Practice Areas 2017-07-12T19:25:33+00:00

Practice Areas

Practice Areas

Investment Unsuitability

Investment recommendations made by a broker must be suitable for an individual investor (“customer”) at the time of the transaction. Customers have a right to expect the broker and bank to conduct a complete evaluation of the customer’s profile information when determining suitability.

Brokers owe a duty to familiarize themselves sufficiently with the customer’s risk tolerance and financial needs. They must be aware of a customer’s financial sophistication, relevant circumstances such as the customer’s number of dependants, debts, assets, sources of income, liquidity needs, and any other information needed to assess capacity for risk. The accuracy of the information collected by the broker while assembling the customer’s financial profile is of paramount importance to determining suitability. Brokers should never encourage customers to inflate assets or understate debts.

The truth is that brokers benefit financially from some transactions more than others. Certain products allow the broker and bank to make more in commissions, fees, or both. Usually the risk to a customer is greater if the suitability decision is influenced by false information. Some products are limited to those customers who have the investment experience necessary to make an informed risk-aware consent. If the customer can be made to appear to qualify for certain investment products based on faulty information, however, the broker or bank may later be able to protect themselves by using that same faulty information as a defense.

Transactions must be approved by the bank’s compliance department for each specific customer in order to satisfy supervision requirements that exist to protect customers from unscrupulous brokers. If trouble arises based on incomplete or inaccurate information stated in the investment agreement documentation, the bank and broker will usually defend by alleging that the customer misrepresented information on the application.

While customers should strive to ensure their financial needs are reflected accurately in the documentation collected by a broker, in our experience customers face significant pressure to sign intake forms that have incomplete or inaccurate information. Many are encouraged to gloss over “the fine print,” leading them unwittingly to misrepresent information that is just not true. For example, important disclosures required by law may not have been provided at the time of the transaction, if at all, even though the documents the customer has signed will represent otherwise. Similarly, a broker’s oral assurances made to induce a customer to proceed with a transaction invariably will not be reflected in the signed documentation. Such bait-and-switch tactics harm customers twice:  first at the time of the transaction, by steering them into unsuitable investment products; and again later, after the customer brings a claim, due to the documentation-based defenses the bank and broker assuredly will attempt to raise to avoid liability.

The core transgression in a fraud claim typically centers on the adequacy of disclosures needed to allow the client to make an informed investment decision. A broker and bank’s financial interests inherently conflict with their duty to consider a customer’s true financial interests. The broker has an incentive to earn commissions and fees, and otherwise reap any other available benefits from handling the customer’s funds in certain ways. Brokers may therefore attempt to push customers into non-ideal products in order to serve their own financial interests. Banks have an incentive to maximize profits as well, and will rationally seek to minimize risk of future liability by securing “ironclad” proof in the form of a customer’s signed intake documentation. The conflict of interest posed by traditional compensation models incentivizes brokers and banks to steer customers into unsuitable investments, in some instances by exploiting the vehicle of false documentation.

Examples of fraud in the mechanics of an investment transaction include situations where the broker falsifies financial information by pushing the customer to sign incomplete forms only to add false information prior to submitting those forms to compliance, or whenever a broker pushes for or forges customer signatures concerning any required disclosures that were not actually provided. Brokers may recklessly or intentionally misstate or omit facts that the bank’s compliance department needs to assess the suitability of a broker-recommended product. Such misrepresentations relate directly to the customer’s financial profile and risk tolerance, as those factors are essential to the bank’s compliance review processes.

Whenever there is any misrepresentation of the financial needs of a customer or the adequacy of required disclosures the broker has plainly violated the duty owed to his or her customer. The problem that arises is that it is difficult to prove fraud. The focused and dogged attention of experienced counsel is essential to any prospects of success. Triple damages may be available in particularly egregious cases. The remedy of enhanced damages exists to incentivize claimants and their counsel to undertake the level of effort needed to prove fraud claims and punish any wrongdoers in the chain of command.

A customer’s consent to engage in a financial transaction should always be based on accurate and complete information. As a customer, you deserve and have a legal right to expect honest, professional, and faithful execution of each transaction. You deserve a broker you can trust not to forge your signature or falsify records after-the-fact. You deserve the opportunity to make informed consent as to any financial transactions you undertake through a broker or bank, which includes receiving relevant disclosures about product risks in a timely fashion. Customers who have been the victims of investment fraud – possibly even an ongoing fraudulent scheme – are at tremendous risk. The best approach is to speak with experienced counsel promptly to assess any potential claims.

Investment Fraud

Churning

Churning claims arise when a broker engages in a series of needless trading transactions merely to generate commissions and fees. In such cases, the broker has violated multiple duties owed to the customer.

