Investment Fraud Lawyer Blog

Investors sometimes hire a financial adviser to manage their money professionally if for no other reason than to escape their own irrationality. Many investors know that, in investing, their emotions can be their worst enemy – leading them to buy high and sell low. They think that a financial adviser, detached from their emotions, will behave more rationally and act in their best interest. Unfortunately, a recent undercover academic study concluded that many financial advisers are too detached from their clients and too attached to their own financial interests to provide professional financial guidance. (“Financial Advisers Flunk Undercover Sting,” Ryan Sager, SmartMoney.com).

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As America ages, regulators are seeing more and more financial abuse of people 50 years of age or older. The North American Securities Administrators Association (NASAA), the association of state securities regulators, reportedly filed 1,241 such enforcement actions in 2010, the latest year for which data has been compiled – more than double the 506 enforcement actions filed in 2009 (“Financial Scammers Prey on Seniors,” by Anne Teresen, Wall Street Journal).

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Morgan Stanley’s CEO James Gorman warned Morgan Stanley employees not to circulate a New York Times op-ed piece by former Goldman employee Greg Smith that blasted Goldman’s culture as “morally bankrupt” and said that success at Goldman was often achieved by selling products that the firm wanted to get rid of. Smith wrote the article to explain why he was resigning from Goldman after over a decade as a managing director. (“Gorman Says He Told Staff Not to Circulate Op-Ed on Goldman,” Bloomberg).

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Sell recommendations by investment analysts working on Wall Street are still a rarity years after regulators and Congress imposed rules to clean up analyst fraud, and years after FINRA banned Jack Grubman of Citigroup and others who issued buy recommendations on technology stocks they privately considered to be “pigs,” in order to reap personal financial rewards for generating more lucrative investment banking business for their firms(“Analysis: Research “sell” notes decline as conflicts persist,” Reuters).

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Investment advisers face legal liability if they fail to exercise special care in dealing with clients who have diminished mental capacity, such as those with Alzheimer’s disease. They need to have reasonable procedures in place to deal with it, and they need to document every step in the process of implementing such a plan in every case in which the need arises. (“Clients with Alzheimer’s pose ‘scary’ legal risks,” InvestmentNews).

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The Securities and Exchange Commission has issued an alert warning firms about their supervisory obligations with regard to unauthorized trading by brokers and advisors in customers’ accounts. The SEC’s alert provides guidance to firms in preventing and detecting unauthorized trading. InvestmentNews calls the SEC’s alert a “scoundrel alert” (“Scoundrel alert: SEC warns firms about policing unauthorized trades”).

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The Financial Industry Regulatory Authority has issued a Regulatory Notice (12-03, Jan. 2012) to “remind” its member firms of their sales practice obligations with regard to complex products, and to provide them “guidance” in exercising heightened scrutiny and supervision over marketing and sales of complex products. Complex products are not defined in the Notice, but are described as including a host of alternative investments, such as derivative-based products, nontraded REITs, structured notes, inverse or leveraged exchange traded funds, hedge funds, and securitized products like mortgage-backed securities and asset-backed securities.

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The declining public trust in the financial services industry confirms the serious problems permeating the industry. A recent survey by the public relations firm Edelman revealed that more than half of the educated public distrusts firms in the financial services sector, making it the nation’s least-trusted sector for the second year in a row (See InvestmentNews, “Car salesmen miles ahead of advisers in consumer trust”).

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The Securities and Exchange Commission has implemented a strategy of using computer analyses to identify hedge funds and other firms whose claimed investment performance figures warrant special scrutiny for possible fraud. Working on the theory that, if the performance seems too good to be true, maybe it is, the SEC has commenced lawsuits and investigations into a number of supposedly “outperforming” hedge funds. More than 20,000 funds have or will be screened by the SEC’s new system.

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Broker-dealers that sold billions of dollars in fraudulent private placements, such as Medical Capital and Provident Royalties notes, “failed massively in their due diligence responsibilities to investors” according to Gordon Yale, a CPA and expert witness in securities fraud cases. (See “Private-placement due diligence ‘sloppy,’” Investment News). They grossly misrepresented investigations into the investments and issuers they claimed to have performed, and, in fact, merely relied on self-serving representations made by management that were false and fraudulent.

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Brokers often pitch alternative investments when the stock market is declining and returns on traditionally safe investments are too low. A few alternative investments may have some merit. Many more are flawed, bad and ugly in that they provide investors little more than uncompensated high risk. Then there are those that cross the line into the realm of the outright fraudulent. Unless the brokerage firm is itself a criminal enterprise, brokers often try sell fraudulent investments away from the firm to avoid detection by the firm. The practice is known as “selling away.”

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Robert Powell’s MarketWatch article entitled “Things are bad, but analysts can’t say sell” underscores how unreliable Wall Street’s recommendations are. Wall Street’s lack of credibility continues to undermine confidence in our financial markets. One reason for that lack of credibility is dishonest recommendations. Many Wall Street insiders have long recognized that “Hold” means “Sell” in Wall Street doublespeak.

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Just as a low tide near the seashore can reveal shipwrecks, a falling stock market often reveals misconduct by investment advisers. This is particularly true with respect to an investment adviser’s duty to recommend only investments to a customer that are suitable in light of the customer’s investment objectives, status in life and risk tolerance. Unfortunately many investors only learn that their advisers have violated this duty when adverse market conditions develop.

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Expecting licensed professionals who provide investment advice to act in their clients’ best interests “should be a basic tenet of the business,” but brokerage firms and their brokers don’t want that fiduciary yoke, says Karen Blumenthal in her InvestmentNews article, “When Your Adviser Can’t Be Trusted.” Moreover, they don’t want the public to know that they don’t want to be held to a fiduciary standard. So, while brokerage firms profess to be trusted advisers or like a member of a client’s family in their advertising, their lobbyists are working hard to persuade the SEC to weaken the “devil in the details” definition of the term “fiduciary” for purposes of governing brokers’ relationships with customers.

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With the rise of consumerism, most Americans take for granted the right to sue doctors, lawyers and other professionals for malpractice. But there is one form of professional malpractice that most people, including trial lawyers, are not familiar with. Stockbrokers, investment advisers, money managers and chartered financial analysts, among others, are financial professionals who are required to adhere to strict standards of conduct.

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