An Intro to Stock Broker Malpractice Claims

Host Sean Harris talks with plaintiff attorney, Dave Meyer, about stock broker malpractice claims.

Sean: Hello and welcome to Civilly Speaking, OAJ’s monthly podcast on practical and timely legal issues, I am your host Sean Harris. Our guest today is Columbus attorney Dave Meyer with the firm of Meyer Wilson and our topic today is stock broker malpractice claims. Dave welcome to Civilly Speaking.

Dave: Thank you.

Sean: Tell us when a new client walks into your office, what’s a typical client look like?

Dave: The most typical client that calls our office is somebody who is between the ages of 55 and 75, they’ve worked for 30-40 years to save a substantial amount of money, with hopes to retire and live off that money and they’ve trusted a financial advisor or stock broker to recommend and implement a strategy of investment that would be appropriate for them and something has gone wrong, which would trigger their call to me. Maybe they’ve lost a substantial amount of money or they are surprised by something they see on their statement and they have a concern that those loses may be caused by something that the broker did wrong. That is usually what triggers the call to me. The big problem in the area is for people to even recognize that they might have a potential claim and the analogy I use is if you are sitting at a red light in your car and someone rear-ends you, I don’t do personal injury work, but I suspect that’s a pretty good case on liability. So that person knows and they have been educated through a lot of good work through trial lawyers over the years that as long as they sustained injury or damage, its likely they have a claim to pursue. But people as investors lose money in the market for a lot of different reasons and of course brokers are not insurers of the market so people lose money a lot of the time as a result of no misconduct, but a lot of times they lost money as a result of misconduct and people don’t know and I believe and I have heard this in our world that 80-90 percent of the investors out there, people like me and you and our parents and grandparents and aunts and uncles who have a potential claim never even pursue it. Maybe they don’t recognize that what’s happened in their account is the result of misconduct or their embarrassed. A lot of people take financial issues personally and their embarrassed. So there is a lot of hesitation to even bring these issues up. Most of the people that call us, call us because their trusted advisor in another area has recommended they pursue legal representation. Maybe it’s their family lawyer or their estate planning lawyer or their business lawyer and it might be their accountant. A lot of these loses are exposed on tax forms and a lot of accountants say hey you know I see a lot of these kind of investments and I think there is a potential problem you should call somebody.  Often times, and this may surprise many people, it’s their new financial advisor. When somebody loses money or is unhappy, whether it might be a change in family circumstances they call another advisor and another advisor looks at it and says holy crap, this is crazy you need to do something about that. So those are usually the trigger points.

Sean: And you mentioned that there is a difference between some misconduct on behalf of the advisor and a bad result and we will talk about that in a minute, but I want to, you mention that a couple categories of whether it be a broker or a financial advisor and I gather that those are terms of are that matter.

Dave: So one of the first things, there are two or three things as a lawyer considering expecting a case of investment fraud, there is a few things you need to do immediately and the first question, I mean I have three or four questions I ask immediately within the first 15 or 20 minutes of an initial intake, but the first question you need to understand who the person was working with. Not only of course their name and where they are, but there are several different types of stock brokers, financial advisors, a lot of different names. A lot of them are legitimate, a lot of them are not legitimate so you’ve got to break through that cloud and figure out what type of license does that person hold and basically it can be divided into two primary types. There’s stock brokers, people I refer to as stock bros and these are what’s technically called a registered representative. They work for a broker dealer or a brokerage firm. Think folks like who work at Mara Lynch, Wells Fargo, Raymond James. Those are stock brokers by their typical name, but their actual name is registered representatives.  And then the other side of the coin and these two make up the bulk of the advisors are registered investment advisors. They are independent advisors, they are regulated differently, the pursuit of claims against both types are completely different so you need to understand first of all who are they working with, is it a registered representative out of a brokerage firm or is it independent advisor that is technically a registered investment advisory that works in an advisory firm because how you go about pursuing those claims is completely different.

Sean: Tell us about that. How are they different?

