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Securities Fraud

At Doss Firm, we handle securities fraud cases and help our clients recover their investment losses caused by broker fraud or other misconduct. We understand how it feels to suffer a substantial investment loss in the context of broker misconduct. Investors should know that brokers have legal duties owed to investors. If investors have their rights violated, it provides a basis to recover investment losses from the broker/adviser and his or her firm.

Investors often repose great trust and confidence in their investment adviser or broker. When that trust is broken and accompanied by an investment loss, the impact can be devastating. Investment losses are hard to make up. It takes a return of 100% to recover a loss of 50% (e.g., to recover from $100 to $50, you have to double your $50 – a 100% return). Investment losses often come at the worst possible time – during retirement, when the investor has limited time and income to make up a loss.

Our securities fraud attorneys can help. We are committed to supporting the victims of securities and investment fraud recover any financial loss that is a result of broker misconduct or stockbroker fraud.

Types of Securities and Investment Fraud

  • Securities arbitration is a way to litigate investment loss claims outside of court. Arbitrators will decide the outcome of the case rather than a judge or jury. There are pluses and minuses to arbitration versus court cases.
  • Unsuitable brokerage advice is perhaps the most common claim of aggrieved investors. A broker’s recommendation is required by law to be suitable for the investor based on several factors that influence the kind of investments the investor wants and needs. 
  • Overconcentration of assets is the opposite of diversification of assets in an investment portfolio. Diversification of assets is the most fundamental principle of prudent investing. Hence overconcentration of assets is the most basic of failures. Overconcentration improperly increases the risk in an investment portfolio.
  • Excessive Use of Leverage and Margin also increases the risk in an investment portfolio. Leverage and margin both refer to the use of borrowed money to purchase investments. Investors can lose more than they invested when margin trades go wrong.
  • Mutual fund fraud usually refers to intentional misrepresentation by a broker of material risks of a mutual fund.
  • FINRA Mediation is a way of resolving investors’ claims outside of arbitration. The mediator helps both sides understand the strengths and weaknesses of their case. The mediator may guide the parties to an agreement, but the mediator does not decide the outcome like arbitrators would.  Each party can accept or reject a settlement proposal by the other side. Most FINRA arbitration cases end in a settlement agreement rather than an arbitration decision.
  • Structured CDs are more complex and risky than traditional CDs. The lock-up period can be decades in a structured CD. Traditional CDs have fixed interest rates. The interest owed to the investor in a structured CD depends on the terms of the CD and the performance of another asset (often a derivative) whose market price fluctuates. Hence the structured CD investor may receive more or less interest than an investor in a traditional CD of similar duration, or even no interest at all. 
  • Credit default swaps are at the upper end of the risk pyramid. These derivatives played a role in the 2008-2009 market collapse.

Securities Arbitration

Securities arbitration is a dispute resolution process that occurs by agreement outside of court but has some similarities with court litigation. Investors who have a dispute or claim against their broker or brokerage firm can file an arbitration claim with the Financial Industry Regulatory Authority (“FINRA”). 

FINRA is the securities industry’s self-regulatory organization. Because FINRA is funded by its member firms, which includes every securities brokerage firm in the United States, the industry essentially regulates itself. Every securities broker’s customer account agreement provides that the customer waives the right to sue the broker or firm in court and agrees to arbitrate any dispute with FINRA. 

There are pros and cons to FINRA arbitration versus court litigation. For example, FINRA arbitration is generally faster and less costly than going to court. The time from filing a FINRA arbitration claim to receiving an arbitration decision is typically 1 to 1 ½ year. Court cases, by contrast, may go on for years. 

Unsuitable Brokerage Advice

Unsuitable brokerage advice is a common investor claim – probably the most common claim. Investors usually depend on a broker to provide sound and proper investment advice. Securities law and FINRA rules require that the advice or investment recommendations be suitable for the investor. 

