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Can You Recover Your Investment Loss: Securities Law

Everyday consumers frequently hire financial professionals to manage their investments. Based on their experience and qualifications, you expect your broker or investment advisor to effectively monitor your account, making trades when necessary. After all, that is the reason you hired them. 

However, you may be surprised to hear that financial advisor negligence and misconduct contribute to billions of dollars in losses for investors every year. 

In an ideal world, you would be able to spot and avoid investment fraud before you become a victim of it. Unfortunately, however, this isn’t always possible. 

So what do you do if this happens to you? Are there ways in which you can recover your investment losses?

Fortunately, you may have legal claims for relief that can allow you to recover what you have lost. This guide will outline the forms of negligence and misconduct that commonly result in losses for investors and how to start the process of recovering those losses. 

Forms of Misconduct Commonly Resulting in Investment Losses

Stockbrokers and investment advisors must comply with regulations imposed by FINRA, the SEC, and the state in which they operate. If your financial advisor violated these regulations and caused you to suffer investment losses, you may have a claim to recover. Common forms of misconduct that often result in investors suffering losses are described in detail below. 

Unsuitable Investment Recommendations

FINRA Rule 2111 requires financial advisors to have a reasonable basis for believing a sale or purchase is suitable for the customer. To determine whether a transaction is suitable, the advisor considers a number of factors about the investor, including:

  • Age,
  • Financial situation,
  • Investment objectives,
  • Investment experience,
  • Liquidity needs,
  • Risk tolerance, and
  • Income needs.

If a financial advisor recommends the purchase of an investment that is unsuitable, that puts the investor at unnecessary risk and can lead to substantial losses. 

Unauthorized Trading

Unauthorized trading occurs when a financial advisor conducts transactions in a client’s account without proper authorization. Financial advisors obtain proper authorization to make trades in two ways:

  1. Having their client set up a discretionary account; or
  2. Seeking express permission for each individual trade.

Discretionary accounts allow financial advisors to make trades without seeking individual authorization for each one. To prevent abuse, investors set up general parameters for their discretionary account that the financial advisor is required to follow. 

Unauthorized trading occurs relatively frequently in the financial industry but has decreased in recent years. FINRA reported 263 customer arbitration disputes alleging unauthorized trading in 2017. The number dropped to 190 in 2020.

Misrepresentation 

The failure to provide investors with all relevant information about an investment, whether positive or negative, is known as misrepresentation. 

If this sounds unethical, that is because it is. In fact, the practice of misrepresentation is strictly prohibited under federal securities laws. 

Financial advisors have a legal obligation to disclose all of the material facts about an investment and can be held liable if they fail to do so. “Material facts” include any information likely to influence an investor’s decision on whether to purchase the security.

Misrepresentations by financial advisors regarding potential investments is a serious indiscretion that frequently results in significant losses to unsuspecting investors. If this has happened to you, you may have a valid legal claim to recover those losses.

Churning

Churning, also known as excessive trading, is one of the most common types of securities fraud.

To understand what churning is, it is important to know how brokers earn their fees. Typically, brokers will earn fees or commissions on each transaction, whether sale or purchase, that is made for an investor client. This is a standard practice, and there is nothing wrong with it so long as it is done ethically.

The practice of churning, however, involves a broker making excessive trades in a client’s account with the primary purpose of generating commissions. Be advised that doing so is illegal. 

Signs that a broker acting on your behalf may be engaging in the practice of churning include: 

  • Unusually frequent trading, 
  • Unauthorized trading, and 
  • Excessive fees. 

Of course, this does not necessarily mean that your broker is engaging in the practice of churning. However, it is imperative that you keep an eye out for these signs and other suspicious activities. 

When in doubt, it may be a good idea to contact an experienced legal professional to seek advice and consultation.

So Can You Recover Your Investment Losses? 

As one securities fraud lawyer puts it, suing your financial advisor over investment losses can be complex, and “it is incredibly difficult to predict what a jury might do.” However, that does not mean that you should not pursue your claims. 

If you have suffered significant investment losses due to the actions or inaction of your financial advisor, you very well may have a legal claim for relief. Fortunately, there are a number of avenues you can take to fight to recover your losses. 

So don’t give up hope. Whether it be arbitration, a civil lawsuit, or criminal charges, there are ways for you to hold your advisor accountable and get back what you are owed.


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