The securities market can lead to exponential growth for investors, but it can also cause significant harm. Securities lawyers focus on navigating the various rules and regulations promulgated by two regulators, SEC and FINRA. Kurta Law represents clients through the FINRA arbitration process to help recover money lost due to broker fraud or misconduct. If your broker misled you or pressured you to invest in risky securities, the stock fraud attorneys at Kurta Law can help.
To protect investors from financial losses caused by fraud, the securities industry is highly regulated. The Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (FINRA) are two of the most important regulatory bodies in the U.S. financial system. The SEC has broad authority to oversee the entire securities industry. FINRA focuses its oversight on the financial services industry, which comprises brokerage firms that sell securities to the investing public.
Unfortunately, fraud and financial misconduct result in billions of dollars in investor losses every year. These losses, while often preventable, threaten the financial security of thousands of investors and cause untold emotional distress. Securities lawyers can help investors regain their lost funds by representing their interests and guiding them through the often complex process of securities arbitration.
In FINRA arbitration, securities attorneys file claims on behalf of their clients. FINRA then administers the dispute and appoints arbitrators to oversee and ultimately decide the case if it does not settle. Hiring a securities attorney to represent your interests through the FIRNA arbitration process may be crucial for your claim. Securities attorneys specialize in these types of disputes and can use their experience and expertise to recover full and fair compensation for your losses.
Do I Need a Securities Attorney?
You may need to hire a securities attorney if you lose money on an alternative or high-risk investment–especially if you told your stockbroker that you wanted conservative investments. Risky investments can come with a high commission for your broker, who may be tempted to recommend an investment that does not fit your needs and financial goals.
Certain investment products are more likely to become the subject of investor fraud cases. These products include:
- Alternative Investments
- Mutual Funds
- Exchange-Traded Funds
- Direct Participation Programs
- Business Development Companies
- Variable Annuities
- Penny Stocks
Not all of these are necessarily risky investments. The amount of risk depends on the issuers and the specific investment contract, all of which your brokers should: 1. Thoroughly understand, and 2. Accurately communicate to you.
FINRA Suitability Standard
Stockbrokers are obligated to understand you as a customer as well as the securities they recommend. FINRA defines this obligation with the Suitability Rule, a.k.a. FINRA Rule 2111. FINRA defines suitable investments as investments that match the investor’s:
- Risk tolerance
- Liquidity needs (i.e., whether you might need quick access to your funds)
- Financial goals
- Investing experience
What is a Security?
Securities are investment contracts. The SEC defines a security as an investment of money in a common enterprise that has the expectation of profits and is based solely on the efforts of others. These criteria are also called “The Howey Test.” Securities must be registered with the SEC (or properly exempted from registration) before brokers can recommend them to investors.
Securities Fraud Definition
Two acts define securities fraud: The Securities Act of 1933 and The Securities Exchange Act of 1934.
The Securities Act of 1933 is sometimes called the “Truth in Securities Law.” It requires that investors have relevant financial information about securities. It also prohibits manipulation and deception in their sale.
The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), the first regulator to oversee brokerage firms.
More recently, FINRA replaced the National Association of Securities Dealers (NASD). FINRA oversees the sales of securities by brokers and brokerage firms.
Signs of Stockbroker Fraud
How can you know if your broker has engaged in fraud? Investors should always be on the lookout for the potential signs of stockbroker misconduct.
Big returns come with big risks: Brokers might persuade investors by highlighting the possibility of high returns without emphasizing the equally considerable risk for losses. If you told your broker that you wanted conservative, low-risk investments, you should not lose significant amounts of money. This is especially true of investors who rely on their investment portfolio for income.
Guarantees: Brokers should never guarantee a certain return on your investment. You should always be suspicious when a broker guarantees a high return.
High-Pressure Sales Tactics: Beware of strict deadlines that might make you feel rushed to buy an investment.
Unexpected Losses: Get in touch with a securities lawyer if you lost far more than the amount your broker represented you might lose.
Surprise Fees: Brokerage firms have an obligation to clearly state their compensation and fees. If you do not understand a fee or believe your broker may have abused their commissions, speak with a securities attorney.
Examples of Stockbroker Fraud
It’s easier to spot potential fraud if you know what to look for. These are some of the most common securities fraud examples:
Unsuitable Investments: These could be alternative investments that come with high risk, or something illiquid like a REIT or a variable annuity that makes it too difficult for you to cash out.
