Broker Fraud Attorney Dallas

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					                                                                                                                            By Christopher Claassen, JD

Securities fraud is negligence, misrepresentation, or omission in connection with the purchase
or sale of a security by an investment professional.

                    s professionals who are privy to your clients’ financial and                                         Whereas everyone invests with the goal to
                    investment information, you are in a position to assist them                                      increase worth, a losing investment does not
                                                                                                                      necessarily equate to a cause of action against
                    in determining whether or not they are the victims of securities                                  the broker for securities fraud, nor do gains on
                    fraud as opposed to just bad luck or bad timing. A common                                         investments necessarily equate to the lack of a
misconception among the general public and members of the brokerage                                                   cause of action against the broker. A good bro-
                                                                                                                      ker—one who does not run afoul of the rules
community alike is that good brokers are those who make money for their                                               and regulations—is one who makes suitable
clients and bad brokers are those whose recommendations are not profitable.                                           recommendations based upon the client’s
                                                                                                                      needs, objectives, and risk tolerance, and not
                                                                                                                      on the broker’s desire to be a hero. The greater
About the Authors:
                                                                                                                      the potential returns, the greater the risks, and
Chris Claassen, JD is an associate in the Dallas office of the law firm Burg Simpson Eldredge Hersh & Jardine, P.C.   unless the client has stated a need, a tolerance,
Mr. Claassen’s practice is focused on representing investors in securities arbitration claims at the NASD and NYSE.
Mr. Claassen has participated in recovering millions of dollars for his clients. He graduated from the SMU Dedman     an understanding, and an acceptance of those
School of Law in 2004.                                                                                                risks, the broker would be well advised to

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             Overconcentration or failure to diversify is the investment
               equivalent of putting all of one’s eggs in one basket.

eschew the temptation of being a hero by “hit-        ments for information needed to prepare the           2. Contains investments that are limited
ting a home run” in favor of investments that         client’s taxes, the presence of the following         to one particular industry (such as telecom-
are compatible with the client’s profile.             may indicate further review for securities            munications) or industry sector (such as
   The securities industry is a highly regulated      fraud is warranted.                                   technology or finance).
industry. Brokers and financial advisers are
required to abide by the rules and regulations        Significant Realized or Unrealized Losses           Source of Income
promulgated by the governmental and self-                Profitability of an investment or of a portfo-      As investors age, it is generally accepted
regulatory organizations (SROs) that regulate         lio of investments is not the standard for          that they should receive a greater portion
and safeguard the securities industry, such as        measuring the appropriateness of the invest-        of their investment income as dividends or
the Securities and Exchange Commission                ment or portfolio, but significant and/or           interest income rather than by attempting
(SEC), the National Association of Securities         consistent losses in the portfolio may alert the    to gain income from capital appreciation.
Dealers (NASD), and the New York Stock                EA to the possibility that a closer review of       If a retiree appears to be receiving most of
Exchange (NYSE).                                      the client’s investments may be in order. The       his or her investment “income” from the sales
   Among the numerous rules and regula-               investments must have been not only suitable        of securities rather than dividends or interest,
tions, two stand out as guiding principles by         for the client’s investment objectives and          further investigation into whether this is
which all business is to be conducted: deal           financial condition, but must also be in line       an appropriate strategy for that person is
fairly and know your customer. The former is          with the client’s tolerance for risk. An EA can     probably warranted.
somewhat amorphous, a general precept that            ask a client about his or her realized and
governs all actions. The latter is designed           unrealized losses and discuss whether the           Churning
specifically to crystallize the proper relation-      investments in the portfolio seem consistent           Significant numbers of trades in an
ship between the broker and the broker’s              with the client’s needs.                            account relative to the value of the account
client. It has come to mean, through years of                                                             may alert the EA to the existence of churning
testing and refinement, that the broker has a         Significant Concentration of the Account(s)         in a client’s account. One way a broker may
duty and an obligation to make recommenda-               An elementary concept learnt by brokers          be compensated is on the volume of transac-
tions that are “suitable” for a customer based        and financial advisers is that of diversifica-      tions conducted for a customer. Therefore,
upon the customer’s investment objectives,            tion—diversification across asset classes           when a broker effects trades for a customer
investment experience, risk tolerance, and any        (i.e. bonds/debt and stocks/equity, cash            that are excessive in light of the customer’s
other factors pertinent in determining a suit-        and cash equivalents) and across industries         objectives, the broker is churning the account
able recommendation.                                  within those asset classes. When an invest-         in an attempt to inappropriately profit
   The most common way brokers and finan-             ment portfolio or account is overconcentrated       from the client. Churning is frequently also
cial advisers incur liability is by failing to make   in a particular security, type of security,         referred to as excessive trading. In addition
recommendations for clients that are “suitable”       or industry sector, the risk of loss in that        to large numbers of trades in an account,
for that client. A broker and a brokerage firm        account is increased, and the broker should         another red flag suggesting the possibility
have a duty to recommend only suitable                carefully explain that increased risk to the        of churning is a large number of relatively
investments for a customer. A suitable recom-         client and recommend actions to correct             small short-term gains or losses. This pattern
mendation is one that takes into consideration        the problem. Overconcentration or failure           might suggest that a broker is executing
the investor’s individual situation, including        to diversify is the investment equivalent           trades for his benefit rather than for the
the investor’s financial needs and tolerance for      of putting all of one’s eggs in one basket.         benefit of the client.
risk. By contrast, a recommendation that is           Overconcentration in an account containing
unsuitable is one that fails to be appropriate        only one individual investment is easy to           Unauthorized Trading
for an individual investor given his or her spe-      recognize. A cursory look at the first page           Once in a while a client may be truly
cific situation and tolerance for risk.               of most year-end statements will reveal how         puzzled by trading in his or her brokerage
                                                      the account is allocated. An account may            account. This sort of bewilderment may lead
How an EA Can Identify Securities                     be overconcentrated if it:                          to a determination that the broker was in
Fraud—Red Flags, Tell-Tale Signs                         1. Contains only common stocks (includ-          control of the client’s account rather than
  Along with the documents clients often                 ing mutual funds that invest in common           the client’s having control. If this appears to
bring their tax professional, clients often              stocks) rather than a mix of common              be the case, asking the client questions about
include their year-end statements for their              stocks, preferred stocks, and debt instru-       whether he or she ever signed any document
brokerage accounts. In reviewing these state-            ments (bonds); or                                giving the broker authority to effect a

