Bad Broker or Bad Luck?                                                                                                     July 2011

By Lance Wallach

You’ve lost money in the market—maybe a substantial amount. Money you thought could be used to plan your future or maybe put your kids through school is now gone. You’re hurt, you’re angry, and we understand. Can you sue your broker, fund manager, or financial advisor? It depends.

The Big Question: Were You a Victim of Fraud or the Market? The big question is whether your broker did anything illegal. You can only sue if what your broker did was beyond just “bad” in the sense of “unfortunate” or even “awful.” Instead, there must have been actual wrongdoing.

Losing money in today’s bad market does not in and of itself give you the right to sue. Sometimes it is just bad luck. After all, investing — even in blue chip investments – carries risks, and the main risk is that the value of your investment could decline. What if your broker gave you bad advice? Again, it will depend on “how bad” the advice was. If your broker recommended investments that were in line with your investor profile and those recommendations were reasonable based on everything your broker knew or should have known, then no – you cannot sue. Well, what kind of bad behavior does leave them liable, you ask? Basically, there are four kinds of bad behavior that may give you the right to sue:

1. Lying or misrepresenting claims;
2. Your broker acting in his interests, not yours, by means of, among others, misrepresentation, churning, unsuitability, and lack of diversification;
3. Not following instructions including claims of unsuitability, lack of diversification, and breach of contract; and,
4. Unreasonable carelessness, like claims of breach of duty and negligence.

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There are a number of different claims that can come out of these types of bad behavior, but fundamentally, if your broker didn’t do one or more of these things, there is no claim. To put it another way: if your broker followed your instructions, was always honest with you, and was reasonably careful, then you cannot sue him – even if his advice or your investments went horribly wrong.

So before suing or filing the paperwork for arbitration, take a deep breath and ask yourself if your broker lied, ignored instructions, or was unreasonably careless by putting his own needs and interests instead of yours. If you find yourself answering no to more than a few of these questions, then, sadly, your broker probably acted with the best intentions, and based on what he reasonably knew at the time, there is no liability.

You will notice that we did not answer the question, “What if my broker stole or embezzled money from my account?” That is because the answer is simple – sue them and report them to law enforcement. Theft is theft, whether it’s by your broker, a guy on a street corner with a gun, or that cousin you never really trusted. For example, two common criminal schemes involving investments and securities are the Ponzi scheme and the pyrimad scheme, though these tend to be complex and hidden. Sometimes theft is simpler. But the short answer is that theft is always actionable. For help with this or if you are still not sure, contact our offices today. As an expert witness, my side has never lost a case. I work with attorneys who will usually take these cases on a contingent basis, and who, more importantly, often obtain great results.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, or visit

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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