You see it in movies — an image of slick stock broker in a basement boiler room in Manhattan, Brooklyn or Staten Island cold calling customers. The pitch is standardized. The broker has a secret stock or IPO just for you (the innocent investor), but the catch is you have to act now because the opportunity won’t last and there is a limit to how much you can buy. The broker gains your trust by making you believe you are getting a special opportunity not available to the masses – that you are a part of an exclusive club of savvy investors. This doesn’t just happen in the movies; just ask all of the victims of Bernie Madoff’s Ponzi scheme. And it still happens today.
The investor thinks he or she has limited risk by buying only a few shares. Meanwhile, the broker has offered to set up the account for the investor which includes an option and margin account to supersize the purchases for the investor, often without the investor realizing that is included in the sign-up forms.
Things go smoothly when the market is great, but things change when the market takes a turn for the worse. The losses mount and the broker is suddenly unavailable. Things spin out of control and your once significant portfolio has dwindled and is filled with a lot of questionable transactions. When you are finally able to speak with your broker, he casually explains your losses as a fluke and that he can easily make back the money with a new investment that, of course, is not available to the masses. Desperate to make up the losses, you once again put your trust in the broker. However, it is to no avail. To make matters worse, as you dig to find out why these investments did so poorly, you learn that your broker and the brokerage house he is associated with have a stake in the various investments – a conflict of interest that was never disclosed to you.
Angry and without answers, you turn to a lawyer.
The lawyer tells you that you cannot sue in court. Rather, he explains that you are forced to pursue binding arbitration before FINRA because when you signed documents establishing your account, you also signed provisions making arbitration your exclusive means of recover. Arbitration before FINRA is governed by the Federal Arbitration Act. FINRA is a private entity funded by the securities industry that both regulates and works with the securities industry to provide oversight. You can see the potential conflict. It is overseen by the Securities Exchange Commission. Parts of the process are cloaked in secrecy. Public interest groups have long sought to obtain statistical data, but they have been denied access. Public Investors Arbitration Bar Ass’n v. SEC, No. 13-5137 (D.C. Cir. Nov. 14, 2014). Public interest groups contend that overwhelmingly the cases go in favor of brokers and brokerage houses.
At the end of the day, if you or a loved one has been cheated, you can report the misconduct to FINRA, and you can arbitrate. You will need to hire an attorney who is familiar with FINRA arbitration and an expert to prepare an analysis of your losses. If you are successful, you can recover your losses, interest, costs, legal fees and in a very few cases punitive and other damages. You can find attorneys with FINRA experience at your state bar association or online. You can also review resources at www.FINRA.org/arbitration-and-mediation.
Please note that this article is designed to give general information on the developments covered and does not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice. The following general article might be of interest to you as you research your legal issue. For advice about your legal situation, contact Mahdavi, Bacon, Halfhill & Young, PLLC directly.