The power to make money is a gift from God.
- John D. Rockefeller.
If true, Rockefeller had the gift...as he made a lot of it. In terms of money, circumstances today are much the same as when Rockefeller was lining his pockets. Everybody wants it, and there are not many people who can look you in the eye and say they have enough.
So, millions of Americans try their luck in the Nation's stock markets, hoping to increase their wealth as public companies, and their share prices, grow with the economy. Most investors have little time to properly research the myriad of entities whose securities trade each day. As such, the majority of investors leave that task to stockbrokers and financial planners. Unfortunately, some of those investors end up wishing they had done their homework themselves.
The stock market can be a dangerous ride. Prices fluctuate daily. Millions are made or lost in a matter of moments. It takes an experienced investor or a skilled broker to navigate the treacherous paths of today's investment environment. The hiring of a sound investment firm has become extremely important. After all, it's your money.
The overwhelming majority of investment professionals are honest, hard working individuals. Nevertheless, each day stockbrokers are accused of cheating their clients. The increase in security-related lawsuits over the last two decades is startling. The United States Supreme Court has remanded all of these types of suits to arbitration or mediation. As such, complaints are normally filed with the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE), or the American Arbitration Association (AAA). In today's litigious environment, binding arbitration clauses are almost always found in account management agreements. With arbitration, qualified arbiters are selected from a list maintained by the sponsoring entity, and when agreed upon by both parties, an arbitration of the complaint will ensue. In arbitration the arbiter decides who wins. Mediation, on the other hand, involves a third party who tries to help negotiate a settlement in order to avoid the more formal arbitration process. Under mediation, both parties must agree on the outcome.
Common causes of action in arbitrations and mediations involve disputes regarding:
1. Margin Calls- Occasionally, a client may wish to buy stock on margin. A broker extends credit to his client in a margin account. A margin call is the demand that a client deposit money or securities to bring a margin account up to the initial margin requirement. If a client fails to produce the additional equity, the broker may liquidate the account, which is called a sell-out. Disputes usually arise over the liquidation of the account.
2. Churning- To increase commissions, a broker may excessively trade a client's account. Churning is illegal under Securities and Exchange Commission (SEC) rules.
3. Unauthorized Trading- A broker buys or sells stock in a client's account without the client's permission.
4. Failure to Supervise- This type of claim usually involves management's failure to properly monitor trading activity within the firm.
5. Negligence- Implies inattention to one's duty or business. If a broker is negligent, the managing firm may also be sued.
6. Omission of Facts- When a stockbroker fails to properly inform his client about a stock's prospects in an effort to get his client to invest in that stock. For example, when a broker knows that a company is going to file for bankruptcy protection, yet, for the broker's private gain, encourages his client to invest in that company.
7. Breach of Fiduciary Duty- As a fiduciary, it is the broker's responsibility to handle the client's money with prudence and to at all times make reasonable decisions regarding the client's finances.
8. Unsuitability- NASD suitability rules require that those selling sophisticated and potentially risky financial products, such as commodities and private placements, make certain that the client has the financial means to assume the risks involved. Usually firms will require a client to have some level of net worth or liquid assets to avoid financial harm if a deal deteriorates. A firm can be sued if an unsuitable client takes a heavy loss in a risky financial endeavor that was touted by the firm.
9. Misrepresentation- A broker must never distort or misrepresent facts for personal gain.
10. Online Trading- Trading online is a relatively new business. Only a handful of claims have been made against online trading firms.
11. Industry Employment Disputes- When a brokerage employee has a claim against the employer or vice versa. For instance, an employer might initiate a complaint if a broker under contract leaves the firm to join a competitor. Likewise, a broker might sue his employer for breach of contract.
12. Shareholder Fraud- Each year, it seems as though there are an increasing number of cases involving shareholder fraud. Fraudulent activities include, but certainly are not limited to: Company directors and officers concealing important facts from shareholders, accounting misstatements, and management option packages that distort the truth for management's benefit. These abuses and others may violate the so-called "disclosure rule," an SEC regulation requiring that public companies release all pertinent information, both positive and negative, which may bear on an investment decision. When word of such improprieties hits Wall Street, the company's stock usually plummets. As a result, many shareholders can, and often do lose, many millions of dollars.
It is estimated that nearly 7,000 securities-related arbitrations were filed with the NASD in 2001, a twenty-four percent increase over 2000. Through September 2001, 2,317 suits cited a breach of fiduciary duty. Nearly 3,000 cases were filed for common stock violation claims. NASD plaintiff awards through September 2001 exceeded $75 million. However, these figures may be somewhat distorted as many complaints were settled outside of the arbitration process.
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