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Investment Fraud--Frequently Asked Questions

Posted by attorney Steven Gard

Mr. Gard has been an active member of the Public Investors Arbitration Bar Association (PIABA) since 1991. PIABA is a national organization of attorneys who represent investors in securities arbitration, litigation and mediation whose goal is to protect investors’ rights and to provide knowledgeable representation to investors who wish to pursue claims for the recovery of investment losses. Mr. Gard has for many years helped to plan PIABA’s annual meetings and has delivered papers at those meetings on several occasions. Since 2006, Mr. Gard’s law practice has been based in Jacksonville, Florida. Prior to that, Mr. Gard’s practice was based in Atlanta, Georgia. Frequently Asked Questions About Recovering Brokerage Account Losses

  • If my investment account has lost money, does that mean that my broker has acted improperly?

Not necessarily. Sometimes investment losses are unavoidable, however brokers and their employers are usually quick to blame “the market" for their own failures and improper conduct. The limited partnership debacle of the early 1990’s and the tainted research produced by major investment firms in the late 1990’s are two recent examples. Sometimes improper conduct has occurred in accounts that have actually increased in value—decreasing the amount of the gains that an investor otherwise would have realized.

  • What sort of conduct or behavior by a broker is considered “improper"?

There isn’t enough room on this page for all of the potential and real abuses that investors can suffer and have suffered at the hands of their brokers. While most brokers are ethical and have their clients’ best interest at heart, it’s the few who don’t who cause most of the problem. Some common examples of improper conduct include churning, recommending unsuitable investments, unnecessarily replacing mutual funds, annuities and insurance policies, recommending too much or the wrong type of life insurance, and selling variable annuities to accounts or investors for whom they are not suitable.

  • Can the government or regulatory authorities help me?

Just like there can’t be a policeman on every street corner, the regulators have limited budgets and limited staff to head off abuses. More importantly, the regulators can’t act on your behalf or represent your interests in court or arbitration against brokers who have acted improperly. Filing a complaint with the SEC, FINRA or your state securities commissioner may result in an investigation of the broker, but it won’t help you to recover your losses.

  • If I feel that my broker has acted improperly, what can I do?

If your claim is for less than $25,000, you can file a small arbitration claim with the Financial Industry Regulatory Authority (FINRA) by filling out a form and paying a filing fee. Information about small arbitration claims and about customer arbitrations in general is available on the FINRA website at www.finra.org. If your claim is for a larger amount, you should consider hiring an attorney who is experienced and knowledgeable about securities arbitration proceedings against brokers and their firms. Information about such attorneys and referrals are available from the Public Investors Arbitration Bar Association at www.piaba.org.

  • How does your firm handle these cases?

I have been representing investors in private practice since 1980. My investor clients have included individuals, pension plans, schools, churches, corporations and trusts. Many investors feel embarrassed or foolish when they have lost money through a financial advisor’s improper conduct. The first thing is to assure them that they shouldn’t feel foolish. Investments are complicated and most people are not sophisticated in that area, trust their brokers to act in their best interest, and are simply too busy with their jobs and families to watch out for someone who might be taking advantage of their trust. Because most of my clients have lost a large portion of their savings, I try to offer fee arrangements that are flexible and not burdensome ranging from full contingency fees to hourly fees to hybrid arrangements that include both an hourly and a contingent component. I screen my cases carefully and do not charge for case evaluation unless some unique investment instrument or unique legal issue is involved. Since most brokerage firms have mandatory arbitration provisions in their new account agreements, most claims are brought in arbitration before FINRA rather than in court. Cases typically are resolved within twelve to fourteen months of filing, and the majority of cases are settled before the arbitration hearing through mediation or direct negotiations.

  • What types of “damages" are available to investors who bring a claim?

We of course begin by seeking the recovery of investment losses, but we don’t stop there. In cases where excessive commissions have been charged, we seek to recover those as well. Often improper conduct reduces the overall return on an investment portfolio. In such cases we seek the difference between the portfolio’s actual return and what the portfolio should have returned absent the improper conduct. Where unsuitable insurance products or annuities have been recommended, we often seek reimbursement of surrender charges so that the client can get out of the unsuitable policy or annuity. Finally, punitive damages and/or attorneys fees may be recovered by investors under certain legal theories and statutes.

  • How can I determine if my investment account has been mishandled?

First and foremost, open and read your monthly account statements as soon as you receive them. You’d be surprised at how many people simply file them away without opening them or reading them. Next look at the transactions section of the statement. Brokers are not supposed to buy or sell anything without your prior knowledge and approval unless you have given them a written authorization or limited power of attorney. If you see purchases or sales on your statement that you didn’t first discuss with your broker and specifically authorize, the transactions can be reversed, but you have to promptly complain to the branch office manager (not just to the broker) in writing if you want to preserve your rights.

  • Next ask yourself if there are any investments that you don’t understand.
  • Brokers sell many more investments these days besides simply stocks and bonds. Some of these investments may be “proprietary products" designed and marketed by the brokerage firms themselves. These products can take many forms, including partnerships, mutual funds, hedge funds, structured investments, and limited liability companies (LLC’s). Brokerage firms design and sell these products in part because they can earn additional fees from them through management agreements or similar arrangements, and the firms motivate brokers to sell them by paying higher commissions on these investments than traditional stocks and bonds. Simply put, don’t buy anything that you don’t understand including understanding all of the risks involved if the investment doesn’t work as intended

  • Then ask yourself if there are any investments that are not readily marketable or that impose a penalty if you have to sell them.

  • Many “proprietary products" cannot be sold or transferred to another brokerage firm, and other investments such as variable annuities impose “surrender charges" if they are sold. Because these investments are designed to be held for the long-term, often for ten years or longer, they may not be suitable for investors who might need access to their money or who don’t have other readily available assets. Brokerage firms pay their brokers higher commissions to sell these types of investments, and brokers often recommend them to investors who aren’t suitable for them simply to receive more commission.

  • How can I find a broker that I can trust?

If your broker recommends that you invest all of your money in one investment, tells you that “I’m recommending this investment to all of my clients", tells you that an investment is safe or “can’t lose", or buys an investment without first discussing it with you and getting permission to buy it, you should ask the brokerage firm to assign your account to a different broker or move your account to a different firm. If your friends or associates recommend a broker to you, make sure that the recommendation is based upon how well the broker explains investments and risks to his clients rather than on how profitable the broker’s recommendations have been in the past. Remember that it’s your money, and nobody is going to look out for your interests better than you. Although brokerage firms are supposed to supervise their brokers, they are usually most concerned with how much revenue the broker produces for the firm. Also, if a dispute ever develops between you and your broker, don’t expect your broker to tell the truth and don’t expect his firm to believe your word over his. The best way to protect yourself if there is a problem is to complain promptly and in writing to the broker’s manager. If that doesn’t result in a resolution to the problem, consult with a lawyer who is experienced and knowledgeable in this area.

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