FINRA’s suitability rule requires that the broker must have a reasonable basis to believe that a transaction or strategy is suitable based on the customer’s investment profile. A customer’s investment profile includes:

  • The customer’s age
  • Other investments
  • Financial situation and needs
  • Tax status
  • Investment objectives
  • Investment experience
  • Investment time horizon
  • Liquidity needs
  • Risk tolerance, and 
  • Any additional information the customer may disclose.

FINRA requires the broker to use reasonable diligence to understand the customer’s investment profile before making any investment recommendation.

Violation of the suitability rule is a form of securities fraud. It is grounds for recovery of investment losses resulting from unsuitable recommendation(s). 

What Should I Do if I Suspect Unsuitable Brokerage Advice? 

If you suspect you are the victim of conflicting brokerage advice, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including unsuitability claims. Call us for a free consultation.

Overconcentration of Assets

Overconcentration of assets is the opposite of diversification of assets. Diversification is the spreading out of risk. In a nutshell, the principle of diversification says don’t put all your eggs in one basket. 

In theory, diversification lowers the risk of an investment portfolio. For example, a junk (high-yield) bond is risky because of the risk of default. However, a portfolio of many junk bonds is less risky and may present an acceptable level of risk. Overconcentration of assets increases risk.

Diversification is a bedrock principle of modern portfolio theory (“MPT”). Over 90% of an investment portfolio’s return is attributable to asset allocation. Asset allocation refers to the broad classes of assets:

  • The percentage of equities (e.g., stocks)
  • Fixed income (e.g., bonds)
  • Cash or cash equivalents (e.g., money market funds) 

The asset allocation is the broadest, bird’ s-eye view of a portfolio. As we focus in for a closer view, we look at diversification within each class of assets. For example, investors should own many stocks rather than just one or a few. 

How to Achieve Diversification in Your Portfolio

The easiest way to achieve diversification (i.e., avoid over-concentration) is to purchase a broadly diversified mutual fund, or better still, a group of such funds. Mutual fund companies such as Vanguard and Fidelity make it easy to achieve diversification with a relatively small amount of money. However, not all mutual funds and exchange-traded funds are diversified.

The “suitability rule” says brokerage firms and their stockbrokers) have a duty only to recommend an investment or strategy that is suitable for the investor based on client objectives and risk tolerance. A non-diversified portfolio reflects an unsuitable investment strategy for most investors. Overconcentration of assets is a violation of the suitability rule and provides grounds to recover resulting losses.

What Should I Do if I Lost Money in an Overconcentrated Account? 

If you lost money in an over-concentrated account, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including failure to over-concentration. Call us for a free consultation.

Excessive Use of Leverage and Margin

Leverage and margin are interchangeable terms. Both refer to the use of borrowed money to purchase securities. Leverage or margin can boost returns if the investment performs well. The potential for increased returns, however, comes at the expense of increased risk. If the investment crashes, the investor could lose his entire investment plus have to repay the margin loan. That is more risk than most investors can or should take on. 

What Should I Do if I Suspect Excessive Use of Leverage and Margin? 

If you have suffered losses in a leveraged or margined account, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including excessive use of margin and leverage. Call us for a free consultation.

Mutual Fund Fraud

Many postings focus on undisclosed fees (e.g., 12b-1 fees, breakpoints). Undisclosed fees, while they are a legitimate item of damage that can be recovered in an arbitration, are not, in most cases, enough by themselves to justify the filing of a securities arbitration claim. 

In our experience, mutual fund fraud is about misrepresenting or omitting to disclose material risks about the fund’s investment composition and performance to potential investors. The misrepresentations may be made in person or in online advertisements and sales brochures. Contrary to some postings on the subject, most in-person, most “free lunch” seminars promote non-traded REITs and other illiquid investments, not mutual funds.

There are several mutual fund fraud cases that are familiar to attorneys who practice in this area. One case involved a proprietary mutual fund of a large, well-known brokerage firm. 

That fund was falsely held out to the public as an ultra-short-term bond fund and as safe as a money market fund. The fund’s portfolio of bonds was not ultra-short-term in duration as advertised, and the fund was far riskier than a money market fund. Many investors lost more than 50% of their investment. That does not happen with a true ultra-short-term bond fund, much less a money market fund.

