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When you hire a brokerage firm or a broker to manage your investments, there are clear and definite laws which govern the way that management is done. The National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) both have Suitability Rules which govern the standards a broker must follow when making decisions for you about your investments. We discuss these rules in the sections below.
If you find that you’re losing money from your investments in puzzling ways or have any suspicion about the integrity of your broker, please contact one of the experienced Florida securities fraud attorneys at Colling Gilbert Wright & Carter by calling 407-712-7300 for a free case evaluation. Our securities arbitration and litigation practice is a nationwide practice.
- Your Broker and Your Information
- What Is Securities Fraud?
- Unauthorized Trading
- Failure to Diversify
- Breach of Fiduciary Duty
- Annuities Fraud
- Mismanagement of Accounts
Your Broker and Your Information
When you begin working with a broker, you would usually give him or her relevant information to help in decision making. This enables your broker to make appropriate decisions that match your situation and preferences. If for some reason you don’t give this information, the Suitability Rules require that the broker try to get it from you before starting on any investment activity.
The information you give to your broker generally includes:
- Your financial status
- Your tax status
- Your investment goals
The NASD Conduct Rule 2310 and the NYSE rule 405 both state that the broker should have “essential” or “reasonable” information about a client before making any investments for them, and that if they don’t have enough information about that client, they should use “reasonable efforts” or “due diligence” to get it.
What Is Securities Fraud?
Securities fraud is an attempt to manipulate the investment market in some illegal way and can be done by private investors, brokers, financial advisors, or corporations.
If you lose money on one of your investments, that doesn’t necessarily imply there was any fraudulent activity on your broker’s part. Nobody can read the future and clairvoyantly see what your best transactions should be at any given time. When we lose on the stock market, it’s usually because of trends and market conditions.
However, there are clear ways that brokers can commit fraud with your investments. Examples of securities fraud include:
- Unauthorized trading
- Failure to diversify
- Breach of fiduciary duty
- Annuities fraud
- Mismanagement of accounts
- Margin trading losses
- Stock market trading losses
If you have reason to think that something illegal was done with your investments, you have the right to file a lawsuit. We will go over some of these examples further in the following sections.
Stockbrokers get paid for trading with their customers’ money. Each account has parameters based on the customer’s income, tax needs, and risk tolerance. When you open an account with a broker you give that information as the basis for trading activity.
Churning is too much trading of securities for that particular account. The more trading the broker does, the more he or she earns, and sometimes it’s tempting for a broker to trade for that reason, rather than in accordance with customer preferences.
When such trades make money, perhaps nobody is upset. The broker is paid and you, as the customer, come out ahead in your investment situation. When these trades lose however, your investment situation worsens, but the broker doesn’t owe you anything in compensation, unless you discover what’s happened and file a lawsuit.
Churning is a Violation
Churning usually happens when you’ve given your broker discretion to trade your account. That means you don’t have to give permission for each trade separately, and if you trust your broker you might give this discretion to avoid having to decide so many things yourself.
If your account is set up so that your broker must obtain your permission for each trade, churning would probably not happen, because you’d be more personally involved in each trading decision.
The National Association of Securities Dealers (NASD) created a rule to cover churning: Rule 2310-2(b)(2) in their Manual. The New York Stock Exchange (NYSE) also has a rule against it: Rule 408(c).
If you claim churning in a court of law, it will be examined in light of your customer information about income, tax needs, and risk tolerance. The court will compare the number of trades and their size with your account’s set-up features and decide whether churning has happened.
If you find that your broker has been trading too much, and if you lose money as a result of that, you have the right to file a lawsuit. At Colling Gilbert Wright & Carter, we have significant experience assessing these situations and determining what would be the best step to take next.
When you hire a broker to handle your investments, you set things up by giving the broker information as to your tax needs and your investment goals. All brokers are required to ask you for this sort of information if you don’t volunteer it, because it forms the basis for their decisions in acting for you.
When you establish this relationship with your broker, you can give him or her written permission to use discretion in trading for you. If you choose not to do this, the broker must get your permission for each separate trade before making it. An experienced stockbroker misconduct attorney can help you file claims if you have experienced unauthorized trading.