Dave: So if somebody calls and probably 80% of the calls that we get on a typical week are clients of brokerage firms, what I call full circle brokerage firms, Mara Lynch, Wells Fargo, UBS, Raymond James. So the first thing you do, say the person says I work with Jane Jones from Mara Lynch then we go online during initial intake and you can pull all this up on the internet, this can literally be done in 30 seconds, you can go to FINRA, which is an acronym for the Financial Industry Regulatory Authority, it’s FINRA, finra.org and you can do what’s called broker check. So if you typed in Google FINRA broker check it comes right up and you type in the name and the location of the broker and their CRD report comes up, Central Record Depository. So the good thing about the financial industry as compared to any other type of professional service, be it doctors, lawyers or accountants, every registered representative, every broker in the United States who is registered with a brokers firm has a public record available to you on your iPad, iPhone and not only should you do this immediately so as you get a call, everybody should do this for their broker that they are working with and their parents and any family or anyone you care about who is working with a broker. Cause you pull it up, now it’s not a 100% accurate and there are a lot of problems with it that lawyers like me do that do what I do are trying to fix, but immediately on your iPad if you are sitting in your living room or whatever you can find the brokers employment history, disciplinary history, regulatory history, information about when they got their licenses, all this is literally on the internet free so the first thing I look at where does the person work. If the broker works at a Mara Lynch or a UBS or Raymond James then you know you have a viable defendant because of course in all the plaintiffs work the first question is does the target defendant, are they collectable? So because we get probably 10 calls a week Sean from people who have invested and trusted their life savings with people who run away with it who steal it but there’s, they don’t work for a broker, they’re not registered then there is nothing you can do. Great case on liability, you know there’s no collectability we all see in our plaintiffs practice. So we know if we look at it and they have been at Mara Lynch for 10 years then we know, it doesn’t say anything about the levity of the claim itself, but we know whether or not that firm is collectible because there are a lot of brokerage firms that we call independent brokerage firms that have very little or no money. You’d be amazed at how many brokerage firms are allowed to intake and invest people’s life savings, but they have very little capital behind them. So people might say oh don’t worry Mr. Meyer I know my broker is with a good firm it’s ABC Investments and I might just know because my experience or I will look it up on the CRD then you can go online one more step to the SCC and figure out, you can see the finances of the company so  every brokerage firm has to file their finances and there is something called net capital, which tells you how much money they have available to pay among other things claims that are pursued against them. So we can do all that in 5 minutes.

Sean: And by the way when you say paying claims, I take it there is no insurance here?

Dave: So there is no requirement that brokers or brokerage firms have insurance. We are trying to work on that because there are a lot of unpaid awards you know much like there probably is in a variety of different plaintiff practices, but there is no requirement for insurance now a lot of the large firms, I am talking about the Mara Lynch, that doesn’t meant that the brokers  the Mara Lynches of the world are worse than anyone else it is just a firm that everyone knows about, they are self-insured, they have plenty of assets available, but there are a lot of firms, and I mean a week doesn’t go by where we get a potential client with a firm that we do not believe has the viability to pay a claim so there is no insurance required now some firms have insurance, but you often don’t know that until you filed a claim, there is a lot of strategy involved to try to maximize the availability of the insurance, but figuring out who the person is licensed with and the viability of the underlying firm is the first thing you should do when in taking a potential client and it is also something you should do for your own family’s well-being, look at the broker  that you are working with because  you’ll see if the broker has any complaints statistically  and this not might be precise but I think that less than 5 or 10 percent of the brokers have 2 or more complaints. So and these are complaints that are disclosed on the record, now there are ways where brokers get these records expunged so it’s not perfect, but compared to lawyers if anyone at one Sean wanted to look you up they wouldn’t know if you had any complaints filed against you, they will know maybe if you ever had an ethics complaint that’s actually been determined by the Ohio Supreme Court, but the information is not nearly as available for lawyers and doctors and accountants. Now I would say that’s good because financial advisors literally have for a lot of people they have access to your entire life savings so there’s a reason that we dig deep to finding that information out, but that’s the first step for brokers. Now if somebody calls in and they work for a registered investment advisor , those are governed either by the SCC the Securities and Exchange Commission or the state regulators depending on how many assets they have under management and it matters because a lot of these firms are independent, they may not be affiliated with a large firm so there may be collection issues and the road to recovery which we can talk about is completely different so there’s completely parallel distinct avenues of pursuit of recovery of claims depending on if it’s a registered investment advisor on one hand or a registered representative at brokers firm in the other.

