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Securities Fraud and Other Investment Losses/fraudulent sales practices: Some of the more common securities liability issues include: the placement of unauthorized transactions, the recommendation of unsuitable transactions, over-concentration of certain positions in an account, churning, annuity switching, failure to execute trades, excessive or unsuitable use of margin, selling away, theft from an account, negligent retirement advice, misrepresentations or omissions regarding investments, recommendation of variable annuities, forged documents, options fraud, unsuitable welfare benefit plans, abuse of a vulnerable adult, whistleblower, or negligent investment strategy.

Unauthorized transactions:

Unauthorized trading occurs when a trading account is non-discretionary (that is the broker is not provided with authority to execute trades on his/her own) and the broker places a trade without the customer’s authority.

Unsuitable investments:

Brokers are required to conduct a “Suitability Review” to determine if a specific investment or investment strategy is appropriate for a given customer. The NASD has specific conduct rules where a broker recommends to a customer the purchase, sale or exchange of any security. The broker/dealer and the registered representative shall have reasonable grounds for believing that the recommendation is suitable for each customer on the basis of the facts, if any, disclosed by the customer as to his other security holdings and as to his financial situation and needs. Prior to the execution of any transaction the broker/dealer and the registered representative involved shall make reasonable efforts to obtain information concerning (a) the customer’s financial status, (b) the customer’s tax status, (c) investment objectives and (d) such other information used or considered to be reasonable in making recommendations to the customer.

Duty to Know Your Customer:

The basic rule of broker-customer relationships is “know your customer”. Brokers are required to obtain a detailed knowledge of a customer’s assets, income, investment objectives and risk tolerance to be in compliance with the NASD/FINRA and other regulations. The surest indication of a failure to follow these rules in customer relationships is a pattern of sales or other transactions obviously designed to reward the Registered Representative rather than meet the customer’s needs.

Over Concentration:

Over concentration occurs when a stockbroker invests a large portion of a customer’s portfolio into a single investment or sector of the market or asset class. A stockbroker who fails to sufficiently diversify a client’s investment portfolio substantially increases the risk of potential investment losses.

Churning:

A claim for churning arises when a broker excessively trades securities in an investment account in order to generate commissions. Churning is a violation of industry standards and constitutes fraud.

Annuity Switching:

A form of churning, which involves switching a client from one annuity to another in order to earn an additional commission.

Failure to Execute:

A broker can be liable for a failure to execute if he/she fails to place a trade ordered by the customer. Sometimes this is referred to as a dropped ticket where the broker negligently fails to execute a trade.

Selling Away:

Private securities transactions (otherwise known as “selling away”) are outside business activities involving securities transactions and are governed by NASD Conduct Rules. Broker/dealers have very strict rules on the sale of securities that are not reported to the company and representatives are precluded from engaging in any private securities transactions without prior written permission from the company.

Excessive or Unsuitable Use of Margin:

Exposing an investor to substantial risk through a margin account (a brokerage account with a line of credit that makes substantial profit for the brokerage firm).

Theft from Account:

Theft occurs when a stockbroker takes money form a client’s personal accounts for the broker’s personal use without the knowledge of the client. Theft in an account may include transactions in discretionary accounts in excess of that approved by a client, unauthorized transactions or unauthorized borrowing or use of a client’s assets.

Negligent Retirement Advice:

In certain circumstances, stockbrokers or financial planners can be held liable for providing negligent advice on when to retire.

Misrepresentations or Omissions:

Securities brokers have a duty to ensure that the information they convey to their clients is accurate and complete. Otherwise, the broker can be held liable for a material misrepresentation or omission of material fact regarding an investment or investment strategy.

Variable Annuities:

Variable annuities are frequently unsuitable investments for certain individuals. Often the annuity contracts or promotions do not explicitly describe the high surrender charges, excessive commissions, and high cost of offering the variable annuity benefits such as tax deferral and death benefits. Investors are oftentimes misled with the promise of guaranteed returns when returns from variable annuities are not actually guaranteed and the return depends on market reactions or volatility of the stock market.

Forged Documents:

Sometimes brokers forge signatures on investment related forms such as new account forms and options account agreement. The attorneys at Mathews Wallace LLP are always on the lookout for forged documents.

Options Fraud:

Options are complicated and extremely risky investments only suitable for individuals who understand the enormous risk of options and can afford to lose a significant part of their investment.

Bogus Welfare Benefit Plans (419 Plans):

The IRS has sought penalties against individuals and companies of up to $200,000 per year for participating in bogus welfare benefit plans. Many companies attempted to obtain favorable tax treatment by creating plans that were set up pursuant to IRS Code section 419 (Section 419A(f)6 and Section 419(e)). Ultimately, the IRS has determined that abusive welfare benefit plans are “listed transactions” which require the participant in the plan to fill out a special IRS form, Form 8886, disclosing participation in a listed transaction. While not every plan is illegal, the IRS requires that you disclose your investment in the plan. If you fail to disclose your participation in a plan the penalties can be significant and even more for companies. If you or your company received a notice from the IRS about penalties and interest regarding your participation in a 419 Plan contact us to discuss your options. Such plans were sold as 419(e), 419A(f)(6) and 419 plans.