FAQs

Just because you’ve lost money invested in mutual funds and stocks doesn’t mean you have a case against your broker. The financial markets have always gone through periodic downturns and upturns, and these swings are not the fault of your broker. However, it is the responsibility of a broker to invest your money in accordance with your investment objectives at the time any invest selection is made, and your broker has a continuing obligation to monitor the status of your investments over time.

Unfortunately, some brokers invest client monies with the sole purpose of generating commissions for themselves without any concerns for the client’s best financial interests. Such wrongdoing would include frequent in- and out-trading known as churning, the purchase of large concentrations of speculative securities on margin, frequent switching out of mutual funds, options trading, unauthorized trading, and sales practice abuses involving annuities and retirement accounts.

The best approach would be to have an attorney who is experienced in representing investors with grievances against brokerage firms make an evaluation of your case after an in-depth interview and review of your entire financial history.

Virtually all brokerage firms incorporate a pre-dispute arbitration clause in the new account documentation, which customers usually sign when they open their accounts with their brokers. This requires customers to arbitrate their claims before three (3) arbitrators in the event of a dispute against a broker, as opposed to pursuing their grievance through the courts and a jury trial.

Most customer disputes are arbitrated before the Arbitration Department of the The Financial Industry Regulatory Authority (FINRA). The New York Stock Exchange maintains arbitration facilities as well, and both the FINRA and NY Stock Exchange have their own separate arbitration procedures, which require the filing of a Statement of Claim with their respective arbitration departments in order to initiate a claim against your broker.

A comprehensive Statement of Claim should include a biographical sketch, a chronology of the alleged wrongdoing committed in your account and enumeration of the various causes of action, and a precise calculation of the financial damages sustained in the account.

Most claimants who file arbitration claims are represented by attorneys experienced in the field of securities arbitration, who in turn retain the services of expert witnesses to assist in the preparation of damage calculations as well as the proof of the case at the arbitration hearing.

Once you have filed your claim for arbitration, the case goes through a discovery phase, wherein the investors are usually required to produce all essential documentation relating to your financial history, including bank account statements, securities brokerage statements, financial documents, and tax returns. Likewise, brokerage firms are required to produce all documentation pertaining to your account, including a number of very industry-specific, behind the scenes documents which the average investor never sees but which contain very pertinent information relative to trading activity that may have occurred in their accounts.

The discovery phase often includes discovery conferences and motion practice designed to resolve discovery disputes. During the discovery phase, the arbitrator may also recommend the possibility of mediation in the intervening time to see whether or not the dispute can be resolved without the necessity of full arbitration proceedings.

After the discovery phase comes the hearing preparation phase, which includes the preparation of briefs, subpoenas, expert witnesses, and essential documents required to prove the losses you are requesting from the Arbitration Panel. This will require considerable cooperation of the investor, but a carefully-prepared case is the best way of assuring a better likelihood of financial recovery.

The hearing stage is when the actual hearings are conducted, testimony is taken from various parties, and proof is given of the alleged damages sustained by the claimant. Hearings usually take two to three days but can take considerably longer for more complex cases. Simple cases involving single transactions can often take a single day only.

FINRA arbitration hearings are conducted in many cities thoughout the United States. In New York State, FINRA hearings are held in Buffalo, Syracuse, Albany, and New York City, depending on the city closest to where you live.

Several main costs included in bringing an arbitration case include the following:

1. Filing fee – $450.00 to $1,450.00.
2. Damage analysis and loss calculations – approx. $400.00.
3. Expert witness fees at hearing – $3,000.00.
4. Investigative costs, data retrieval costs, and costs associated with copying charges and exhibit production fees – $100.00 to $500.00.

From beginning to end, arbitration proceedings usually take from ten (10) months to one (1) year. In other words, from the date of filing of your Statement of Claim through the date of an award of the Arbitration Panel, the average time associated with the average FINRA Arbitration hearings is ten (10) months to one (1) year.

Absolutely. Your decision to file a claim in arbitration against your broker will require your commitment to work closely with your attorney as your case proceeds. This will include several in-depth interviews with your attorney to discuss the facts and circumstances of your relationship with your broker, as well as your financial history over all. You will also have to work with your attorney in providing him with your entire financial documentation, as well as meeting with your lawyer for hearing preparation and actual testimony at the hearing of your case.

