Differentiating Investment Misconduct from Market Volatility: A Guide to Identifying and Responding to Losses

Investment Losses

Volatility in markets exposes the weaknesses or unsuitability of investment strategies and securities recommendations by advisors, such as over-concentration in certain securities or too much leverage. If investment strategies are sound, investors can generally withstand fluctuations in the market that are to be expected. Volatility puts stress on investments and can lead to massive losses in an unstable market when investments or strategies are unsuitable. Knowing how to distinguish between market volatility and fraud can help you recognize foul play when it happens and respond to it appropriately.

What Is Market Volatility?

Market volatility is the frequency and impact of movement in the market. Volatility can correspond with gains or losses. Market volatility can be caused and affected by various factors, such as:

  • Political developments and elections
  • Geopolitical events
  • Natural disasters
  • Industry changes and regulations
  • Company public relations
  • Monetary policies
  • Economic strength or weakness
  • Changes in interest rates
  • Company performance
  • Unsuitable valuations
  • Changes in sentiment

These factors are inherent in investing in the market.

What Is Investment Fraud?

Investment fraud refers to misconduct by brokers, advisors, or brokerage firms that cause investors to lose money. This behavior can take many forms, including the following:

  • Brokers recommend investments that are too risky or otherwise unsuitable based on an investor’s goals, planned investment time, and risk tolerance. They often do this to generate high commissions.
  • Advisors intentionally provide false or misleading information about investment products to generate sales, including making unrealistic claims about potential returns.
  • Firms create complicated investment products designed to conceal risks and fees. They then pressure brokers to push these products.
  • Brokerage firms fail to properly supervise brokers, letting deceptive sales practices continue unchecked. They might encourage bad behavior through sales quota incentives.
  • Brokers recommend investments derived from Ponzi schemes, which use money from new investors to pay fake “returns” to earlier investors and give the illusion of profitability because they fail to conduct proper due diligence into the investment and consider what is in their client’s best interest. This fraudulent setup eventually collapses, wiping out the investments along with it.

Investment misconduct is a deliberate or negligent act by financial professionals that leads to investor losses. The common thread is brokers and firms prioritize their own profits over their duty to provide sound advice and transparent recommendations suited to an investor’s needs and goals and what is in their individual best interest. When a brokerage firm or one of its brokers causes your investment losses due to misconduct, the team at Erez Law, PLLC can step in. We have over 35 years of experience and have recovered more than $200 million for our clients.

How Market Volatility Can Expose Investment Misconduct

Market volatility is a normal part of investing. However, market volatility can often expose when brokers have recommended products that are unsuitable for their clients or that are not in their best interest. When the market is in bull mode, it tends to cover up unsuitable investments and strategies. However, when the market is under pressure, mistakes are revealed.

For example, investors see extra returns when the market goes up with margin or leverage. However, when the market declines, this leads to margin calls and realized losses. The same can occur with structured notes linked to risky indices.

Brokers and advisors must complete a suitability assessment for each client and investment. Part of this assessment involves carefully considering the investor’s objectives, risk tolerance, and market conditions. Even when the broker does not intend to mislead the client, the brokerage firm may still be responsible for the broker’s failure to prepare a proper suitability assessment.

Brokers also have a duty to recommend investments that are in their clients’ Best Interest (Reg BI). When they fail to consider the current economic conditions or their client’s long-term investment goals and sell unsuitable investments to them, they are not acting in their client’s best interest. They and the firms that hire them can be held accountable for such misconduct.

Options for Financial Recovery

If you discover that your investment losses have occurred due to financial misconduct, you may have options to recover your money. The primary form of recovery is through alternative dispute resolution, including FINRA arbitration. Jeffrey Erez has tried over 50 cases in arbitration and is ready to help you.

The key to understanding your options and seeking justice is to work with an experienced investment fraud attorney. Contact Erez Law, PLLC today for a free consultation to learn more about how our legal team can help you.

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Author: Jeffrey Erez

The founder of Erez Law, Jeffrey Erez, focuses exclusively on securities arbitration and litigation. Mr. Erez passionately believes in representing aggrieved investors and obtaining justice for his clients through litigation.