Losses are an inherent possibility when you invest. That fact does not automatically prevent you from pursuing lawsuits, however. A stock loss lawyer often looks to the investment adviser or broker to compensate investors who lose money due to the wrongful conduct of the broker or advisor. Many of these claims are based upon violations of rules of the Financial Industry Regulatory Authority (FINRA), common law, and state statutes. Below are some of the types of grounds for stock and investment loss lawsuits.
Negligent Advice
Your stockbroker must exercise reasonable care in delivering investment advice and recommendations to you. Negligent advice can entail a broker’s information about a company, its financial condition, or actions where the broker failed to adequately take measures to verify the accuracy of the information. Your broker may have carelessly failed to disclose a material fact about a problem with your investment or a company.
Brokers owe investors a duty to refrain from advising or obtaining unsuitable investments. To fulfill the standard, your broker must learn and understand your investment goals, financial situation, tax status, need for cash, experience in investing, and your willingness or ability to assume particular kinds of risk. A stock loss lawyer may bring claims on your behalf, for example, when your broker fails to reasonably diversify your portfolio (i.e., fails to offer a mix of investments to reduce the risk of losses). Often, customers with limited or fixed incomes, preparing for investment, or funding college may not need riskier, speculative investments.
Exceeding the Scope of Authority
FINRA’s rules about knowing the customer come into play if you claim that the broker acquired or sold stocks without your permission. In such claims, a stock loss lawyer alleges that the broker went beyond your instructions as to what investment actions you would take. An example includes selling a stock at a lower price or buying at a higher price than you authorized. Your instructions may also indicate that the broker first gets your express permission before buying or selling or that your broker executes the transaction as instructed.
Lawsuits arising out of unauthorized behavior or omissions raise questions of ratification. This defense may apply if, after learning of the transaction, you took no steps to have it undone, did not object to the broker, or accepted the benefits of the transaction. Further, in discretionary accounts, the broker may use his or her reasoned judgment in buying or selling investments and the mix of your portfolio.
Breach of Fiduciary Duty
Your broker must act in your best interest. This fiduciary duty involves loyalty to you and prohibitions against self gain at your expense. Claims based on breach of fiduciary duty may arise out of the following:
Churning
In such a practice, the broker buys or sells investment products primarily to generate commissions or fees. Mutual fund managers may violate your fiduciary duty by “switching” (excessively moving investments in and out of the mutual fund portfolio). Proof of churning or switching might require an expert to determine whether the broker engaged in excessive transactions. These practices are prohibited even with brokers handling discretionary accounts.
Self-Dealing
A common breach of fiduciary duty arises when the broker stands to gain from the transaction, such as by being an owner or family member of an owner of the company issuing stock.
Front-Running
Upon receiving a customer’s order to purchase stock, the broker will first buy for his own benefit. This practice may cause you stock losses because of the possibility that you will have a higher purchase price from the demand generated by prior buying. Further, you face the risk that you might not get the volume of investments you seek.
Fraud
You might suffer stock losses at the hands of fraudulent statements by the broker. A fraud claim requires proof that the broker made a material misstatement of fact, that it knew it was false, intended to deceive you, gained as a result of the misrepresentation, and caused you harm as a result. In a fraud claim, you must show that you justifiably relied upon the broker’s statement in your decision to buy or sell a particular investment.
