Investment Advisor Misconduct

While the differences between a stock broker and an investment advisor are technical and extensive under the law, (the two types of professionals exist under completely separate regulatory systems), an investment advisor is a financial professional who gives investment advice for a fee, sometimes charged on an hourly basis, but usually charged on an annual percentage of assets under management. In contrast, stockbrokers generally charge commissions on a per-trade basis, although that changed for a while as brokerage firms tried to blur the distinctions between brokers and investment advisors. Investment advisors also usually have discretion to make investment decisions on behalf of their customers, while stockbrokers generally must obtain their customer's approval before engaging in a trade. Because an investment advisor has discretion over the customer's account, the advisor owes the customer the highest duty of loyalty and due care at all times. One final but important difference: investment advisors often can or must be sued in court, whereas claims against stockbrokers generally must be pursued in arbitration.

There are numerous ways in which an investment advisor can violate legal and ethical obligations to his or her customer, and most of these overlap with the types of misconduct committed by brokers. The most common types of investment advisor misconduct are:

• Recommending Unsuitable Investments: A great investment for one person might be a foolish investment for another. Each investor has his or her own unique set of circumstances. A 40-year old unmarried surgeon should probably invest very differently from a middle-class parent planning for her kids' college years. A 70-year old retiree on a pension should not invest in the same way as a wealthy 70-year old business owner who is still working. Stockbrokers have the duty to know their customers and to ensure that each recommended investment is suitable for that customer in light of factors such as the customer's age, financial status, ability, and willingness to handle risk, investment knowledge and experience, and investment objectives. If you lost money in an unsuitable investment, the broker may be responsible, and a qualified Ohio stockbroker misconduct attorney may be able to help you recover part or all of your losses.
• Misrepresenting or Omitting Facts:Some brokers lie about things you need to know in order to properly decide whether to invest. Some brokers don't necessarily lie, but they withhold certain facts that might affect your investment decision. And some brokers who misrepresent or omit facts are simply careless. Whether the broker's misrepresentation or omission is fraudulent or simply negligent, if it caused you to make a poor investment, the broker may be liable for your loss.
• Excessive Trading or "Churning": Remember that any broker who is compensated by commissions earns those commissions whenever you buy or sell, and whether you make money or lose money. When a broker who has discretion to control the investments in your account engages in excessive trading in order to generate commissions, that's churning, and churning is fraud. Your broker can be sued for churning your account.

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• Engaging in Unauthorized Trading: In most instances, a broker is permitted to buy or sell a security only after receiving your permission to do so. But sometimes, brokers engage in unauthorized trading. Unless you have given the broker the right to exercise his or her own discretion in handling your investments, unauthorized trading constitutes a breach of the broker's fiduciary duty and a violation of your rights. The unauthorized trades can be voided and resulting losses can be recovered from your broker.
• Failing to Follow Instructions: A broker usually is obligated to follow the instructions of the customer with respect to buying or selling a stock. If you instructed your broker to buy or sell a stock and he or she failed to do so, the upward or downward movement of that stock might cost you a lot of money. In some instances, the broker will not necessarily ignore your instructions, but for his own benefit rather than yours, might pressure you to hold the stock you originally instructed him to sell. Failure of a broker to follow your instructions, and even improper pressure to change your instructions, can be grounds for recovering your loss.
• Misappropriation and Other Criminal Activity: Occasionally, a broker will engage in plainly criminal acts like theft, fraud, and forgery. In essence, the broker hatches a scheme to steal your money. Sometimes this scheme will involve what is known as "selling away," meaning the broker's investment activities are being done on the side and are not being reported to or approved by the brokerage firm that employs him or her. Brokers have even been known to sell investments that don't exist. You have the right to seek recovery for any fraudulent conduct that results in misappropriation of funds by a broker.
• Concentration: A broker generally has the duty to recommend that the customers account be diversified among different investments, investment classes, and industries. Proper diversification is one of the best ways to control risk and avoid excessive losses. If a broker concentrates too much of your portfolio in one type of investment, (such as stocks), or puts too much of your money in only one or two different stocks, or buys too many stocks in the same industry, you face a much greater risk of suffering a large loss. For instance, millions of investors lost money beginning in early 2000 because their brokers had concentrated their accounts in high-flying technology stocks that plummeted en masse. A broker who fails to recommend a properly diversified account can be liable for some or all of your losses.

WARNING - Deadlines apply to all of these rights of recovery. Delay can result in your claim being time-barred, or in a particular forum refusing to hear your complaints. But these deadlines are complicated. Don't procrastinate in seeking qualified legal assistance. Likewise, don't give up because you assume you've waited too long. Tony Hartman, Jay Salamon, and Hugh Berkson, at the law firm of Hermann, Cahn & Schneider are experienced Ohio investment fraud lawyers who can look at your case. Contact us. We'll let you know for sure.

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