Case Studies of Stockbroker Misconduct, Securities Fraud, and Successful Mediation and Arbitration by Investors Recovery Service
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Client is an employee of high tech firm located in Silicon Valley. He had substantial stock options granted to him, and from time to time traded in his company shares. Brokerage firm had a relationship with his employer and handles all employee stock transactions. Client called broker and wanted to purchase $400,000 worth of stock for short term trade. Client asked the broker “is there any pending news announcement or change of opinion from your research analyst”. Broker says no. Client gave broker an order to purchase 20,000 shares at $21 per share. Less than one hour after client purchased stock, brokerage firm research analyst announced downgrade on stock. Stock dropped 4-5 points almost immediately. Client held stock and lost $180,000 over the next five trading sessions.
We sued the stock brokerage firm in arbitration for stock fraud, stockbroker misconduct, market manipulation and sought investment recovery procedures to restore our client’s losses. Brokerage firm refused to settle, because their position was that the research department had no obligation to advise our client that a negative report was imminent. That would constitute unlawful stockbrokers conduct . We disagreed because when clients specifically ask stockbrokers a direct question, such as “is there any information imminently coming out on a particular security” that they follow, stockbrokers must answer either I don’t know, or they must contact research department and ask them. When stockbrokers make affirmative statements such as “no, there is no change of opinion on the security”, client has reasonable basis to rely upon that statement.
We went to securities mediation, but were unable to reach a settlement. We then went to securities arbitration, but because there was no agreement to go to the American Arbitration Association, we were compelled to go to the FINRA (National Association of Securities Dealers) instead. At the hearing the arbitrators focused on stockbroker misconduct, in particular a pattern of in-house trading showing that one of their institutional clients had traded out of 250,000 shares of the stock, in increments of 15-25,000 shares at a time, just moments before the downgrade was made public. That fact, in conjunction with the stockbroker’s advising our client that there was no change of opinion, made the other side feel vulnerable to believing they would lose.
Shortly after the securities arbitration hearing was concluded- which lasted three days - the other side offered to settle for $100,000. We advised our client to take it because our client had several opportunities to sell the stock for a total loss of less than $40,000, after the news was already out, but refused to sell anyway, hoping the stock would go back up. We believe that our special knowledge of proprietary trading and so called “Chinese Wall” ethical obligations helped us to present the best possible case before the dispute resolution facilities at the FINRA.
Client had $1 million in company pension plan. Broker suggested placing entire amount in a so-called safe, all cash (no debt) Real Estate Limited Partnership. (REIT) Shares were publicly traded, but not a very liquid market. After several years this REIT went in bankruptcy. We filed a complaint alleging unsuitability and misrepresentation . Firm alleged that Client was a sophisticated investor with vast real estate holdings who understood the risks and voluntarily agreed to assume them. Case settled for $500,000.
Client was a successful business person - president of a publicly traded NYSE company. Lost about $250,00 in various limited partnerships. We alleged misrepresentation. Firm alleged that Client received prospectus for each offering and therefore understood the risks and voluntarily agreed to assume them. This case went to hearing. We were unsuccessful in settlement talks although we reduced our demand to $75,000, as we were concerned that client’s extensive business background might work against him. Best offer from firm to settle was $25,000. At hearing the client testified that at his job as President he was responsible for 3000 employees and the shareholders. He relied on six managers to advise him of the facts prior to his making a decision. He testified that he thought of his broker as his 7th advisor. Arbitrators awarded him $300,000. (even we were pleasantly surprised with this award).
Client was an 80 year old Bay Area Realtor. He was cold-called by an East Coast firm and the broker told him how he could successfully trade his account. Client went for the bait, and 2 years later was down $300,000. We alleged churning but could not allege unsuitability because our client had 27 other brokerage accounts. Nevertheless we believed that the client had given this broker just enough rope to hang himself. Case would not settle. We went to hearing and client was awarded $125,000.
Client was a 78 year old widow who had lived in same home for 25 years. She had no other meaningful assets other than her home, which was worth $600,000. She sold her home and gave $100,000 to a daughter and $500,000 to her broker, whom she had known for only a few months. 15 months later she was out $302,000. The broker had earned $215,000 in commissions. Firm settled this case for $300,000.
Client was long term employee (20 years plus) of a small optical company. Client never earned more than $40,000 per year. Her company was taken over by another company and in less than 1 year her stock went from a market value of $100,000 to over $1 million. The Pension administrator accidentally sold her shares just prior to a big run-up in share price. Client said she did not know stock was sold because she had not received notice. The Pension administrator admitted that they did not send notice, but, client had withdrawn $300,000 from her account, which could have only come from one place, namely sale of her stock. This case was never filed, and settled approximately 30 days after we sent a demand letter to the Pension Administrator. Our position was simple: the Client was not obliged to know where the money came from, but plan administrator was obliged to send notification of sale to clients attention. Settlement amount: $650,000.
Client was retired airline pilot. He had an approximate $400,000 portfolio at brokerage firm and was advised by broker to invest it more aggressively. Client did just that and ended up owning approximately 70% high technology types of stocks. When the market sold off, the firm kept advising client to remain long these stocks, as they would recover. Client eventually sold and lost $200,000 of the $400,000 invested. We also alleged that many transactions were entered by the broker without first calling client. Client however never objected to these transactions. Case settled in mediation for $115,000.
We filed three cases as one, against the same firm, for selling notes in Towers Financial. Towers allegedly invested in medical accounts receivables. Towers promised investors a 12% return on a three year note. We filed multi claimant (3) complaint totaling $1.1 million. Brokerage firm alleged that the prospectus given to our clients stated on the front page that this was a speculative investment and should only be purchased by individuals that could afford to lose their entire investment. We alleged that the broker failed to perform adequate due diligence and if they had they would have learned that this was a Ponzi Scheme and therefore inappropriate for any investor. We settled all three claims for a total of $600,000.