Investments are made to help individuals achieve their long-term financial goals. They are a means of enhancing the future. However, when financial advisors or brokers take advantage of an investor for their own selfish monetary gain, an investor’s future can quickly come crumbling down. Money earmarked for college, retirement, or future plans can be lost, and most people are made to believe that there is no recourse for getting back their losses.
Before you go back to square one, contact the legal team at Erez Law. Some types of investment losses are recoverable, especially if fraud or misrepresentation played a role in the loss. If you are interested in obtaining more information on how an attorney may be able to help you get compensation for your investment losses, reach out to the experienced team at Erez Law. We want to hold brokers to the highest ethical standards and ensure that there are repercussions for fraudulent behavior. Contact us today for a free consultation by calling (888) 840-1571.
Are Investment Losses Recoverable?
When people invest their money, they may operate under the assumption that if their investment money is lost, it is just that, lost. Individuals tend to write off these losses as the “cost of doing business.” The money is written off or forgotten about, and the individual who invested is left feeling embarrassed, betrayed, and financially impaired. What many people don’t realize is that in certain situations, investment losses can, in fact, be recoverable.
Which Investment Losses Can I Try to Recover?
Not all investment losses can be recovered, but there are some situations where losses incurred under certain circumstances may be recovered. There are generally three situations that may warrant an investor’s money being recovered. Those situations include churning, unsuitable investments, and misrepresentations or omissions.
Churning is also known as excessive trading. Churning happens when a financial advisor or broker makes a large number of trades. This is done to generate more commissions for themselves, not because of market volatility or because they think it is for their client’s benefit.
Churning is an act that breaches a financial advisor’s duty to recommend both suitable investments and investment strategies. If an account’s equity has been turned over multiple times in a year and a single broker has made the bulk of the transactions, churning could be taking place.
If investing money and generating a profit were easy, everyone would be doing it. That isn’t the case, and that is why people turn to professionals for advice on suitable investments and investment strategies.
FINRA is an organization authorized by the U.S. Congress to protect investors. They are responsible for ensuring that brokers operate fairly and honestly in their dealings with investors. Before a broker makes an investment, they are supposed to consider the investor’s needs and take into consideration the investor’s personal goals and objectives.
A retired individual is unlikely to want to put the bulk of their nest egg into high-risk investments. A broker or financial advisor that makes investments counter to the needs or wishes of the investor or who makes investments that aren’t in their client’s best interest may be guilty of making unsuitable investments.
Misrepresentations and Omissions or Unauthorized Trading
People make important decisions based on facts. Investing is no different. When a broker presents an investment opportunity to an investor, they are required by both state and federal laws to disclose the truth about the opportunity. With the appropriate and necessary facts and figures in hand, an investor can make an educated decision about whether they want to accept the risk of making an investment.
However, a broker may misrepresent the facts or leave out crucial facts in their pitch in order to entice a client into investing in a project. Failing to fully inform an investor about undue risks, expected future performance, or other vital information is a breach of duty.
Unauthorized trading is also considered a misrepresentation and omission, because unless power of attorney has been bestowed on a broker, all trades made must be approved by the investor. Unauthorized trading is when a broker makes decisions and executes investments without the express consent of the investor themselves. Like when someone makes a purchase on a credit card without the owner of the card knowing it, it is an action that can cost the investor to lose
What are the Most Common Types of Investment Loss?
While there are three predominant categories of investment losses that are recoverable, there are numerous schemes and scenarios that can result in these types of losses. Some of the most common circumstances that can result in an investment loss include:
A Ponzi scheme is a type of fraudulent investment strategy. It may also be called a pyramid scheme. A schemer gets a core group of individuals to invest their money in a fraudulent opportunity or investment deal. The deal usually promises high returns for little to no risk involved, a “too good to be true” type of offer. The schemer and sometimes the original investors entice other people into investing their money as well.
Instead of investing this money, the schemer uses some of it to pay off original investors while pocketing the rest. As more people join, the return to the schemer increases. There are little or no actual, legitimate earnings. Ponzi schemes collapse in on themselves when the promoter of the scheme runs out of new investors and, therefore, new influxes of cash.