May • June 2006                                                                                                                                       25
                Many clients recognize they have suffered losses,
           but either unnecessarily blame themselves for not knowing
                  better or don’t know they may have recourse.

transaction without first discussing it with      How can a securities fraud                             to helping your client is to recognize the signs
the client would alert the EA to the possible     attorney help?                                         typically associated with securities fraud and
existence of unauthorized trading in the             Many clients recognize they have suffered           then referring the client to an attorney with the
account. Discretionary authority allowing         losses, but either unnecessarily blame them-           experience to further evaluate the case and
the broker to trade the account without first     selves for not knowing better or don’t know            determine the best course of action. It is also
discussing a transaction with the client must     they may have recourse. An attorney experi-            important to point out that there are statutes of
always be in writing.                             enced in the evaluation and prosecution of             limitation associated with securities fraud
                                                  securities claims can evaluate an account to           claims, so time is of the essence in making any
Inappropriate Use of Margin –                     determine if losses are the result of a bad mar-       determinations.
Significant Amounts of Margin Interest            ket or the result of securities fraud. If the losses      To find an attorney to advise you if
  Although margin can be a tool for some          are the result of securities fraud, an attorney        this situation should arise with one of
investors, trading securities on margin brings    experienced in this area can file a claim against      your clients, go to the Public Investors
the potential for higher losses—even the possi-   the brokerage firm and/or broker and seek to           Arbitration Bar Association (PIABA)
bility of losing the entire account and still     recover those losses. A securities fraud attorney      website at or call 1-888-
owing the brokerage firm money. If a client is    knows the process. Such an attorney would              621-7484. PIABA is a national bar
using margin, as indicated by a charge for mar-   also have experience dealing with brokerage            association whose member attorneys are
gin interest, the broker should have explained    firms and their attorneys and will not be con-         dedicated to the representation of investors
the risks involved with using margin.             fused or intimidated by their tactics. The key         in disputes with the securities industry. EA

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