Sean: Well speaking of the path to resolving these claims I gather there’s going to be some paperwork and documents along the way. What kinds of things are, I know a lot of lawyers when they hear financial stuff their eyes kind of glaze over. Are there particular documents that you are looking at?

Dave: So again, we are in this initial intake, we’ve gone online we have confirmed that the broker with whom the client works is registered at a large financial firm, we’ve confirmed that the dates where the client worked with the broker coincide with the employment so then the issue is what’s the value of the claim and people will always have a number in their mind, hey I think I lost a million dollars and I get calls from lawyers that are considering referring a case to me and they say this is a great case clients lost a million dollars, well that doesn’t mean, that’s one factor of course I mean first of all did they have four hundred million to begin with or did they lose everything they have, over what time period, what types of investments, obviously there are all kinds of questions, but the most important information  I want to see immediately is account statements, now not everyone keeps all there account statements so that varies depending on the client, we want to see that the account opening documents because when you, when all of us go start a relationship with a brokerage firm or an advisor we fill out new account documents and what’s in those new account documents is very important, it has your name, your contact information obviously, but it also has your investment experience, your investment objectives, a lot of other information that we as security fraud lawyers want to look at. So if we can get copies of that and your statements and sometimes people say well I have been with them for 15 years and you know we’ve got folks in our office that are reviewing years and years of statements we try to do what we call an internal P and L, profit and loss to figure out, you know how much money was actually invested, how much money was withdrawn and then try to evaluate how much was lost so we can get a sense of you know the value of the claim so account statements and new account documents are the primary documents that we want to see initially.

Sean: And I can imagine Dave that plenty of folks come in and again, get a bad result, money was lost, that doesn’t necessarily mean that there was any misconduct or malpractice. What kinds of issues or malfeasances are you looking for to make it a worthwhile case?

Dave: So there’s a variety of claims, obviously the most egregious would be theft. So for broker you can think, that doesn’t happen happens unfortunately a lot, we have a slot of theft claims in our office where the broker steals money so that’s…

Sean: He just outright takes it.

Dave: Theft. Yes, stealing money. Theft, conversion. When a broker steals money, assuming it’s a substantial amount of money they’re likely to get caught and go to jail and so there’s usually a parallel criminal case that you have to work through you know to also pursue the civil side against the brokerage firm. And there’s cases like unauthorized trading, churning, suitability, but the most typical claim is probably 70% Sean of what we see are recommendations of investments that are inappropriate for a particular individual or couple based of their life circumstances because there’s a lot of standards in the industry, I mean this is a whole different set of rules and regulations, it’s not something just to be dove into lightly, but generally a requirement for a broker is to at its base is to recommend and implement an investment portfolio that’s suitable and appropriate for the investor given there circumstances, when I say circumstances I mean age, investment experience, net worth, tax situation, health and these factors are all in the rules and regulations in the securities industry. So for example if there’s a 75 year old couple whose saved $300,000 after 40 years of work all that money should not be invested in one aggressive stock. I mean that would be an egregious example, but there’s variations of that so it’s typically not as openly shot of a theft it’s typically an investment strategy that is inappropriate for the investor based on their circumstances.

Sean: And when you use words like reasonable and what I hear you saying is that the broker used their judgment, I mean are these expert intensive cases, is this a battle of the experts between one side saying this was perfectly reasonable and they just don’t like the outcome and other disagreeing?

Dave: There is different standard, negligence, fiduciary duty, suitability there are different standards for different cases, but often times at a hearing and we will talk about where these cases are actually heard it is often times an evaluation that the arbitrators, which are the folks that ultimately decide these cases are going to evaluate whether or not the investment portfolio implemented by the advisor was appropriate and their likely going to hear from experts on both sides, yes.

Sean: And you mentioned arbitrators, that’s not juries?

