Broker Investigations (2024)

GWG Renewable Secured Debentures UBS Puerto Rico Fund Losses (Various)

Detroit General Obligation Bond Losses (Various)

Unit Investment Trusts

Thompson National High Yield Notes

Suitability

Selling Away

Over-Concentration

Unauthorized or Excessive Margin

Margin is when you use your own securities in your account as collateral to borrow money from your brokerage firm typically to purchase more securities. For instance, this has the effect of magnifying any profit or loss made on the securities. In addition, the securities serve as collateral for the loan. The net value, (the difference between the value of the securities and the loan), is initially equal to the amount of one’s own cash used. Also, this difference has to stay above a minimum margin requirement. To clarify, this is to protect the broker against a fall in the value of the securities to the point that they can no longer cover the loan. As a result, this creates a lending relationship with your brokerage firm.

Similar to a bank, when you borrow money, you are charged an interest rate. If the securities in your margin account decline in value sufficiently, your brokerage firm will require you to immediately deposit more collateral to secure the loan due to the decrease in the value of their collateral–the securities in the account. To clarify, this is called a margin call. When you receive a margin call, you will either have to deposit additional money into the account or additional securities. If the investor does not have additional securities or money to deposit, the firm will sell enough securities to cover the margin call and meet the required equity maintenance levels.

Furthermore, when the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. For instance, the investor either has to increase the margin that they have deposited, or they can close out their position. They can do this by selling the securities, options, or futures if they are long and by buying them back if they are short. However, if they don’t do any of this, the broker can sell his securities to meet the margin call.

The above-mentioned scenario puts the investor at risk to lose more than the amount invested if the value of the security depreciates. In addition, the margin interest being charged only adds to the financial damage done to the investors. Lastly, this usually results in the investor owing money to the brokerage firm even after all of his positions have been liquidated.

The landmark case of Piper, Jaffray & Hopwood, Inc. v. Ladin, 399 F. Supp. 292; 1975 U.S. Dist. LEXIS 16441 (S.D. Iowa August 26, 1975), holds that “The imposition of a duty to investigate the financial capability of an investor entering a margin transaction and to inform that investor of the implications of a margin purchase can also be justified as part of a stockbroker’s professional responsibility.” If you have been put on margin without your permission, were not fully warned of the risks of investing on margin, or do not feel that it was suitable for someone of your age, experience, risk tolerance or net worth to be placed on margin you may have legal rights against your broker and the brokerage firm.

Did your broker or financial advisor excessively buy and sell securities in your account? Generally, churning is the practice of executing trades in order to generate commission for the broker or financial advisor. For churning to occur, your broker or financial advisor must exercise control over the investment decisions in your account. Churning can be a violation of SEC Rule 15c1-7 and other securities laws, worthy of broker investigations.

The Financial Industry Regulatory Authority (FINRA) has rules prohibiting churning and excessive trading. Excessive trading is the same as churning, but without the requirement that the person engaging in the trading does so for the purpose of generating commissions. Churning and excessive trading can violate FINRA Rule 2310, and FINRA Rule 2310-2(b)(2).

It is also against state securities laws and federal securities laws to churn an account. If you are a victim of churning you may have legal rights against your broker and the brokerage firm. Contact us if you're interested in broker investigations due to churning.

Did you lose money due to a stock broker or financial advisor churning your account?

Broker-client disputes typically involve allegations that a brokerage firm and its registered representative churned or excessively traded a client’s portfolio in order to generate income for the broker and the firm and/or that the client was sold investments that were not suitable given the client’s investment objectives. At the root of churning cases is the question, “Was there a reasonable probability that the securities trading would be sufficiently profitable to cover its cost?”

Economists and securities industry professionals are often called as expert witnesses to assist arbitration panels in determining whether an account has been churned and, if so, what damages have been suffered by the client. Simple ratios and rules of thumb have long served as traditional economic analyses of liability and damages issues in churning cases. However, advances in computer technology and in our understanding of financial economics now allow for more thorough analyses.

The two common indicators of alleged excessive trading in churning cases: are 1) turnover ratios and 2) cost-to-equity ratios. Turnover ratios measure how often, on average, the securities in a client’s portfolio are traded in a year. Cost-to-equity ratios measure the annual cost of the trading as a percentage of the client’s investments.

There are three common measures of damages in churning and suitability cases: 1) out-of-pocket loss, 2) benchmark portfolio or well-managed account, damages, and 3) trading costs. Out-of-pocket loss is the change in a client’s equity less any net deposits made during the period. Out-of-pocket loss is an inappropriate measure of damages because it ignores the opportunity cost of invested funds. Also, general market movements that are unrelated to the alleged fraud significantly affect the out-of-pocket measure.

The benchmark portfolio measure of damages corrects the deficiencies in the out-of-pocket loss measure. The benchmark portfolio measure of damages is the difference between what the client’s equity would have been had the portfolio been appropriately managed and the client’s actual equity at the end of the disputed period. The benchmark portfolio measure of damages is most widely used in cases where the primary allegation is that unsuitable securities were purchased for the client.

Trading costs (commissions, bid-ask spreads, mark-ups and markdowns, margin interest, and fees incurred by the client) are a widely used measure of damages in churning cases. Although not generally understood, the simple trading cost measure suffers the same flaws as the out-of-pocket loss because, like out-of-pocket losses, it ignores the opportunity cost of invested funds. Fortunately, the adjustment necessary to correct the simple trading cost measure is straightforward and closely related to the benchmark portfolio measure of damages.

False Statements & Omissions

Your broker or financial advisor cannot make false statements or omissions. If your broker or financial adviser only talked about the “upside” and how much money you are going to make, without talking about the potential risk to your money, this may constitute a material misrepresentation or omission by your broker. Your broker has a duty to disclose to you known or readily available information such as the earnings and financial health of each company's stock.

False statements often include promises about future performance, price predictions, any guarantees, and special knowledge about the performance of a particular security. Omissions are the failure to disclose known or discoverable risks about an investment. If you are a victim of false statements or material omissions you may have legal rights against your broker and the brokerage firm. Contact us for broker investigations over false statements.

Mutual Fund Fraud

Unregistered Broker or Securities

Anyone who sells securities must also be registered under the Financial Industry Regulatory and the Securities Exchange Commission broker/dealer registration rules or find an exemption from registration. This is true for anyone who gives financial advice as to the purchase and sale of securities. Investment advisers must also be registered or find an exemption. When an investor purchases a security and the registration provisions have not complied with the investor may have a right to rescind the transaction and/or hold the unregistered party liable for damages. Federal securities laws and state “blue sky” laws require brokers, brokerage firms, and the securities sold to be either registered or exempt from registration. If your broker or financial advisor is not registered or sold you unregistered securities you may have legal rights against the broker and brokerage firm. Contact us for help with broker investigation.

http://smartcheck.cftc.gov/ Smart Check is an easy-access free tool to check the background of a financial professional and do your own quick broker investigations. Smartcheck.gov shows pending actions and more.