Selling Away: Did your investor solicit you for an investment that their firm does not offer? This is called “selling away” and is against FINRA rules.
Failure to Supervise: Financial firms can also be on the hook for their broker’s mistakes. FINRA requires that firms create supervisory systems reasonably designed to protect their investors from fraud. “Failure to supervise” is a common cause for investor disputes.
Churning: Review your account for signs of churning, also known as excessive trading. Brokers may execute an excessive number of trades to generate more commissions for themselves.
Unauthorized Trading: Brokers should never execute trades without your authorization unless your portfolio is approved for discretionary trading.
Over-concentration: If your broker has a financial motive for recommending a stock, they might fail to diversify and instead over-concentrate your portfolio on high-risk investments.
Omission or Misrepresentation: Your broker should be honest with you when they describe an investment. If your broker left out important information about a security, or misrepresented it entirely, contact a securities attorney.
Ponzi Schemes: Investors should never lose money in an outright fraud. In a Ponzi scheme, the new investor’s money is used to pay off previous investors rather than being properly used to generate an investment return.
Negligence: Brokers owe it to their investors to research and fully understand a product before recommending it to their clients.
Bottom line: These are just some of the types of securities fraud cases Kurta Law litigates. If there is a transaction or a charge on your account statement that you do not understand, reach out to a securities lawyer. You should also contact a securities attorney if you believe your stockbroker recommended exceedingly risky investments.
If you decide you need a securities attorney, FINRA arbitration is the likely next step.
How Do Securities Lawyers Recover Losses?
When dissatisfied parties want to recover money, they usually sue in civil court. Investors, however, usually sign a pre-dispute arbitration agreement. This means the investor agrees to settle any disputes with their broker and investment firm through a FINRA arbitration panel. Arbitrators are supposed to be neutral parties and do not work for FINRA.
What Can a Securities Lawyer Do for Me?
FINRA cannot provide you with any legal advice. Securities industry rules and regulations can be dense, and cases can be quite complex. Fraudulent brokers thrive when investors do not fully understand their products and the regulatory rules that govern their sales. Securities attorneys offer a huge advantage for investors who feel their firm may have exploited their inexperience with the securities industry. One study also showed that securities lawyers helped correct arbitration panels’ bias for brokers and brokerage firms.
According to FINRA arbitration statistics, disputes settle in 16 months on average. Arbitration also costs less than filing a civil case.
FINRA Arbitration Process
The FINRA Arbitration process is straightforward but can still involve complex legal issues that you might not feel comfortable presenting on your own. Security lawyers can make sure you’re on top of your FINRA arbitration claim and can more effectively argue your case.
FINRA arbitration cases comprise the following steps:
1. Claim Submitted
Investors submit their claim through a FINRA portal.
2. Claim Served on Brokerage Firm
The firm receives notification of the investors’ claim.
3. Answer Submitted
Firms respond with any relevant defense.
4. Arbitrator Selection
Both brokers and investors have a say in the selection of an arbitrator panel. Securities lawyers can offer significant insight during the arbitrator selection process.
5. Prehearing Conferences
Parties schedule prehearing dates over the phone or videoconferences.
During the discovery process, your securities attorney exchanges documents with the firm to prepare for the hearing.
This is an optional settlement process. Parties select a mediator who will evaluate both sides of the dispute. Mediation can result in an even quicker resolution than arbitration. Ask your securities fraud lawyer if this makes sense for your case.
8. FINRA Arbitration Hearings
Hearings take place in person, at a designated FINRA hearing location, or over Zoom. Your securities attorney will present the facts of your case.
9. Arbitration Award
After the hearing, the FINRA arbitration panel will determine the amount of the investor award.
Can I Afford a Securities Lawyer?
Yes. Securities lawyers typically work on contingency, which means they only make money if you win. At Kurta Law, skilled securities fraud attorneys will not take on your case unless they think they can recover your losses. If your investments lose money because of a reason other than broker misconduct, a securities fraud lawyer will likely determine that you do not have a winnable case.
Investors should not lose money because of their broker’s greed or simply due to the firm’s lack of supervision. You do not have to endure the stress of losing money due to broker misconduct. Securities lawyers at Kurta Law have the necessary experience to ensure you recover your money as quickly as possible.