Financial matters can be bewildering. Stockbrokers are supposed to help simplify the complexities and steer us in the right direction. But sometimes, stockbrokers care more about earning commissions than they do your well-being. It results in customers being stuck with dismal investments. Customers who complain are met with vigorous denials often supported by reams of “gotcha” paperwork that bear your signature or some other type of tacit approval. Most investors are caught completely unaware.
Our purpose here is to alert you to the traps and provide information that can help protect you against investor fraud and financial abuse.
1. Account Application. This form can appear overwhelming, but it is the most important document and can mean all the differences in a FINRA arbitration proceeding (described below). Here are a few things to consider when completing the form:
- Financial information related to your income, net worth, liquid net worth. Do not exaggerate. The more wealth you appear to have, the more the stockbroker will try to label you as a sophisticated, knowledgeable investor who is more open to risk.
- Information about the length of your investment experience. The more experience you appear to have, the more the stockbroker will try to label you as a sophisticated, knowledgeable investor. Most people interpret this question to mean how long have you had a brokerage account. But this could belie your true understanding of investments if you have relied primarily on the stockbroker for advice. A more reasonable interpretation of this question is what is your experience in making your own investment decisions.
- Investment objectives and tolerance for risk. This can be a pretext for investor abuse. Do not try to impress the stockbroker with false bravado. Since the average investor truly does not understand investment risk, avoid stating your objective is speculative or aggressive, or that you have a high tolerance for risk. This is simply code for “reckless” or “gambler,” and it gives the stockbroker a license to put you in every lousy investment that pays a high commission. Prudent investors typically have a low to moderate tolerance for risk and will seek to preserve their capital combined with some growth and/or income characteristics. Stick with quality and resist efforts, however persuasive, to label you as anything other than a prudent investor.
- A defrauded customer who unwittingly has allowed the stockbroker to inaccurately portray them in the form as a knowledgeable investor with a high tolerance for risk will find this form used against them in a FINRA arbitration proceeding.
2. Welcome Letter and Other Communications. What appears to be a heart-felt greeting or similar correspondence may be a trap. Buried in the pages of a form letter will be a summary of the information contained in your account application, which will include your investment objective and risk tolerance. There will also be an invitation to correct any inaccurate information. The average person tends to pay little heed because they have either been lured into a false sense of security or are too overwhelmed by this level of paperwork to focus. Herein lies the trap. A failure on your part to notify the firm that your investment objective is not speculative or that you do not have a high tolerance for risk will be used as an admission that the information is correct. Another “gotcha” moment.
3. Trade Confirmations. This can also appear overwhelming but it, too, is important. Aside from listing the security, the price, and the fees, the trade confirm will also identify whether the trade was “solicited” or “unsolicited.” This is a very important distinction. A trade marked “solicited” is one that was recommended by the stockbroker and one for which the stockbroker is responsible. A trade marked “unsolicited” is one that was initiated by the customer for which the stockbroker has little if any responsibility. A stockbroker intent on concealing investor fraud will identify the trades as “unsolicited” in an effort to absolve themselves of all responsibility for steering customers into lousy investments. A customer who does not object will find the confirmation used against them in a FINRA arbitration proceeding as an admission that they initiated the trade.
We have mentioned FINRA arbitration proceedings because the brokerage firm will require you to agree to submit all disputes to FINRA arbitration. Arbitration is a simplified process that takes between 12 and 18 months. The actual arbitration proceeding can last from a day to several weeks depending on the complexity of the case. All the paperwork discussed above will be brought to bear at the arbitration, either for you or against you. One to three arbitrators selected by the parties will hear and decide the outcome of the dispute. The panel’s decision is final and, absent extraordinary circumstances, non-appealable.
If you would like a further explanation of the matters discussed here, please contact one of Sanford Heisler Sharp's investment fraud lawyers in New York or San Diego.