Dave: So yeah, one of the things in a lot of people miss and I probably get 3 calls a month from lawyers that said hey David I took this case six months ago and I filed it in my local common pleas court and now I am six months later and I got an entry turning my case over to mandatory arbitration and what’s this all about? So the first thing that lawyers need to know is that 99% of these claims do not go to court. When all of us go and sign up with a brokerage firm on the back of page 6, 7 or 8 in small tiny print of the new account document is a mandatory arbitration provision and ever since the Supreme Court in 1987 validated these mandatory arbitration clauses every costume dispute against a brokerage firm goes through mandatory arbitration and that arbitration is governed by the Financial Industry Regulatory Authority, FINRA. So FINRA is a pseudo government agency, it’s a self-regulated organization that’s funded by the securities industry and operates under the authority of the security and exchange commission and they have an enforcement division where they basically are the police force for these securities laws and they also have an arbitration division where they administer the arbitration process so essentially I am a securities arbitration lawyer that pursues investor claims and FINRA arbitration and it’s got its own rules. The first thing somebody should do if this is there first case is download the FINRA’s arbitration procedural rules because there’s rules from the time you file the case all the way through preparing the claim, discovery, hearings, the actual final hearing with the evidence and the decision and the post decision issues, it’s a completely different rules it’s like civil procure all over again, the rules of evidence don’t apply hard and fast. It’s sort of like the wild wild west, there is no depositions, the discovery is limited, there’s no interrogatories and so you are going to go into a hearing but there’s certain rules, certain disclosure dates that have to be met so if you don’t follow the rules you can get yourself into a lot of trouble,  but the final hearing, which is basically the trial takes place without you having done any depositions, so the time that you cross examine their experts for the first time and now luckily if you do it a lot you may  of crossed examine that expert ten other times, but it’s a lot different than court. Lawyers are surprised at the process, there’s no depositions and the arbitrator selection process is a lot different than jurors. The arbitrators are selected through a ranking process so once you file the claim both sides get a list of potential arbitrators and then you are allowed to rank and strike a certain amount and we keep at our office we have files on all the arbitrators so its hundreds if not thousands of arbitrators around the country that we keep their prior decisions, their social media, the Facebook, we do all that to try the, you know we want to get the fairest arbitration panel as possible to hear our case.

Sean: And by the way, who are those folks?

Dave: So you can be an arbitrator.

Sean: I should be.

Dave: You should be. In fact every trial lawyer should be an arbitrator, but you don’t need to be a lawyer. I’d love to get more teachers and more craftsmen, I mean I would like to see, I would like to see the arbitrator poll here in Ohio near more the jury pool. And you go online to FINRA and fill out the application. It’s not an easy application and I don’t know, I don’t want to say this, but some people believe it’s intentionally difficult. It’s gotten better and we have worked hard to improve that process, but you fill out an application, you get a couple references and the only real requirement is you have to have five years of core business experience so that could be really anything. Certainly as lawyers we would qualify you know with college and law school and working and then you take some training online and you take a test and you got to pay to do all this, but you do get paid and you get paid an honorarium of I don’t know I think it actually just changed to maybe 5 or 600 dollars a session, there’s two sessions a day, whatever it is, you do get paid for the pre hearing conferences and you do get paid, you’re not going to get rich, but I would like to see is more diverse pool of arbitrators because at the end of the day the fairness of the arbitration process depends pretty much solely on the arbitrator pool. So I encourage everybody to get their spouses and their family and their adult children who have some good life experiences to become arbitrators and selecting a ranking striking those arbitrators is much like voir dire, but you get to do it in your own office and you’ve got a couple weeks to do it and you know those of this who do it all the time we talk to each other about the potential issues with arbitrators. I mean once they get assigned they’re there and those are the ones that will decide all your prehearing issues and ultimately if the case doesn’t settle prior to the final hearing there will be one of three arbitrators who will decide your case and if it’s a case that’s under $100,000 you can request one arbitrator and the good news is there is actually an expedited process for claims under $15,000, you can do what’s called on the papers and we do this. You literally file the claim, file the proper papers with FINRA. The fee is much less than a larger claim and you don’t even have a hearing. You file the paper, it’s called a statement of claims that can do a complaint in the civil case, the respondent, which is the brokerage firm gets served, they file a response and you may be able to file a reply and then that’s basically it. There is one arbitrator selected and they make a decision. Another thing that is much different, there is a lot of things different in FINRA arbitration in court, but the final decisions on the merits by the arbitrators is generally final and non-appealable. The grounds to appeal a final decision is very small. You essentially and it depends on the circuit, but you essentially manifest disregard the law for example is barely even enough these days, you almost have to prove fraud on the behalf of these arbitrators. They’re not required to apply the law strictly, in fact they don’t even have to be lawyers. And now typically the chair person, there’s three arbitrators, typically the chair person will be a lawyer, generally they don’t have to be. So you know you are in a hearing and you’re doing objections and hearsay and a

