Most investors have suffered significant losses in their brokerage accounts when the market plummeted amid the COVID-19 health crisis. While many investors’ losses are attributable to nothing more than the market decline, some investors’ losses may have been the result of a broker’s negligence or a brokerage firm's misconduct. Those investors would include (1) retirees living on a fixed income and other conservative investors who did not want to be or could not afford to be exposed to the stock market, and (2) those investors whose losses are substantially greater than market losses.
Millions of retirees do not have the ability to return to work to generate income to replace their investment losses. Many of these retirees relied on their brokerage accounts to pay for their living expenses during their retirements. Other investors, regardless of their station in life, are conservative by nature and did not want their money exposed to the volatility or risks of the stock market. As a result, retirees and conservative investors may have a valid claim to recover their losses because their money should not have been exposed to the stock market.
Still other investors have seen their accounts decline in value by a much greater percentage than the overall stock market decline. Those investment losses may be the result of undisclosed risks of margin, leveraged investments, option strategies, structured products, over-concentrated stock positions, or other unsuitable investment strategies recommended by a broker.
If any of the above describes you, you may be asking whether you have any recourse to recover your investment losses. The short answer is yes. But determining whether you have a valid claim requires an evaluation of numerous facts and circumstances.
Below is a list of issues that need to be evaluated.
1. Is it really possible to recover my investment losses?
2. What situations can give rise to a claim to recover my losses?
3. What factors determine whether I have a claim?
4. Where do I file my claim?
5. How long do I have to file a claim?
6. What should I do to get started with my claim?
Lawyers who specialize in this practice area can assist you in evaluating your potential claims. Dimond Kaplan & Rothstein, P.A.’s investor rights lawyers have vast experience representing victims of stockbroker negligence and brokerage firm misconduct. DKR’s lawyers can assist you in examining the numerous variables that can determine whether you have a valid claim to recover your investment losses.
1. Can I Really Recover My Investment Losses?
Yes. If your investment losses are the result of broker or brokerage firm negligence, fraud, or some other misconduct, you may be able to recover at least some portion of your investment losses. To be clear, most investors suffer investment losses during a market crash. But the simple fact that you lost money or even that your losses are greater than what the market lost does not, in itself, give rise to a valid claim to recover investment losses. You must demonstrate that your losses were the result of misconduct by the broker or brokerage firm.
2. What Situations Can Give Rise to a Claim to Recover My Losses?
Some of the common situations that may give rise to an investment loss claim are: margin losses, over-concentration or lack of diversification, options and other complex product losses, and unsuitable investment recommendations or failure to follow investors’ instructions.
A. Margin Losses
Margin involves borrowing money to buy securities. The securities in your account serve as collateral for the loan. If the securities drop in value, such as during the current coronavirus market crash, the brokerage firm can sell your securities to pay down the margin loan.
This type of investing can be very risky. In fact, using margin can cause you to lose the entire value of your account, and even more. If your broker recommended margin borrowing and did not properly explain the risks or if you could not afford the risks of margin borrowing, you may be able to bring a claim to recover your losses.
As of February 2020, FINRA reported that a total of $545 billion in margin balances were outstanding (not including non-purpose loans) in customer accounts. Many of those accounts likely experienced margin calls during the COVID-19 market crash. Most margin agreements give brokerage firms broad discretion to force margin liquidations. But, if the brokerage firm improperly recommended the use of margin or if the brokerage firm failed to exercise a margin liquidation in good faith or in a commercially reasonable manner, you may have a claim to recover your margin liquidation losses.
If you suffered significant losses from margin liquidations, we need to know if your broker recommended that you use margin or if the brokerage firm liquidated your securities in an unreasonable manner.
B. Concentrated Stock Positions
Concentration (or more accurately over-concentration) is when a significant portion of your account is invested in only one stock or in securities from one sector of the economy. That is, you have “too many eggs in one basket.” This lack of diversification subjects investors to significant risk of loss if the particular stock or economic sector declines.
When markets fall dramatically, over-concentrated portfolios can lose much more than the general markets. This is especially true when the stock or economic sector in which you are invested is especially volatile. For example, hotel, cruise line, airline and oil and gas stocks have been particularly hard hit during the COVID-19 pandemic.
Brokerage firms may claim that they did not know and could not have known that your over-concentrated holdings were going to decline in value. But that is not a valid defense. Because no one has a crystal ball to see how securities or industries are going to perform in the future, diversification can protect you from unforeseeable events. Indeed, diversification is a fundamental investment tool precisely because no one has a crystal ball.