Usually, permission is given orally. But there are times when a broker is tempted to make a trade based on his or her own expectation that money will be made from it, and that some of that money will take the form of the broker’s commission. If it does turn out to be a profitable trade, presumably you as the customer won’t object, and the broker will have increased his income.
But if you find that your broker is making such trades without your knowledge or permission, you should immediately complain and ask for it to stop. There’s no guarantee that it will be profitable, and if you should lose money from it, you can hold your broker liable for that. Trading with your money should be done according to your needs, preferences and risk assessment, not your broker’s.
Failure to Diversify
Most of us have probably read books or articles which urge us to diversify in our investments, and this general agreement stems from the market’s performance over the decades. Humanity knew this principle long before our stock exchange was born, and talked of not putting all your eggs in one basket. But what if the basket is dropped?
The market consists of many investment areas. All good brokers advise us to diversify so that when one part of the stock market is paying poorly or even losing money, the others will almost certainly pay better and perhaps very well.
This is essential if you want to follow the advice “Invest for the long-term and don’t panic over each little blip.” You can relax about blips in one part of the market if you have some of your money building in other parts that are progressing steadily. And when it all reverses, you can still be relaxed.
However, your money can be too narrowly invested in several ways:
- Only in one industry (for example, many people were burned by this mistake when the dot-coms collapsed during the 1990s)
- Only in common stocks (and that would include being in mutual funds that invest only in common stocks)
When one area of the market is doing particularly well, it’s tempting to join the rush and transfer your money for a maximum gain. Although many people have theories and developed hundreds of indicators or variables that can supposedly tell you what the future holds, nobody really knows why stock prices change. The company’s earnings are part of it; so are supply and demand, and people’s feelings and attitudes. There’s a mystery at the heart of it all.
So the wise investment strategy is to spread your money out and look ahead. If you’ve instructed your broker to diversify and find one day that your money is all in one small area, you’d have a valid basis for a lawsuit.
Breach of Fiduciary Duty
Fiduciary duty exists where there’s a trust relationship between a customer and a professional. You the customer hire a doctor or stockbroker because of their professional knowledge and training, and you trust them to make good decisions for you.
For their part, the professionals are obligated to be diligent and act in good faith for you, using their superior knowledge and expertise in that particular field. When they violate your trust by taking advantage of you somehow, in a way that you might not immediately recognize, they can be held legally liable for any losses you sustain.
When that professional is a stockbroker, breach of fiduciary duty can arise when the broker has discretionary authority for managing your account. When you set up your account, you give the broker information about your risk preferences, as well as about your tax needs and income situation, and this should be the basis for the broker’s investment decisions for you.
If you give written permission for him or her to make trades for you without necessarily speaking with you each separate time, then that trading should be based on the overall conditions that you give when you open the account. If they’re not, the broker can be held liable for breach of fiduciary duty.
There are many ways a broker can break that fiduciary trust, all of which can cause enormous loss for you as their customer. These include:
- Unauthorized trading
- Securities fraud
- Failure to diversify
Breach of fiduciary duty can be pinpointed to certain circumstances, such as when your broker:
- Gives you investment advice
- Carries out your investment orders
- Exercises discretionary authority in your account
In those situations, you’re relying on your broker’s knowledge, honesty, and professionalism, and paying him or her for those things. When a person is a fiduciary, higher standards are imposed on him than average. If you find your broker has been trading in violation of the basic rules of your account and if you lose money as a result of that, you have the right to file a lawsuit.
Variable annuities are often bought by seniors as part of their retirement packet. The insurance company agrees to make periodic payments for the rest of your life, and a death benefit is included which guarantees a specified amount to your beneficiary.
They’re tax-deferred, but if you withdraw any money ahead of time, there are steep charges. They’re a good money-maker for the insurer, who gets a generous up-front commission as well as annual trailer fees, plus fees charged for the mutual funds that are usually part of the annuity.
Investors don’t always do so well, as the funds aren’t liquid, so there’s a large fee for withdrawing any, and for an elderly person who may have sudden high healthcare costs, this can be a severe blow.