Promissory notes are similar to IOUs. They are a written promise from one party to another that debt or a sum of money is owed. A promissory note can be redeemed either on-demand, or a future date of payment can be specified on the note. Although these notes can be issued by financial institutions, more often, they are used by small companies and individuals who are unable or unwilling to get capital from traditional financial institutions.
A promissory note can turn almost anyone into a lender. These notes may promise high rates of return as a way to compensate for the unknown risk of investing.
A margin account allows a client to borrow money from a brokerage firm in order to buy certain investments. However, there are federal limits in place as to how much an investor is allowed to borrow under a margin account. Federal law also requires that these clients maintain a certain percentage of an account’s value to use as collateral since they borrowed the money to begin with.
This can be a risky strategy when the investment declines in value, which is why high-risk purchases should be avoided. Using a margin account can maximize commissions for the broker, meaning that margin abuse may be a concern.
Brokers are paid on commission. Some brokers or financial advisors will resort to intense or “high-pressure” sales techniques to generate commissions for themselves. These tactics can include pushing unsuitable investments onto individuals in an attempt to generate more commissions. Investors may feel forced, pressured, or even bullied into making investments that are not in their best interest.
Direct Participation Programs
A direct participation program, also known as a DPP, is a non-traded and pooled investment. These investments are typically in real estate or energy-related fields that seek money for a lengthy period of time, typically five to ten years. These DPPs may be able to provide investors with a stream of income from the venture itself. However, DPPs are also used by fraudsters as a way to siphon off fees and commissions from investors.
Outside Business Activities
Outside business activities are also sometimes referred to as “selling away.” A typical scenario may involve a reputable or licensed broker or financial advisor telling an investor that they have a good investing opportunity. The investor will give the broker money, and the broker will end up investing that money directly in the opportunity, avoiding making a transaction through the brokerage firm. This round-about selling activity is a violation of FINRA regulations.
Theft or Forgery
There is no complicated definition. Some brokers or financial advisors will outright steal by using forgery or other means to direct money from an investor or investor’s account into their own pocket.
Unfortunately, financial elder abuse costs elderly individuals billions of dollars each year. Brokers or financial advisors may take advantage of an elderly individual’s good-faith or lack of knowledge about the markets to swindle them out of their retirement money. This type of abuse can include high-pressure tactics, misinformation about investments, fraudulent investment schemes, or outright theft or forgery.
Signs of Investment Fraud or Misrepresentation
Investment fraud and misrepresentation may be difficult to spot. Brokers do not want to be caught. Once an investor catches on that something may be wrong, the broker’s meal ticket ends. There are also serious penalties for those caught swindling investors. So how can investors identify when they are being taken advantage of? Watch for some of these classic warning signs:
- High returns with little or no risk involved
- Returns that seem too consistent
- Dealing with unlicensed sellers
- Difficulty getting payments issued
- Broker being too pushy or using high-pressure sales tactics
- Broker not clearly answering investor questions or using evasive answers
- Broker not allowing the investor to ask questions
- Broker using misleading statements
- Unprofessional business conduct on the part of the broker
- Broker not returning phone calls
- Lack of communication from the broker
- Failing to recognize all transactions on your account statement
- Broker making unapproved investments on your behalf
- Investment strategies that seem too complex
- Investment strategies that are secretive
- Broker promises inside information or has “special” connections
- Broker asks for unnecessary personal information or bank account numbers
Can an Experienced Investment Loss Attorney Help Me?
If you have experienced investment loss, you may have legal options available to you for seeking financial compensation. These types of cases can get intensely complex and intricate, which is why you need the help of a skilled and experienced investment loss attorney. The legal team at Erez Law has the resources and the knowledge base to investigate complicated financial matters and get to the bottom of your investment loss situation.
You don’t have to sit back and accept serious investment losses. Take a stand and contact the attorneys of Erez Law for help. We can review your case and lay out your options for seeking compensation through the legal system. For a case evaluation, contact us today at (888) 840-1571.