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Your broker and his/her firm have certain obligations and requirements when investing your money. If these obligations have been breached and as a result of this breach, the value of your portfolio has decreased, you may have a cause of action against your broker and/or investment firm. Most causes of action have a six year eligibility period. Barry can help you resolve your brokerage lawsuit in New York or New Jersey.

You’ve worked hard for your money. Regardless if it is to be used for your retirement or your child’s college education, if your investments have been improperly invested, you may have the cause of action to seek redress against the broker and his/her firm. If you believe you have been wronged by your broker, please call us at our New Jersey or New York office or email us at barry@bordetskylaw.com to get started with a free consultation.

Common causes of legal action relating to investments include:

Unauthorized Trading

Unauthorized trading occurs when a broker trades your account without seeking your express authorization prior to the transaction.

Unsuitable Trading

One very important element of your broker’s recommendations is the information set forth on your new account form. A broker is responsible for recommending only those securities which fit your investment objective, age, investment background and financial security. When your broker recommends a particular security measure for an investor, the broker must take into consideration several factors prior to making the recommendation. Not every investment is suitable for every investor. Certain points must be reviewed when making a recommendation for an investment, such as: Does the investor want long term positions? Can the investor financially withstand a loss in the position and whether the investment fits the objectives of the investor? If the recommended investment is outside of the investor’s originally stated objectives, the broker and/or the broker’s firm should forward certain documents to the investor to sign acknowledging the investor wants the specific investments or had the financial wherewithal to handle a loss from the trading that is outside of the scope of the investor’s original objectives.

There are many variables in a suitability claim. To prove a cause of action for unsuitability, “a [claimant] must prove (1) that the securities purchased were unsuited to the buyer’s needs; (2) that the [respondent] knew or reasonably believed the securities were unsuited to the buyer’s needs; (3) that the [respondent] recommended or purchased the unsuitable securities for the buyer anyway; (4) that with scienter, the [respondent] made material misrepresentations (or owing a duty to the buyer failed to disclose material information) relating to the suitability of the securities; and (5) that the buyer justifiably relied to its detriment on the defendant’s fraudulent conduct.” 1 As the requirements are conjunctive, a party must prove all five factors.

Lawyers going over work

Suitability is analytically a subset of a fraud claim. 2 It is the claimant’s burden to prove the required elements to establish that respondents acted to defraud, manipulate or knowingly deceive the investor.3 In general, a suitability claim will fail where an investor relies solely upon a general statement that he relied upon an investor broker or investment firm for direction, without identifying precisely what kind of misrepresentation or omission the respondents engaged in with respect to any particular investment. Id.

The suitability of an investment recommendation is determined at the point of the purchase of the security at issue, based on the circumstances existing at the time, and not upon the subsequent performance of the securities. FINRA Rule 2310. As the Second Circuit noted “any investment that turns out badly can appear to be – – in hindsight – – a low return, high risk investment.” Courts ruling on these issue have held that even the most exhaustively researched positions are fallible and, as with every case, the courts will look at all circumstances surrounding the trading including whether the investor was told of the risks and then tries to play on naïveté. 4

The underlying facts relating to a case will determine whether the investments and a strategy were appropriate or suitable.

The Law Offices of Barry M. Bordetsky Bordetsky represents investors, brokers and broker-dealers in suitability matters. If you have questions regards to cases, please call us.

Sources:

1 Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993).
2 Brown, 991 F.2d at 1031.
3 Podgoretz v. Evans & Co, Inc., 1997 WL 138989 *9 (E.D.N.Y. Mar. 25, 1997).
4 Okley v. Hyeprion 1999 Term Trust, Inc., 98 F.3d 2, 8 (2d Cir. 1996). Indeed “[i]t is the very nature of securities markets that even the most exhaustively researched predictions are fallible.” Id.; Bowman v. Hartig, 334 F.Supp. 1323, 1328 (S.D.N.Y. 1971)(“That plaintiffs were told they would make ‘substantial profits without extraordinary speculative risk’ is the common complaint of any loser against his investment advisor. The law does not give premiums for naïveté.”).