Customers make a number of claims against their brokers which include the following in order of frequency:

1. Unsuitable investments – This means the purchase of investments, usually risky or illiquid investments, which aren’t probably suited for the investor which have been sold to an investor by a broker without informing the customer of the risk characteristics of the investment.
2. Churning – This means the repeated purchase and sale of securities in a customers account for the sole purpose of generating commissions for the broker without any concern for the investors best financial interests.
3. Margin trading – Often used in combination with unsuitable trading and churning type activity referenced in (i) and (ii) above. This is when a broker places your account into a margin position in order to engage in leveraged borrowing against your existing account holdings thereby increasing the risk in your account, but which also enables your broker to generate more sales commissions.
4. Unauthorized trading – Unauthorized trading occurs when a broker buys or sells securities in your account without your permission and this type of illegal behavior is also often combined with unsuitable trading, churning and margin trading referenced in (ii) and (iii) above. The average investor has no business speculating through margin type trading activity, but a number of brokers have nonetheless used margin trading to victimized elderly, inexperienced or unsophisticated investors with representations of great profit while at the same time generating exuberant commissions for themselves.
5. Mutual fund switching – This involves the repeated switching out of different families of mutual funds for the purpose of generating excessive commissions without any concern for the investor’s best financial interests.
6. Retirement account abuses – This includes a broker engaging in prohibited trading activity in IRA, 401k and other investment type accounts which should normally be invested for the long term and which can include unsuitable trading activity, churning, unauthorized trading, margin trading and mutual fund switching referenced in (i), (ii), (iii), (iv) and (v) above.
7. Variable annuity abuses – Variable annuity investment products aren’t for every investor and their purchase is often accompanied with high commissions which are oftentimes not disclosed to investors. Further, some unscrupulous brokers repeatedly switch customers into and out of different annuity contracts for the sole purpose of generating commissions. Some brokers sell variable annuity products for the supposed tax benefits, even though they might be purchased in an IRA account or accounts which are already tax deferred in nature.
8. Selling away – This is where a licensed broker sells investment products including oil wells, investments in businesses, promissory notes and a number of other different types of “investments” whose prices cannot be readily ascertained by looking in the daily financial pages The sale of which were not actually approved by your brokers’ superiors or employers. Some brokers are tempted to engage in “selling away” due to the high commissions promised them by their promoters.
9. Forgery/theft/embezzlement – This is when a broker conspires to transfer investments out of a customers account with forged signatures and false representations.
10. Failure to execute – This is where a broker fails to follow a customer’s instructions to buy or sell securities as a result of which the customer sustains financial damages when the securities in question rise or fall in price.
11. IRS Section 72(t) Early Withdrawal – Additionally, the erroneous suggestion of IRS section 72(t) early withdrawals from qualified retirement accounts can wipe out a lifetime of savings in just a few years.

There is no way of assuring that you will get all of your money back with the filing of a claim against your broker in arbitration. No attorney can give any guarantee of a specified recovery which you might receive in an arbitration proceeding. Attorneys experienced in the area of representing customers in securities arbitrations, however, generally will not accept cases for which they do not feel a monetary settlement or award will be forthcoming. The decision by an experienced arbitration attorney to accept your case is his or her vote of confidence that there is a considerable likelihood that some recovery of monies will be had.

Attorneys experienced in representing investors in securities arbitration proceedings often accept customer cases on a contingency fee basis. This means that the attorney’s fees are paid to the attorney if and only if a settlement or award is recovered through the case. Under New York State law, clients remain obligated for the costs associated for bringing their claim, such as those outlined in answer 4 above. However, when a settlement or award is made, customers are first fully compensated from any available settlement or award funds for costs which they have laid out before any attorney’s contingency fee calculation is made.

Arbitration Panels can make any number of awards in an arbitration case including the following:

1. Trading losses.
2. Realized and unrealized losses.
3. Margin interest charges.
4. Commissions.
5. Margin account debit balance losses.
6. Lost opportunity or losses associated with how your account would otherwise have performed if it was properly managed by your broker.
7. Attorneys fees.
8. Any fees paid by you associated with the filing of your claim with the FINRA including filing fees, forum fees, arbitrators fees, and administrative fees.
9. Punitive damages.

Keep in mind, however, that no assurance can be made that any specified level of recovery will be made by an arbitration panel and arbitration panels oftentimes do not specify what category or categories of damages monies are being awarded under, but rather, they sometimes simply make lump sum awards to investors.