Many times investors do not realize what has happened to their account. Most victims of securities fraud do not realize that they have been defrauded until after the fact, and even then they may still not understand what happened or how it happened. Confusing account statements and patterns of trading which the customer does not understand, coupled with sudden changes in the value of the account, may be a sign of securities fraud. If the performance of the account is inconsistent with the broker's verbal statements, this may also indicate stockbroker fraud and misrepresentations for which the customer may have legal recourse.
Stockbrokers and brokerage firms owe a duty of care and loyalty to their customers. The broker must use the standard of care and diligence needed to protect the customer's interest. Failure to fulfill that duty may constitute negligence or malpractice by a broker. The duty of loyalty requires that the broker refrain from self-dealing and place the interests of the customer first. A source for tension and potential for conflict of interest may arise given the brokers' typical method of compensation through commissions on sales. This may tempt some brokers to overtrade or churn the account to generate commissions.
A broker also has a duty to follow the instructions of the customer and to execute orders promptly at the best available price. Unless the customer has given the broker written, discretionary authority over the account, the broker may trade only after receiving prior authorization from the customer.
The stockbroker has a duty to disclose all material facts relating to proposed investments and not to make any misrepresentations. In particular, a broker has a duty to disclose the risks of any proposed investment. A broker has a responsibility to learn about the customer's profile and the investments being recommended, and to only recommend securities which are suitable for the particular customer in light of the customer's investment objectives, financial circumstances, level of sophistication, and risk tolerance. A brokerage firm also has a duty to reasonably supervise their brokers in order to enforce compliance with securities laws and to prevent violations.
Read further discussion of the duties of stockbrokers to their customers.
Often investors will not know if they have been defrauded until they consult with a professional. If the customer has been relying upon the expertise of the broker, he or she may not be in a position to independently evaluate what has occurred in the account. However, a qualified attorney, and sometimes a different, new stockbroker may detect the securities fraud upon a review of the account statements. An accountant or tax return preparer may see signs of trouble when reviewing the trading in the account.
Problem signs for an investor to be aware of include:
If you have experienced any of the above, you may be a victim of securities fraud.
If an investor thinks that he may have been defrauded, he should take action to protect himself. First of all, an investor should go over his account statements and all documents from the brokerage firm to review the trading in the account. In the meantime he should halt all trading by the broker in the account until the concern is resolved. A customer may write a letter of complaint to the broker and the broker's supervisor (and make sure to keep a copy of the letter), or request a meeting with the broker and the brokerage firm branch office manager to discuss the problem. But in such a situation the customer should exercise extreme caution as any letter he writes or anything he says in a meeting may later be used against him.
It may be advisable to consult with a qualified attorney and to have the account documents reviewed by a professional in order to determine whether the customer has been a victim of securities fraud. If an investor believes that he has been defrauded by his stockbroker or brokerage firm, he may file a Complaint and Demand for securities arbitration.
There are definite time limitations within which one must file claims for securities fraud. Besides statutes of limitations and eligibility rules which may prevent a legal action, a customer may jeopardize the credibility of his case by waiting too long before taking legal action. The failure of a customer to act quickly upon discovering problems may be used as a defense against him to show that he actually accepted the activity at the time as in accordance with his desires, or that he ratified it after the fact.
There are a number of different methods for calculating damages. In general, if you prevail on the merits of your claims, you may receive an arbitration award of your out-of-pocket losses. The calculation of damages may be computed based upon just the particular wrongful trades or on the overall performance of the portfolio, and it may also include compensation for what the account should have generated in income or growth absent the broker's wrongdoing. In certain instances, arbitration awards may also include reasonable attorney's fees and interest on the losses. In exceptionally outrageous cases, arbitration awards may include punitive damages in excess of the amount which would merely compensate the defrauded investor.
Securities arbitration involves certain costs which will be partially dependent upon the size of the claim. The filing fee, which must be paid to the arbitration forum upon filing the case is determined by a fee schedule based upon the amount of the claim. For example, claims between $100,000 and $500,000 require a $1,425 fee to be paid to the Financial Industry Regulatory Authority arbitration forum upon filing. Additional forum fees will be incurred depending upon how many hearing sessions the case requires.
If you want to retain an expert witness to analyze the trading, prepare a report or to testify on your behalf, the fee will generally depend upon the amount of hours devoted to the case. An attorney may be retained on an hourly basis, and some lawyers may agree to take the case on a contingency fee basis so that you do not incur legal fees except as a percentage of the arbitration award. There are also fee arrangements which combine some retainers with a contingency fee. Additional out-of-pocket expenses may be incurred in connection with the preparation of the case. Arbitrators may assess the expenses of the arbitration as part of their award in the decision of the case.
Arbitration forums have established rules and procedures for the arbitration process. In general, arbitration is less formal, less expensive and quicker than court as a method for the resolution of disputes. Securities arbitration is designed to provide an efficient process for the presentation of claims and a decision or ruling by a disinterested panel of arbitrators. Many participants feel that the arbitration process works reasonably well and provides public investors an opportunity to "have their day in court" without actually going to court. Arbitrators generally appear fair, well-informed and sensitive to the issues and the individuals involved in the case.
Investors may present their claims in arbitration without being represented by an attorney. There is no requirement for legal counsel and some arbitration forums offer simplified arbitration procedures for smaller claims, such as claims of no more than $25,000. However, the broker and brokerage firm will have their attorneys and a customer may find that he is at a distinct disadvantage in presenting complex legal arguments without the benefit of counsel.
Most large brokerage companies have entire teams of attorneys "in house" in their legal departments, and also frequently retain large, outside law firms to represent the brokerage company in arbitrations. These are highly trained and experienced professionals who are paid to zealously take the side of the broker and brokerage firm. They usually know how the system works, they mean business, and when they feel it is appropriate they play hardball. It is generally advisable for a customer who believes that he has been defrauded by a stockbroker to consult with an attorney and to have the benefit of legal counsel in preparing and presenting the claims on his behalf. A qualified attorney for the customer may frequently be able to negotiate a settlement for the customer prior to any arbitration hearing.
Can we hope for more than twice in our lifetime?