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Securities Fraud and Unsuitable Investments
As an investor, it is often difficult to determine whether you have been a victim of unsuitable investments or securities fraud. Indeed, many instances of securities fraud go undetected. Most investors will not even consider the possibility of misconduct until they are faced with the loss of their investment. Because the market naturally fluctuates, not every loss means you have been the victim of fraud. However, unless you had aggressive and speculative objectives, significant losses should spark your concern and prompt you to undertake a further investigation. It may be difficult or nearly impossible to detect fraud unless you consult an investment and securities fraud lawyer who knows what constitutes suspicious activity. Listed below are just a few warning signs for securities or investment fraud:
- Your broker does not return your phone calls.
- The transactions on your statements do not make sense to you.
- Your account statements include transactions you did not authorize.
- You find unidentifiable debits or credits on monthly account statements.
- You see a dramatic drop in value of stock in a short period of time.
- The market is “up”, but you are losing money.
- The majority of investments recommended by the broker are declining in value.
- Your broker tells you to view market news as entertainment.
- Your broker fails to disclose important information regarding an investment purchase.
- Your broker begins trading in high risk and speculative investments.
- You are paying capital gains taxes, despite the fact that your account value is decreasing.
- Financial results are markedly different from publicly announced expectations.
These warnings signs do not necessarily mean you are a victim of fraud, but there are other rules that may also protect you, such as those pertaining to sustainability. However, if you experience any of these red flags, it is in your best interest to immediately seek the advice of a New York City stock broker fraud attorney with experience in handling investment and securities fraud matters.
Ms. Malecki is a member of and has been on the Board of Directors of the Public Investors Arbitration Bar Association (“PIABA”). She was the Vice-President on the Board of Directors of the PIABA Foundation. She has commented on FINRA rules as part of that group and the Board. See her comments here.
To prove fraud, a customer must show that the broker or someone else in the industry (a) intentionally or recklessly made a misrepresentation or omission of material fact that the customer justifiably relied upon, and then (b) suffered damages as a direct result of reliance on the misrepresentation or omission of material fact. More plainly, this means the customer has lost money because he or she relied on information provided by a broker or securities industry member that the broker/member either knew or should have known was not true.
In making certain claims of fraud, an investor must show some reliance or action related to the misrepresentation. When a showing of reliance is required, it can be established by direct or indirect evidence. Direct evidence is akin to a statement in a prospectus claiming the existence of a lucrative contract that the issuer does not have. When the investor can show that their investment decision was based on that statement or omission, they have provided direct evidence of reliance.
At times, a brokerage firm may misleading sell a proprietary product or sell a defective proprietary product. A proprietary product is a product created by the brokerage firm to sell to the public itself, as an issuer. Because there are potential conflicts of interest between the seller (brokerage firm) and buyer (investor) of this product, the area is ripe for fraud.
Investors can also use indirect evidence to prove reliance using a theory called fraud-on-the-market or claim defects in the securities products sold. Courts use the fraud-on-the-market theory when a misrepresentation artificially inflates the price of the stock. Because the misrepresentation affected the stock price, and the investor bought the stock based on the affected price, the investor is assumed to have indirectly relied on the misrepresentation that misled the market as a whole. In such case, the defendant may try to show that the misrepresentation was not important or did not affect stock prices. The defendant may also attempt to show that the individual investor knew that the statement was false or would have bought the stock even if he or she had known of the falsity of the statement.
When a fraud by omission is claimed, the investor does not have to prove reliance. For example, if a prospectus omits to put prospective investors on notice that the issuer's patent on its primary product is being contested in court, it would be difficult for the investor to prove that he or she specifically relied on the missing information. The courts have decided that if the omitted information constitutes material facts that reasonably could be expected to influence an investor's purchase decision, positive proof of reliance is not required. Rather, reliance is presumed to exist. The defendant can overcome this presumption by showing that the investor's purchase decision would not have been affected even if the defendant had disclosed the omitted fact by, for example, proving that the plaintiff did not read the prospectus. Similarly, with defective products, a New York City securities fraud lawyer from Malecki Law can argue that the product should never been sold, was misleadingly marketed and sold, as well as was misrepresented in offering and other materials.Unsuitability
For your investments to match your individual investment goals, a broker must make investments on your behalf responsibly, and recommend and present options that that to the best of their knowledge, are realistic and adhere to your liquidity, immediate needs, and long-term plans. They are not allowed to recommend unsuitable investments. An investment can be deemed unsuitable if it is unreasonable to the financial constraints of the client, if the knowledge upon which the investment is predicated can be proven insufficient, and/or if the client is not given full disclosure of risk or return on said investment. The failure of a broker to meet these central responsibilities and duties of trust can make them liable to their client. It is important to note that unsuitability refers not to selecting for example a bad stock that fares poorly, but rather to the wrong type of investment being made, particularly in the selection of high-risk investments which are inappropriate to the client’s goals or means. There must be a reasonable basis for the broker’s investments, namely proper research into foreseeable hazards and genuine benefits. The New York City stock broker fraud attorneys at Malecki Law will make a sound analysis as to the suitability of your broker’s investments, and the astute evaluations needed to avoid unsuitable investments, and take action against those at fault.Regulation Best Interest
In addition to meeting know your customer obligations, per newly adopted SEC regulation known as Regulation Best Interest (“Regulation BI”), all brokers and broker-dealers (as well as all financial advisors) must act with their customers best interests in mind. This broker-dealer and broker standard of conduct was introduced by the SEC back in April of 2018 as part of a larger overall plan that, once implemented, would clarify and advance the duties and responsibilities of brokers and broker-dealers to their clients. All brokers and broker-dealers were required to be in compliance with the new regulations and standards as of June 30, 2020. That said, it may take some time before we see the effects of the newly implemented regulations, especially when it comes to filed cases.
For more information explicitly defining the legal parameters of unsuitability and/or Regulation best interest, seek the aid of a New York City securities fraud lawyer, and consult the following FINRA rules and regulations:
- Recommendations to Customers (Suitability)
- FAQs regarding FINRA Rules for Non-Equity Securities Trading and Customer Suitability
- Fair Dealing with Customers
You have rights as an investor. You may be entitled to recover the investment money you lost as a result of broker or company misconduct. If you note any suspicious activity and feel you have been wronged, contact an attorney with experience in securities and investment fraud.