Churning benefits the broker as a result of the compensation brackets and milestones put in place by the bank. An unnecessarily high number of transactions leads to fees that are tremendously damaging to the customer’s overall financial portfolio. Worse still, churning often occurs in inadequately diversified portfolios due to broker expedience. It becomes harder to detect in larger portfolios. The broker focuses attention on earning commissions from buying and selling activity involving a limited subset of securities, not on diversification. The practice thus can expose customers to wild fluctuations in portfolio value and lead to a total loss of upside for the customer even in a rising market.

Customers who suspect they are currently victims of churning need experienced counsel to identify suspect transactions, end churning activities, and obtain compensation for costs, investment losses, and other damages, as appropriate.

Sometimes the broker and bank will be unable to work together in a joint defense after a customer files a complaint. Individual brokers, local bank managers, central compliance managers, and other bank personnel each may play a role in the dynamic leading to the customer’s claim. In some cases, a broker may be made into a scapegoat by the bank. Often such scapegoating arises midway through the case, forcing the broker to scramble to find separate counsel to combat the bank’s allegations.

There may be valid but unknown reasons why a broker and bank will begin to point fingers at one another. The bank has an incentive to limit any remedies a customer may obtain from it. By arguing that in the exercise of its reasonable due diligence it could not have detected or prevented the fraud, the customer may be left with little recourse other than to chase the individual broker for any damages. Some brokers with a history of transgressions may have little to no assets for a customer to recover.

Particularly in a true scapegoating scenario, brokers will have specific internal knowledge and information about bank practices that may be useful to their defense. Such information gives the broker the power to affect the strength of a customer’s claims and rebut scapegoating at the same time. Whenever there is a clear conflict or divergence between the bank’s and broker’s respective interests in a matter, brokers should consult with their own counsel as early as possible, and remain open to coordinating with the customer’s counsel as may be appropriate.

Broker Representation

Compliance

With an up-to-date understanding of the ever-changing compliance and regulatory landscape, The Investment Advocates can help hedge fund managers, brokerage houses, individual brokers, and investment advisors reduce their operating risk while avoiding harm to consumers. We advise on best practices, safe harbors, and pitfalls for the unwary. An effective compliance consultation can help mitigate against potential liability that may otherwise arise in a variety of contexts such as communications with the public, proprietary services promotion concerns, and other common regulatory and compliance concerns.

By confidently navigating uncertainty and working cooperatively with regulators when needed, it is possible to resolve many risks before they can damage your bottom line. The Investment Advocates’ compliance consulting services are ideally suited for any investment professionals who desires to serve their customers faithfully and with the utmost professionalism. An up-front investment in your business model will build long term good will, avoid litigation and regulatory risk, and help you sleep better at night.

Investment Unsuitability

Investment recommendations made by a broker must be suitable for an individual investor (“customer”) at the time of the transaction. Customers have a right to expect the broker and bank to conduct a complete evaluation of the customer’s profile information when determining suitability.

Brokers owe a duty to familiarize themselves sufficiently with the customer’s risk tolerance and financial needs. They must be aware of a customer’s financial sophistication, relevant circumstances such as the customer’s number of dependants, debts, assets, sources of income, liquidity needs, and any other information needed to assess capacity for risk. The accuracy of the information collected by the broker while assembling the customer’s financial profile is of paramount importance to determining suitability. Brokers should never encourage customers to inflate assets or understate debts.

The truth is that brokers benefit financially from some transactions more than others. Certain products allow the broker and bank to make more in commissions, fees, or both. Usually the risk to a customer is greater if the suitability decision is influenced by false information. Some products are limited to those customers who have the investment experience necessary to make an informed risk-aware consent. If the customer can be made to appear to qualify for certain investment products based on faulty information, however, the broker or bank may later be able to protect themselves by using that same faulty information as a defense.

Transactions must be approved by the bank’s compliance department for each specific customer in order to satisfy supervision requirements that exist to protect customers from unscrupulous brokers. If trouble arises based on incomplete or inaccurate information stated in the investment agreement documentation, the bank and broker will usually defend by alleging that the customer misrepresented information on the application.

While customers should strive to ensure their financial needs are reflected accurately in the documentation collected by a broker, in our experience customers face significant pressure to sign intake forms that have incomplete or inaccurate information. Many are encouraged to gloss over “the fine print,” leading them unwittingly to misrepresent information that is just not true. For example, important disclosures required by law may not have been provided at the time of the transaction, if at all, even though the documents the customer has signed will represent otherwise. Similarly, a broker’s oral assurances made to induce a customer to proceed with a transaction invariably will not be reflected in the signed documentation. Such bait-and-switch tactics harm customers twice:  first at the time of the transaction, by steering them into unsuitable investment products; and again later, after the customer brings a claim, due to the documentation-based defenses the bank and broker assuredly will attempt to raise to avoid liability.