Churning

Churning is defined as a level of trading in an account controlled by a stockbroker that is excessive “in light of the nature of the account and the objectives of the customer.” Churning occurs when a broker, exercising control over the frequency and volume of trading in the customer’s account, initiates transactions that are excessive in view of the character of the account.1

Churning takes place when your account is excessively traded for the purpose of generating commissions for the broker. Brokers and their employing firms generate fees from different avenues. With respect to investors, firms primarily charge investors one of two ways: with a set fee based upon the amount of assets in the account or a commission generated by each trade in the account.

A claimant cannot merely second-guess his broker’s strategy after losses occur by claiming that the trading was excessive. The trading at issue must have had no reasonable connection to the objective of the customer.2

There are certain instances where a high level of trading will not fall under the definition of churning. For example, accounts that trade aggressively and on margin, a high level of activity does not constitute evidence of churning, but rather is both normal and expected.3

Two people signing a document

The claimant’s behavior during the period of allegedly excessive trading must be reviewed to determine whether the claimant was aware of the trading activity and, if so, whether the claimant took reasonable action to stop or alter the active trading strategy. In one court case involving this issue, the court granted summary judgment against an investor who, over a two-year period, failed to take corrective action to stop alleged churning.

In short, the [investors] … churning claims are based on the “heads I win, tails you lose” proposition that the [investors] may recover for the losses sustained in their accounts despite their knowing acquiescence in the management of the accounts. The proposition is without merit.4

The “who, what, where, and when” of a trading history is critical in determining whether a churning case exists, as a churning claim is fact intensive and each case is different.

The Law Offices of Barry M. Bordetsky represents investors, brokers and broker-dealers in churning matters. If you have questions regards to cases, please call us.

Sources

1 In re Thomson McKinnon Securities Inc., 191 B.R. 976, 983 (S.D.N.Y. 1996); Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 464 F. Supp. 528, 534 (D. Md. 1978); Vogel v. A.G. Edwards & Sons, Inc., 801 S.W. 2d 746, 750 (Mo. Ct. App. 1990) (calling “the investment objectives of plaintiffs” “the essential guideline” for determining whether excessive trading has occurred).
2 Follansbee v. Davis, Skaggs & Co., 682 F.2d 673, 676 (9th Cir. 1982) (“[T]he excessive trading element of a churning case is not established unless the frequency of the trades was unrelated to the customer’s objectives.”) (emphasis added).
3 Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 373-74 (1st Cir. 1973), citing Note, Churning By Securities Dealers, 80 Harv. L. Rev. 869, 875 (1967) (noting that more activity is expected in an account where customer is interested in short-term, speculative profits than in an account where customer seeks conservation of principal and receipt of dividends).
4 Altschul v. Paine, Webber, Jackson & Curtis, Inc., 518 F. Supp. 591 (S.D.N.Y. 1981)

Fraud or Misrepresentation

This occurs when your broker intentionally misleads you, or fails to inform you of important information relating to the investments in your account. This fraud or misrepresentation precludes you from making an informed decision regarding your investment.

Failure to Supervise

A brokerage firm is required to supervise its brokers to insure that the registered representatives are acting in accordance with governing rules and internal compliance requirements, as well as state and federal laws. When there is a breakdown in the supervisory process, often times the acts of the broker are not caught and the broker is permitted by the firm to continue his or her improper activity in your account.

Case Examples

The Law Offices of Barry M. Bordetsky has successfully resolved several scenarios when it comes to investor laws, including:

  • Secured award of $1,200,000 in compensatory damages and $600,000 in punitive damages against brokerage firm, broker and principal that was supervising the broker.
  • Secured award in favor of elderly investor who sustained losses after she was told by broker to take money from home equity and invest it into the stock market.
  • Successfully mediated many arbitration cases before filing of claim as well as prior to hearing to secure high percentage of dollar losses for customers who lost millions of dollars by virtue of acts and/or omissions of their broker and the broker’s employer.

Learn More

To learn more about the rights, responsibilities, and rules for investors and their clients, click on the links below to view valuable resources, including complete acts text and much more.