If you lost money because your account was over-concentrated in a single security or economic sector you may have a claim to recover your losses. We would need to know how those holdings came to be in your account. Did the broker recommend the securities? Are you an employee of the company whose stock was concentrated in your account? Even if you acquired the shares through your employment, did your broker fail to diversify your account or implement a protective option strategy? Unsuitable recommendations to concentrate your account in only one stock or securities from one economic sector can give rise to a claim against the brokerage firm.
Moreover, if your broker recommended that you hold the over-concentrated positions or advised you to “hang in there,” “sit tight,” or “stay the course,” you may have a claim to recover your investment losses. Recommendations to hold an unsuitable over-concentration in a security or sector are just as actionable as unsuitable recommendations to buy.
C. Options and Other Complex and Risky Products or Strategies
Options, structured products, volatility investments like VIX-based securities, and leveraged ETFs and ETNs often subject investors to significant risk of loss. As a result, these investments and strategies are unsuitable for many retail investors.
Yet, some brokers and brokerage firms claim these products will provide significant investment returns with limited losses. Some brokers do not properly understand these investments and sell them to investors anyway. Some marketing materials mislead investors about the risks or nature of the products or strategies. And some brokerage firms structure these products incorrectly or manage the recommended strategy improperly, thereby subjecting investors to excessive, undisclosed risk of loss.
These products or strategies can cause devastating losses when markets plummet or simply when markets are volatile. When the bottom recently fell out of the stock market during the COVID-19 pandemic, many of these risky products and investment strategies suffered enormous losses – losses that often were substantially greater than the general market losses.
If you lost money in an option strategy, a structured product, leveraged ETFs or ETNs, VIX-based securities, or some other risky product, you may have a claim if your broker misrepresented the risks or exposed too much of your money to that risk, or if the brokerage firm structured these products incorrectly or managed the recommended strategy improperly.
D. Unsuitable Recommendations or Failure to Follow Your Instructions
Brokers are obligated to recommend only suitable investments. That means that your broker is permitted to recommend only those securities and investment strategies that are consistent with your investor profile. In making recommendations, your broker is required to consider your age, investment objectives, risk tolerance, ability to withstand losses, and liquidity needs, among other things. This obligation is generally referred as the “Know-Your-Customer” rule.
Moreover, your investor profile may change over time. You may have children and a need to save for college tuition. You may retire and need to live on a fixed income. You may face a health crisis that requires a significant financial obligation. These life changes can alter your risk tolerance and your investment objectives, and your broker must consider changes to your investor profile when making investment recommendations.
If your broker recommended investments or an investment strategy that was not consistent with your needs and investments goals or if your broker failed to consider changes to your investor profile, you may have a valid claim to recover your investment losses.
In addition, brokers are required to follow your instructions. For example, if you clearly expressed that you were not willing to expose your account assets to significant risk of loss, brokers are not permitted to recommend risky investments (even if you can afford to take risks with your money). If you asked your broker to put a protective strategy in place, but your broker failed to do so, you may be able to recover your losses. The failure to follow your instructions can subject the brokerage firm to liability.
When your broker violates an industry rule or a law and you lose money as a result, the employing brokerage firm often can be held liable for your broker’s misconduct. Moreover, because brokerage firms are obligated to supervise brokers, the brokerage firm can be held liable for your losses as a result of the brokerage firm’s failure to adequately supervise your broker.
3. What Factors Determine if I Have a Claim?
The evaluation of a stockbroker negligence claim or brokerage firm misconduct claim can be complicated and involves an examination of numerous facts. When clients contact DKR’s investor rights lawyers, the dollar amount of your losses and the market events that played a role in your losses are only two pieces of the puzzle that makes up your claim.
Our team has vast experience representing thousands of investors throughout the United States and Latin America. We have recovered more than $100 million for our clients. Some of our team members have worked in the financial services industry and others have represented brokerage firms and defended these types of cases earlier in their careers. Our knowledge of the securities industry and our well-rounded experience in customer-brokerage firm disputes not only allows us to evaluate your claims, but we also can anticipate and prepare for a brokerage firms’ defenses.
A. Can the Brokerage Firm Afford to Pay Me?
In addition to the liability aspect of a case, we consider whether the brokerage firm can pay a settlement or arbitration award. Even with a strong liability claim, it may not make economic sense to pursue a claim if the brokerage firm does not have the money to pay you.
Many investors are unaware that brokerage firms are not required to carry liability insurance. Even when brokerage firms carry insurance, many insurance policies covering small brokerage firms often have low coverage limits and are filled with coverage exceptions and exclusions. As a result, it is important to understand a brokerage firm’s finances. The Securities and Exchange Commission maintains a database of brokerage firms’ annual financial filings at www.sec.gov. Our knowledge of brokerage firm insurance and our ability to evaluate a brokerage firm’s finances is a vital first step in the investigation of your potential claims.
