Brokerages Can Point the Finger But They're Still Liable

Just the other day, a FINRA (Financial Industry Regulatory Authority) arbitration panel found Wells Fargo liable for $2.8 million because Wells Fargo failed to adequately supervise a major account in which there was significant fraudulent activity. As we've mentioned in previous posts, even though Wells Fargo did not perpetrate nor was it a party to the misconduct itself, the fact that Wells Fargo (back then it was Wachovia) served as the supervising broker-dealer of the investment accounts in which fraud was taking place under FINRA's regulations means that it's on the hook. This is important from the standpoint of fiduciary responsibility and internal financial industry checks-and-balances, as well as from the practical legal and economic standpoint of recovering losses suffered due to financial misconduct of various kinds. From a fiduciary standpoint, it's vital that brokerage firms and not just individual brokers or investment advisors (or in the Wells Fargo case, a secretary at a law firm representing the aggrieved Boca Raton-based family investment partnership) be held accountable for misconduct occurring within client accounts. When something goes wrong, in the eyes of FINRA, brokerages cannot simply point the finger at rogue brokers or scheming secretaries and say it's strictly the other guy's/gal's fault. Now, not only is this good internal practice, forcing brokerages to monitor and regulate themselves as the first line of defense against misconduct, but legally it often enables clients who lose money--in this case, some $6 million--at the hands of crooks to go after the brokerage firm, too. In the Wells Fargo case, the family investment partnership successfully prosecuted the secretary who perpetrated the fraud against them in civil court. Unfortunately, the secretary was unable to pay the damages. Surprise, surprise. The partnership's legal team then smartly took their case to FINRA, and shined the spotlight of accountability on Wells Fargo. Although the secretary was the agent of fraud and not working for Wells Fargo, the bank was found by a FINRA arbitration panel to be liable for negligence to the tune of $2.8 million, since they didn't catch the fraud and losses in the accounts as soon as they should have. Obviously, the partnership has a much better chance of recovering money from Wells Fargo than from a disgraced secretary.

If you or anyone you know has been the victim of broker misconduct of any kind, please contact us immediately for a free consultation.

Brokers May Have Been Broken by Financial Crisis

Did post-traumatic stress disorder lead huge numbers of brokers to make bad investment decisions on behalf of customers in the aftermath of the 2008 financial crisis? According to a recently published study from an academic journal called, "The Journal of Financial Therapy" (who knew such a thing existed!), it seems entirely likely they did. The study is based on a survey of financial advisers across the industry, “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Post-Traumatic Stress," and according to an article in MarketWatch the survey found that 93% of financial advisers and planners admitted they'd wrestled with PTSD following the crisis. That's not all, though. Shockingly, fully 40% of respondents to the survey said they had suffered severe PTSD symptoms. The respondent pool was responsible for anywhere between $20-$40 million in assets.

In order to qualify for a clinical diagnosis of PTSD, one must exhibit symptoms including sleep disturbance, high stress levels, anxiety, difficulty concentrating, and self-doubt for a period of more than one month. Many of the financial advisers who took part in the survey claimed that their symptoms continued for far longer than that--in some cases, for years afterward. Moreover, the study shows a correlation between the brokers' PTSD symptoms and a widespread shift in investment strategy over a period of a few years.

Although we sympathize with brokers who suffered personally during one of the worst financial crises in history, we tend to sympathize more with the customers whose life-savings simply vanished during that very same crisis, and who, we're quite sure, experienced their own form of PTSD or worse.

One psychologist quoted in the article mentions that PTSD sufferers tend to engage in very risky behavior like "substance-abuse, aggression, and thrill-seeking." Indeed, at The Green Firm it has been our experience that a surprising number of brokers reeling from the financial crisis have demonstrated such erratic behavior in its aftermath, often at the expense of customers who had already suffered losses due to the market's collapse. No matter how much sympathy we accord to brokers suffering from PTSD, they are still professional investors, still responsible for our money, and they still have supervisors who should be monitoring them for symptoms associated with PTSD as with any other condition that causes them to be unable to do their job. 

If you or anyone you know has been the victim of broker misconduct or any other form of investment fraud or negligence, please contact us immediately for a free consultation.

FINRA's Monthly Blacklist

We don't know about you, but seeing the unjust finally get their due always gives us a boost. hat's in part why we look forward to the release of FINRA's monthly "Disciplinary and Other FINRA Actions" report. This is just what it sounds like, a listing of all the sanctions, fines, suspensions, and other disciplinary actions that have handed down by FINRA against the iniquitous brokers, investment advisors, and brokerage firms who have dis-served or manipulated their customers in so many different ways. It's a long report, but what stood out to us is the recurring appearance of firms who have mishandled private placements in flagrant disregard for FINRA's warnings over the past few years that they would be cracking down on private placements (see 2010 and 2011 "Annual Regulatory and Examination Priorities Letters" as well as Regulatory Notice NTM 10-22 in April 2010.) FINRA was not kidding. Janco Partners, Lincoln Financial, Roth Capital Partners, and the Tidal Group--to name a few--have all suffered penalties as a result of failures to fulfill their obligations related to private placements. If you're not sure or need a refresher on what a private placement is, here's Wikipedia on the subject:

Also worth noting in the report is the fact that KMS Financial Services was punished for failing to do its due diligence before letting its broker-dealers sell shares in a dubious hedge fund. Bad on them. FINRA warned you! According to Regulatory Notice 10-22, if a firm knows about a private placement offering, they are required to conduct due diligence to make sure the private placement is suitable for its customers before investing. 

Finally, FINRA also provides listings for individual brokers who have been suspended. It's a long list (see page 17). If you've ever had it in the back of your mind that your broker-dealer ripped you off, why not see if he or she made the list... And then contact us. 

Granny Gets Taken

 A particularly distasteful case recently came to our attention that describes how a former Wells Fargo Broker defrauded an elderly widow out of $650,000. Despicable. And, unfortunately, all too frequent an occurrence...

The elderly are common targets for financial adviser misconduct, fraud, and all kinds of other injurious, unlawful behavior. One tip for elderly people (and for the younger generations who should be looking out for them) to prevent being taken advantage of would be to take the time each month to review your account statements. If there is anything fishy or even just difficult to understand in the statements, schedule a meeting with your financial adviser in order for him and her to explain everything in the statements.  If you have reason to suspect he or she is not being honest with you, begin to document these meetings and any other meetings you have with your adviser.  It is a helpful way to remember what you were told; and, if you ever end up in arbitration for any reason, you will have an incredibly effective tool for an attorney arguing your case. 

If you or anyone you know has been a victim of broker misconduct or securities fraud, please contact us for a free consultation.