lot of these things no one has even heard of so it’s a pretty wild experience, but it’s much quicker than court. There are a lot of benefits, I mean we have all been in court cases that take ten years. The good news when I tell people, and this is statistically confirmed on FINRAs website the average time it takes from the time someone calls me to the time their case is concluded is about 13 months and I would say it’s usually in my experience 9-12 months. We have had a couple cases appeal so that obviously takes a little bit longer, but  99% of the time, particularly if your claims against one of the larger brokerage firms if they lose they’ll pay and there’s a great prevision in FINRAs code that if you get a decision against a brokerage firm they must pay you within 30 days or you literally could shut the firm down, it’s called an expedited suspension proceeding so they of course they don’t want that so there going to pay so when you win a case that’s against a viable firm that is interested in continuing to do business you’re gonna get paid.

Sean: Now Dave tell us registered investment advisors and how those, are they governed by FINRA?

Dave: So far we have been talking about registered representatives, which we call generally stock brokers, financial advisors, there registered with a brokerage firm, governed by FINRA and that’s where we pursue the FINRA arbitration process. On the other side of the coin there registered investment advisors there not governed by FINRA. There is a lot of us trying to push FINRA to oversee registered investment advisors, but that hasn’t happen yet. So right now there governed by either the securities exchange commission or the state regulator depending on how what assets under management they have. Now in turns of a claim if we get a call and the client is working with an RIA a registered investment advisor we can go online it’s a different system, but you can go online and get there filing to determine how big they are and if it’s a small dinky ate outfit you might have the same problem if it’s a small tiny brokerage firm that doesn’t have the availability to pay and that’s a problem. So we look and see who they are working with, who they are affiliated with, if it’s a firm of substantial size then we want to get the client agreement between the investor and the registered investment advisory firm because that generally will dictate, they will generally have an arbitration provision, they won’t be FINRA because there not governed by FINRA, but it typically will be AAA or JAMS, which is challenging because AAA arbitration is extremely expensive. Now there is a consumer aspect to a consumer track, but in my experience, I have spent 70, 80, 90 thousand dollars in fees in AAA arbitrations so the claim has to be substantial enough to justify those types of fees. JAMS has, a lot of people know JAMS, that’s just mediators but JAMS also has an arbitration  forum and they have rules, arbitration rules as well, but again it’s just expensive so on FINRA the typical expenses that’ll  be assessed by the arbitration panel at the end might be between, in my experience, 5-20,000 dollars and if you win then you hope that the FINRA arbitration panel asses them against the adverse party, but a lot of cases have come to us, potential cases have come to us against registered investment advisory we must decline simply because the expenses associated with pursuing a claim in either AAA or JAMS you know out way potential recovery for the client. So my advice to anyone whose working with an RIA and I personally have an account with a registered investment advisor, you know this is sensitive subject for me to, you know if a registered investment advisory goes out of business and it’s just a locally owned operation you know there’s no big firms generally behind them to pay and you know a lot of confusion, and you know this is a good point so if you have an account with an registered investment advisory they may set up actual accounts at SCHWAB or TD Ameritrade and in those instances in those cases where you have a relationship with the registered investment advisory  your accounts are set up through SCHWAB or TD, that firm, those brokerage firm in most cases are just, are just working as a clearing firm, there just moving paper and holding money. They don’t own, they argue they don’t owe the same duties  to the costumer as the IRA does so people think well it’s okay if my IRA does something bad, it’s says Charles Schwab right here and my advisors name is on the account, but that’s an illusion a lot of the times and people may not understand that they may not get the same protection and if they were to go directly to Charles Schwab and have an account  because you can be an introducing broker or be a clearing firm and if you are an introducing broker that’s the firm that has the relationship and the heighten duties with the client and those often differ than with the clearing firm, and clearing firm liability is very challenging, I mean in a typical case comes in or someone calls the registered investment advisory firm has gone out of business and then we have to evaluate pursing a claim against the clearing firm and its challenging at times.

Sean: Sounds tougher.

Dave: Tougher.

Sean: Dave Meyer thanks very much for joining us…

Dave: My pleasure.

Sean: here on Civilly Speaking.

Dave: You do a great job, nice job Sean.