Frequently asked questions regarding Securities claims
Beginning in 1990, attorney Eric E. Ludin represented large brokerage firms defending claims filed by customers against brokers. Many of these claims went to arbitration and Mr. Ludin served as lead counsel in these cases. This experience enabled him to learn how brokerage firms defend these claims and gave him a unique insight into the best methods of pursuing them. Since 1996, Mr. Ludin has focused his securities practice on the exclusive representation of customers against firms. He has successfully represented numerous clients in claims against the largest firms in the United States. In addition, Mr. Ludin has frequently published articles in legal publications regarding securities claims and has lectured on this topic.
The attorneys at Tucker & Ludin do not charge for an initial consultation for most types of securities claims. If we agree that you have a legitimate claim and will represent you, it will normally be on a contingent fee basis. The contingent fee agreement states that the attorney will receive a percentage of any recovery as its fee. This percentage will vary depending upon when the case is resolved and will be clearly set forth in the agreement. Out of pocket costs will be paid by the client. These costs include filing fees and expert witness fees. The attorneys are careful about not incurring these expenses without first discussing them with the client and obtaining client approval in advance.
Securities fraud is committed when a security is bought or sold in reliance on an untrue statement of a material fact. It can also apply when the seller of a security does not tell the buyer relevant facts which makes other representations misleading. Under Florida law, the recommendation to purchase a security which is unsuitable for the buyer can also be considered to be fraudulent under certain circumstances.
Before an individual can be a broker, he or she must be a registered representative with the Financial Industry Regulatory Authority (FINRA, formerly known as the NASD). At a minimum, a broker must pass the Series 7 Examination, which is the Qualification Examination for General Securities Registered Representative. In addition to complying with state and federal law, a registered representative must comply with the duties imposed by FINRA and the brokerage firm that they work for. These duties are written in the FINRA manual and their firm’s internal compliance manuals.
FINRA Conduct Rule 2310, applies to a broker’s duty to recommend suitable investments. This rule states:
(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.
(b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:
(1) the customer’s financial status;
(2) the customer’s tax status;
(3) the customer’s investment objectives; and
(4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.
In order to determine if the broker violated this suitability rule, the attorney must learn details about the client’s personal financial circumstances. One must explore the client’s age, employment status, source of income, net worth, level of sophistication with regard to securities, and ability to assume risk. Given the same investment losses, a disabled roofer with a 9th grade education may have a much better suitability claim than a retired heart surgeon with a long investment history due to the doctor’s greater ability to assume risk and capability to asses that risk.
Generally speaking, churning is excessive trading in light of the client’s investment objectives with the broker exercising control over the trading and acting with intent to defraud. A broker who engages in churning puts his desire to generate commissions above what is in the best interest of his client. There is no set formula for determining whether churning has occurred, but, your attorney can consider this by examining the amount of commissions generated relative to the assets in the account.
Some brokers get in the bad habit of exercising trades without discussing them first with the client because of the relationship and level of trust that they have developed. However, FINRA regulations and most brokerage firms will not permit a broker to execute a transaction without prior authority unless the customer has signed a discretionary account agreement.
Attorneys should always ask their clients whether they specifically authorized the trade beforehand and what representations were made by the broker before the client gave this authority to buy or sell.
Both industry and firms prohibit a broker from guaranteeing a profit in a particular transaction or guaranteeing that they cannot lose. However, this happens all the time though it is never put in writing.
In fact, brokers should warn their customers about the risks of any investment and often fail to do so.
A broker cannot recommend a purchase or sale of a security while in possession of material, non-public information. Material information is any information that a reasonable investor would consider important in making an investment decision. This information must be available to investors generally.
Red flags go up if your broker told you a “rumor” or “tip” and traded based on that information or that the broker advised that something very significant was about to occur without disclosing the nature of the event.
Selling away occurs when a broker recommends, refers, or solicits a customer to purchase or invest in a financial product not offered by the brokerage firm. This will often occur when a broker recommends that his customer invest in an outside business owned by the broker or other members of his family. A broker should never use the relationship that he has developed with his customer to secure funds for a business or investment not approved by the brokerage firm.
When you open your brokerage firm account you are required to sign an agreement with the brokerage firm. This agreement is extremely important to your lawyer and often affects the outcome of any securities claim you may have. First, the agreement normally contains an arbitration clause requiring that any dispute between you and your broker be resolved in arbitration with FINRA and NOT in court. Your lawyer should be familiar with the rules that apply to FINRA arbitrations. Second, the agreement will often state your investment objectives, risk tolerance and contain other personal financial information that the broker relied upon in evaluating the suitability of the trades in your account. Often this information was wrongly completed by the broker rather than the customer, or contains incomplete or erroneous information, or was not completed at all. Third, the agreement contains information describing the obligation of the broker to the customer.
If you no longer have your agreement, you should call the brokerage firm and request a copy before your initial meeting with your attorney.