B. Factors Concerning Brokerage Firm Liability
Once satisfied that a brokerage firm is financially capable of compensating you for your losses, DKR will have a detailed discussion with you about your investment history, your personal financial situation, your investment objectives and risk tolerance, and your interactions with the brokerage firm. We also will carefully review your account statements and other documentation, including any communications between you and the brokerage firm (letters, e-mails, texts, and voice mails), and any marketing materials or risk disclosures that the brokerage firm gave to you relating to the investments or investment strategy at issue.
1) Your Investor Profile
The strength or value of your claim can rise or fall depending on who you are – your investor profile. Are you an experienced investor with significant knowledge and understanding of the securities markets? Are you a retiree living on a fixed income? Were you saving for your children’s college education? Did you have liquidity needs to pay for medical care or to care for a family member? Were you willing to forgo asset growth in order to preserve your principal? Were you interested in aggressive growth, even if that meant taking greater risk of loss? Was the money in your account all or most of your liquid assets or do you have a significant amount of cash or investments in other accounts?
The answers to the above questions can significantly impact the strength of your claim.
2) Your Interactions with Your Broker and the Brokerage Firm
As part of your claim, you will have to demonstrate that your broker or the brokerage firm did something wrong. Because brokers and brokerage firms rarely admit wrongdoing during a case, you may need documentary evidence to prove your case. For example, do you have e-mails from your broker that prove that an investment was recommended? Do you have text messages that contain your broker’s claims that a certain investment or strategy was safe, when it actually was very risky? Do you have the brokerage firm’s marketing materials that contain misleading information about the nature or risks of an investment or strategy?
Our review of the above documents and others relating to your claim, are vital to our ability to fully evaluate (and ultimately prove) your claim. A single e-mail or text message can significantly alter the strength of your claim. It is important that you gather all written communications between you and your broker and between you and the brokerage firm, your monthly account statements, your account agreements, and marketing materials or other written materials regarding the investments or investment strategies relating to your claim. If you do not have all documents, our lawyers usually can obtain most of them from the brokerage firm.
4. Where Do I File My Claim?
Most brokerage firms’ account agreements require customers to pursue disputes with the brokerage firm through binding FINRA arbitration. This is a private dispute resolution forum, rather than the public court system. The process is designed to be more time and cost efficient than traditional court litigation. There typically are no depositions, with discovery predominantly involving the production of documents.
FINRA arbitration claims typically take 12 to 18 months from the time a case is filed through the time of the final hearing (i.e., the trial). In many instances, cases are settled before the final hearing, thereby decreasing the length of time that it takes to recover your market investment losses.
5. How Long Do I Have to File a Claim?
Pursuant to FINRA rules, any claim must be filed within six years of the occurrence or event giving rise to the claim. There often is a dispute regarding what triggers the running of that six-year period. Some argue that the initial recommendation or investment purchase starts the clock. But other later events also can serve as the occurrence or event that begins the six-year period.
In addition to FINRA’s six-year eligibility period, statutes of limitation may apply to your claim depending on your state of residence. Many statutes of limitation are shorter than FINRA’s six-year eligibility period so it is important that you act timely if you have a claim. The failure to file a claim within the required time may prohibit you from prevailing on your claim, regardless of how bad your broker’s or the brokerage firm’s conduct was.
6. What Should I Do to Get Started with My Claim?
Many investors are inclined to attempt to recover their losses from the brokerage firm on their own. This is rarely effective. Brokerage firms often simply claim that there was no wrongdoing. And when a firm offers a settlement, the offer usually is far less than the losses.
Investors also rarely obtain any satisfactory result from contacting the SEC or FINRA. While these regulatory entities are charged with policing the securities industry, they generally do not assist investors in the recovery of investment losses.
If you believe you are a victim of stockbroker negligence or brokerage firm misconduct, you should seek the advice of a lawyer who has expertise in the area of FINRA arbitration. Consultations with DKR’s investor rights lawyers are free, and our attorneys possess the requisite knowledge to determine if you have a valid claim to recover your investment losses.
DKR represents investors on a contingency-fee basis. That is, you would not pay any attorneys’ fee unless and until we recover money for you. And even then, our fee would be paid out of the recovery. An attorney experienced in handling stockbroker misconduct disputes likely will be able to achieve a better result for you than if you were to act without counsel.
Call Dimond Kaplan & Rothstein, P.A. at 888-578-6255 for a free case evaluation. We can help you navigate these issues and answer your questions. If we identify negligence in the handling of your brokerage account, we will discuss a strategy to pursue a claim to recover your losses.