Investment Fraud

There are several possible repercussions for financial and investment advisors who are found to have engaged in misconduct toward their customers.

To begin, the type of misconduct committed by advisors can vary widely, ranging from simple negligence (e.g., misunderstanding a trading instruction from a customer) on one end to outright stealing from a customer’s account on the other. Most incidents of misconduct fall somewhere in the middle and involve issues such as misrepresenting or omitting facts in connection with the sale of a security, recommending unsuitable investments, churning, unauthorized trading, or generally failing to act in the best interests of the customer.

Depending on the severity of the misconduct, advisors may be subject to arbitration proceedings brought by their customers, discipline or termination by the firms for which they work, enforcement actions and penalties pursued by the Securities & Exchange Commission (“SEC”) or the Financial Industry Regulatory Authority (“FINRA”), or criminal action brought by state or federal authorities. Sometimes actions taken by the SEC, FINRA, or state/federal authorities result in restitution being paid by an advisor or the advisor’s firm to affected investors, but more often than not, an investor’s most likely chance of a financial recovery of losses caused by an advisor is through the FINRA arbitration process (*most agreements between investors and advisors or brokerage firms contain binding arbitration clauses). According to FINRA, there were 2,260 customer arbitration cases filed in 2017 (compared with 2,515 filed in 2016). The vast majority of these cases settle, but for those that go all the way through to a full trial, the customer is awarded damages in about 40% of the cases.

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There are several signs that an advisor may be committing some sort of wrongdoing toward a customer/investor. Here is a non-exclusive list:

The advisor has recently been the subject of multiple customer complaints and/or regulatory inquiries. FINRA maintains a public database, known as BrokerCheck, that shows a advisor’s complete disciplinary and complaint history. BrokerCheck reports most disciplinary results and customer complaints and is a good way to see if an advisor has been in trouble before. If an advisor has engaged in financial fraud or misconduct with other investors, he may have engaged in misconduct with you as well.

The advisor’s explanations don’t make sense. If investments in a customer’s portfolio have declined in value and your advisor can’t explain why or the explanation does not make sense, you should investigate further.

The advisor sells products that involve higher commissions or fees than what is customary. Certain kinds of investments pay advisors very high compensation, and advisors sometimes recommend such investments to make more money for themselves at their customers’ expense. High commission products are typically investments like non-traded REITs, limited partnership interests, private equity type deals, annuities of various kinds, other products with an insurance feature, oil and gas investments, structured products, and certain mutual or hedge funds.

A given investment declines in value suddenly and unexpectedly. A sudden decline in value is often an indication of fraud of some kind. Often it signals that there have been long term misrepresentations about the investment’s value.

The advisor changes firms multiple times. Often times advisors change to a new firm because they are no longer welcome at their old firm. You may learn that the advisor was “terminated” or “permitted to resign” following allegations of misconduct.

The customer notices a trade or new investment on her statement that she does not recall. You should be immediately on your guard if you see a transaction or an investment on your statement or a sale on your statement that you didn’t discuss with your advisor. Unless the investor has some sort of “managed” or “discretionary” account with the advisor, all purchases and sales should be approved by the customer before they are made.

The advisor asks the customer to sign documents before he has had the chance to review them. An even worse sign is when the advisor fills out documents for the customer or signs the customer’s name for him. Many times advisors want investors to sign documents necessary to sell an investment before the investors have had a chance to understand fully what the investment is, how it works, what the commission is, and what risks may be present.

The advisor tells the customer that the returns on an investment are “guaranteed.” There are very few, if any, investments that provide “risk-free” returns. If your advisor has led you to believe that your returns are fixed or guaranteed in some way, you should be very wary of such investments.

The advisor has made verbal statements that are directly contradicted by written statements that the customer/investor has seen. Some advisors will cause an investor to believe that cautionary language found in documents that accompany an investment are merely “lawyer’s jargon” with which the customer/investor need not be concerned. If your advisor is verbally telling you something different than what the documents state, that is a sign that he or she is not telling you the whole story.

The customer cannot figure out how the advisor is being compensated. Many times the compensation paid to an advisor is very difficult to discern because it may be built into the purchase price or being paid to the advisor by a third party (albeit from your investment proceeds) rather than directly by you. If your advisor tells you that he is not being paid for selling a certain investment to you, you should seek out more information.

The advisor is not regularly communicating with the customer. If your advisor is not returning your phone calls or emails, it may be that he/she is intentionally avoiding having to explain or discuss recent events relating to a problematic investment that he/she sold to you.

The customer’s net worth or income or risk tolerance is overstated on a form sent to her. Certain kinds of investments are appropriate only for investors with high levels of sophistication or income or net worth. Some advisors may claim that they are “helping” you by making you eligible to buy an investment than you would not otherwise have been able to buy. If you see any of this information on a form and it isn’t consistent with your real circumstances or objectives, then there could be a problem and you should investigate.

The advisor is continually buying and selling different investments in the customer’s account within a short period of time without any apparent rhyme or reason. Some advisors violate a client’s trust by buying and selling investments purely for the commissions that he or she will earn. If there are many transactions taking place in your account that you do not fully understand, you should investigate further.

The advisor generates “summaries” of the customer’s investment holdings and returns but the customer either cannot understand them or is unable to independently verify their accuracy. Statements of your investment and investment returns should be easy to read and understand. If yours are confusing or misleading in some way, someone may be trying to disguise inaccurate results.

Finally, if a customer or investor suspects (or discovers) wrongdoing on the part of his or her advisor, there are several steps that should be taken.

Eliminate the advisor’s ability to cause further financial harm. Act quickly to remove or cancel any trading authority previously given to the advisor.

Find a new advisor that you feel that you can trust. Once you do that, you should transfer your current holdings away from the advisor that caused you harm.

Preserve all communications that you may have with your advisor/advisor. If you have emails, letters, memos, etc., retain them. You may later need to establish what was (and what was not) communicated between you and your advisor.

Take a snapshot of your current account holdings. Ensure that you have a record (account statements, trade confirmations, and the like) of what you were sold and when.

Consult with a lawyer. An investment fraud lawyer can help you understand the unique legal issues that may apply to your situation (including any applicable statutes of limitations) and navigate the FINRA arbitration process.

Initiate a FINRA arbitration to recover any investment losses.