take to make the most effective claim for full and fair financial compensation for your illegitimate investment losses.
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I may have been a victim of investment abuse, what should I do?
WATCH: What Should Investors Do If They Believe They Are a Victim of Investment Abuse?
Investors should seek help from an experienced securities lawyer because, simply stated, they have nobody else to turn to who’s objective. If you go to your financial advisor, they’re going to tell you, “It’s okay, your investment will come back; hold on; markets go up and down; you’re going to be alright in the long-term.”
But what they will not tell you is whether the investment from day one was even suitable for you or not. What an experienced securities attorney will do is look at your investment, look at it in the context of your portfolio, look at in the context of your financial needs and circumstances and tell you whether or not they think it was appropriate for you.
Often after consulting with other experts in the industry, they will tell you that given these facts, given who this investor is, and given these products or this portfolio, whether the investment or the investment portfolio was suitable for the client in the first place. Simply stated, it’s the only place you can get an objective, honest viewpoint.
I think by and large most financial advisors are honest people who want to help their clients, but sometimes they make mistakes, and when they do, it’s very difficult for them to admit to it. That’s why you need an experienced investment lawyer.
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Examples of Recoveries We’ve Secured for Investors
$11.1 Million → Verdict against Smith Barney broker who sold away in violation of FINRA rules
The firm obtained a verdict of over $11.1 million, which included all the principal losses plus ordered the bank to indemnify the claimants for a $10 million state court judgment entered against them, for investors who sustained losses in a failed real estate development recommended by their Smith Barney broker who sold away in violation of FINRA rules and industry rules.
Brokers are prohibited from recommending investments that are not approved by their brokerage firms, an illicit practice called “selling away”. The recovery represents 100% of the investors’ losses. The award is notable in that the arbitrators made Smith Barney liable for the amount the investors owed Wachovia Bank under a $10 million dollar final judgment against the investors who were guarantors of a loan made in connection with the failed development. Click here to view the award.
$4.5 MILLION → Recovery for negligence and negligent supervision
Banco National de Mexico S.A., Institution de Banca Multiple, Fiduciary Division, as Trustee of the Trust Agreement Numbered 15437-5 v. Morgan Stanley & Co., Inc. Case No. 12-01019: The firm represented Banco National de Mexico, S.A. (“Banamex”) as trustee of a trust which is beneficially owned by a Mexican family against Morgan Stanley and recovered $4,500,000. The FINRA arbitration panel made a finding of negligence and negligent supervision. The claim was based on Banamex’s allegation that Morgan Stanley caused a cross pledge to be recorded on its accounts with Bank Morgan Stanley, a Morgan Stanley affiliate, without its authorization.
The cross pledge amounted to a guaranty on loans made by Bank Morgan Stanley to a third party. When the third party’s investments declined significantly in 2008-2009, Bank Morgan Stanley seized approximately $5,200,00 from the Banamex accounts based on an unauthorized cross pledge. The award is significant in that it is a very large FINRA arbitration award and represents the recovery of nearly all of the funds taken from Banamex. The trial lasted eight days and was defended the Greenberg Traurig law firm which represented Morgan Stanley. Click here to view the award.
$1.1 MILLION → Verdict against Morgan Keegan for securities fraud
Cobb vs. Morgan Keegan & Co. (FINRA). The Firm obtained a $1.1 million dollar verdict against Morgan Keegan, in a case alleging securities fraud over the sale of Morgan Keegan closed-end and open-end mutual funds, known as RMK Mult-Sector High Income Fund (RHY), RMK Advantage Income Fund (RMA), RMK Select High Income (MKHIX), RMK High Income Fund (RMH), RMK Strategic Income Fund (RSF). The verdict and subsequent recovered amounted to 80% of the investor’s net losses. Click here to view the award.
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The Investment Loss Attorneys at Sonn Law Group Can Help
At Sonn Law Group, our investment loss lawyers have extensive experience representing clients who have experienced losses related to stockbroker misconduct and investment fraud. Contact us for a free case review. We will determine if you have a reasonable claim and help you decide how to proceed.
DISCLAIMER: This article contains opinions and not statements of fact in any way whatsoever. The information here is general information that should not be taken as legal advice. No attorney-client relationship is established between you and our attorneys by reading this article. This article is attorney advertising and should not be used as a substitute for legal advice from a qualified lawyer.