The combination of elderly clients and high commissions and fees for the insurer has made variable annuities a focus of fraud. Morgan Stanley has been facing a large lawsuit in Massachusetts for over-charging for them, after dealing with another such lawsuit only about a year previously, for which they paid a $50 million settlement amount.
If you’ve purchased variable annuities without being told the full story of how they work and what they cost, you may have a valid arbitration claim. Perhaps you’ve been given a promise of guaranteed returns; this would be false, because as their name suggests, variable annuities give returns that vary with the stock market.
At Colling Gilbert Wright & Carter we have a lot of experience representing victims of annuities fraud. We can help you assess your situation and determine what would be the best step to take next.
Mismanagement of Accounts
According to the Caribbean Business News, there have been a number of athletes, entertainers and business leaders who have experienced heavy losses in Puerto Rico bonds and related closed-end bond funds (CEF). UBS issued a disclosure notice to clients recently that stated, “You should understand that an investment in Puerto Rico bonds involves risk and that you may lose part or all of your investment.” UBS operates over a dozen closed-end bond funds which have experienced significant losses due to the downturn in Puerto Rico bonds.
Closed End Bond Funds for High Net Worth Investors
Typically, closed-end funds are sponsored by a fund management company which controls how the fund is invested. Financial advisors, like UBS, solicit money from investors in an initial public or limited offering. The investors are awarded shares in securities or other financial assets which correspond to their initial investment. Some funds invest in stocks, others in bonds – such as Puerto Rican bonds – and others invest in some very specific financial products.
It is known that UBS operated over a dozen closed-end bond funds which were hit by the downturn in Puerto Rico bonds. For example, one closed-end UBS fund, the Tax-Free Puerto Rico Fund Inc. had a net asset value of $5.52 on Sept. 11, 2014 down from $6.73 the week before and $9.55 on January 31, 2014. Over 75% of this fund is invested in Puerto Rico government bonds.
Currently, many securities fraud lawyers, including Colling Gilbert Wright & Carter, are currently investigating the following closed-end bond funds:
- Puerto Rico AAA Portfolio Target Maturity Fund
- Puerto Rico GNMA US Government Target Maturity Fund
- Puerto Rico Fixed Income Fund
- Puerto Rico Fixed Income Fund II
- Puerto Rico Fixed Income Fund III
- Puerto Rico Fixed Income Fund IV
- Puerto Rico Fixed Income Fund V
- Tax-Free Puerto Rico Fund, Inc.
- Tax-Free Puerto Rico Fund II, Inc.
- Tax-Free Puerto Rico Target Maturity Fund, Inc.
- Tax Free Puerto Rico Fund
- Puerto Rico AAA Portfolio Bond Fund
- Puerto Rico AAA Portfolio Bond Fund II
Did UBS Mislead Investors?
In mid-September 2013, as concerns rose about Puerto Rico’s $70 billion debt load and weakening economy, Puerto Rico bonds took a hit in value, a result of US money managers selling off bonds and taking losses.The losses were magnified because many investors owned the bonds through leveraged closed-end funds, which financial experts say magnifies the risks and potential losses.
Many investors also used margin or other loans to invest in Puerto Rico bonds and Puerto Rico focused closed-end funds. Many investors have received margin calls and have been forced to liquidate their Puerto Rico bond or closed-end bond funds. Allegedly, the risk associated with bonds as well as the use of margin was not fully disclosed to fund investors by their investment advisors.
Particularly hard hit were closed-end funds run by UBS Asset Managers in Puerto Rico, the market leader in closed-end funds. The experienced securities fraud attorneys at Colling Gilbert Wright & Carter are investigating closed-end bond funds run by UBS, as well as Santander Securities and Popular Securities.
Contact Our Experienced Lawyers Today
If you have reason to think that something illegal was done with your investments, you have the right to file a lawsuit. At Colling Gilbert Wright & Carter, our Florida securities fraud lawyers are ready to help. For a complimentary review of your case, please call 407-712-7300 or reach out to us through this website.