Another well-known example of mutual fund fraud involved a high-flying, proprietary fund of another well-known brokerage firm with a “rock star” manager. The fund was falsely marketed as an intermediate-term bond fund. Genuine intermediate bond funds are relatively low risk, low return funds. 

After exciting, soaring initial returns that turned out to be “too-good-to-be-true,” but were used to market the fund, this “intermediate-term bond fund” lost about half its value. Many investors lost a significant amount of money in that and other funds managed by the same person.

What Should I Do if I Suspect Mutual Fund Fraud? 

If you suspect that you are a victim of fraud involving a mutual fund, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including mutual fund fraud. Call us for a free consultation.

What Happens in FINRA Mediation?

As the name suggests, mediation involves a mediator whose job is to get the parties to be realistic about the weaknesses (not just the strengths) of their case. That is easier said than done because we are all emotional beings who do not always make perfectly rational decisions. 

 The better mediators do more than facilitate – i.e., more than merely shuttle offers and counter-offers between the parties. They are evaluative – that is, they give the parties the benefit of their informed opinion. 

 FINRA mediation has a high success rate. Most FINRA arbitration cases settle before arbitration. The main benefit of this is that the parties control the outcome themselves – not three strangers sitting as arbitrators. 

 With the help of a mediator and their attorney, both sides can weigh the costs and risks of going forward to an arbitration hearing. Then, both parties can decide whether the other side’s “best and final” settlement offer is enough to settle the matter.

How Do Structured CDs Work?

Structured CDs are unsuitable for most investors. They are entirely different from traditional CDs. Traditional CDs have a fixed interest rate and offer terms as short as a few months. A structured CD has a variable interest rate and often has a term of 20 years. 

The interest rate depends on the performance of linked security (usually an option). Because of that linkage, a structured CD may pay more, less or no interest at all compared to a traditional CD of similar term.

While structured CDs may be marketed as safe CDs, they are not safe. Investors have lost half of their principal investment on structured CDs that have discontinued making an interest payment. Structured CDs are often marketed as being FDIC insured, but that claim is uncertain at best. The FDIC has said that its insurance does not cover market-linked or contingent interest payments.

We are currently representing investors who were sold structured CDs linked to a type of derivative called interest-rate swaps, more specifically, Constant Maturity Swaps. To understand how these structured CDs work, and whether they are good deals or bad deals, one needs a detailed understanding of, and the ability to conduct, market research and complicated quantitative analyses of various interest rate swap transactions, spreads, yield curves, et cetera

Most investors – and most sellers of structured CDs – have no such understanding or ability. It follows that most sellers do not understand the product well enough to adequately explain the risks to potential investors. 

What Should I Do if I was Sold Structured CDs? 

 If you were sold a structured CD, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including structured CDs. Call us for a free consultation.

What Is Credit Default Swap?

A credit default swap (“CDS”) is a form of options contract trading. A CDS contract provides the purchaser with protection against a default by the issuer of a bond held by the purchaser. It is thus said to be a form of insurance. The protection or insurance provided by CDS contracts is similar to commodities options contracts used by producers to lock in a price for a specified period. However, CDS contracts, like other options contracts, can be used for speculation as well as hedging.   

Purchasers of CDS contracts are typically institutional rather than individual investors. They are relevant to this discussion only to the extent that unbridled speculation in CDS contracts could become a factor leading to a market collapse like the one in 2008-2009.  

Why Choose Us as Your Securities Fraud Lawyer?

The attorneys at The Doss Firm have substantial experience representing investors, and we work hard to provide value for our clients. Under the leadership of Jason Doss, past-President and a current Board of Directors member of Public Investors Arbitration Bar Association (PIABA), The Doss Firm has represented more than 1,400 investment fraud victims across America and recovered over $2 billion on behalf of aggrieved investors. 

If you have suffered an investment loss or have a question about your investments, call us today at (855) 534-4581 for a free, confidential consultation.

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