Investment Fraud

The core transgression in a fraud claim typically centers on the adequacy of disclosures needed to allow the client to make an informed investment decision. A broker and bank’s financial interests inherently conflict with their duty to consider a customer’s true financial interests. The broker has an incentive to earn commissions and fees, and otherwise reap any other available benefits from handling the customer’s funds in certain ways. Brokers may therefore attempt to push customers into non-ideal products in order to serve their own financial interests. Banks have an incentive to maximize profits as well, and will rationally seek to minimize risk of future liability by securing “ironclad” proof in the form of a customer’s signed intake documentation. The conflict of interest posed by traditional compensation models incentivizes brokers and banks to steer customers into unsuitable investments, in some instances by exploiting the vehicle of false documentation.

Examples of fraud in the mechanics of an investment transaction include situations where the broker falsifies financial information by pushing the customer to sign incomplete forms only to add false information prior to submitting those forms to compliance, or whenever a broker pushes for or forges customer signatures concerning any required disclosures that were not actually provided. Brokers may recklessly or intentionally misstate or omit facts that the bank’s compliance department needs to assess the suitability of a broker-recommended product. Such misrepresentations relate directly to the customer’s financial profile and risk tolerance, as those factors are essential to the bank’s compliance review processes.

Whenever there is any misrepresentation of the financial needs of a customer or the adequacy of required disclosures the broker has plainly violated the duty owed to his or her customer. The problem that arises is that it is difficult to prove fraud. The focused and dogged attention of experienced counsel is essential to any prospects of success. Triple damages may be available in particularly egregious cases. The remedy of enhanced damages exists to incentivize claimants and their counsel to undertake the level of effort needed to prove fraud claims and punish any wrongdoers in the chain of command.

A customer’s consent to engage in a financial transaction should always be based on accurate and complete information. As a customer, you deserve and have a legal right to expect honest, professional, and faithful execution of each transaction. You deserve a broker you can trust not to forge your signature or falsify records after-the-fact. You deserve the opportunity to make informed consent as to any financial transactions you undertake through a broker or bank, which includes receiving relevant disclosures about product risks in a timely fashion. Customers who have been the victims of investment fraud – possibly even an ongoing fraudulent scheme – are at tremendous risk. The best approach is to speak with experienced counsel promptly to assess any potential claims.

Churning

Churning claims arise when a broker engages in a series of needless trading transactions merely to generate commissions and fees. In such cases, the broker has violated multiple duties owed to the customer.

Churning benefits the broker as a result of the compensation brackets and milestones put in place by the bank. An unnecessarily high number of transactions leads to fees that are tremendously damaging to the customer’s overall financial portfolio. Worse still, churning often occurs in inadequately diversified portfolios due to broker expedience. It becomes harder to detect in larger portfolios. The broker focuses attention on earning commissions from buying and selling activity involving a limited subset of securities, not on diversification. The practice thus can expose customers to wild fluctuations in portfolio value and lead to a total loss of upside for the customer even in a rising market.

Customers who suspect they are currently victims of churning need experienced counsel to identify suspect transactions, end churning activities, and obtain compensation for costs, investment losses, and other damages, as appropriate.

Broker Representation

Sometimes the broker and bank will be unable to work together in a joint defense after a customer files a complaint. Individual brokers, local bank managers, central compliance managers, and other bank personnel each may play a role in the dynamic leading to the customer’s claim. In some cases, a broker may be made into a scapegoat by the bank. Often such scapegoating arises midway through the case, forcing the broker to scramble to find separate counsel to combat the bank’s allegations.

There may be valid but unknown reasons why a broker and bank will begin to point fingers at one another. The bank has an incentive to limit any remedies a customer may obtain from it. By arguing that in the exercise of its reasonable due diligence it could not have detected or prevented the fraud, the customer may be left with little recourse other than to chase the individual broker for any damages. Some brokers with a history of transgressions may have little to no assets for a customer to recover.

Particularly in a true scapegoating scenario, brokers will have specific internal knowledge and information about bank practices that may be useful to their defense. Such information gives the broker the power to affect the strength of a customer’s claims and rebut scapegoating at the same time. Whenever there is a clear conflict or divergence between the bank’s and broker’s respective interests in a matter, brokers should consult with their own counsel as early as possible, and remain open to coordinating with the customer’s counsel as may be appropriate.

Compliance

With an up-to-date understanding of the ever-changing compliance and regulatory landscape, The Investment Advocates can help hedge fund managers, brokerage houses, individual brokers, and investment advisors reduce their operating risk while avoiding harm to consumers. We advise on best practices, safe harbors, and pitfalls for the unwary. An effective compliance consultation can help mitigate against potential liability that may otherwise arise in a variety of contexts such as communications with the public, proprietary services promotion concerns, and other common regulatory and compliance concerns.

By confidently navigating uncertainty and working cooperatively with regulators when needed, it is possible to resolve many risks before they can damage your bottom line. The Investment Advocates’ compliance consulting services are ideally suited for any investment professionals who desires to serve their customers faithfully and with the utmost professionalism. An up-front investment in your business model will build long term good will, avoid litigation and regulatory risk, and help you sleep better at night.