Litigation

By: Daniel M. Hanifin

“Selling away” is when a broker leads an investor to investments that are not offered through their brokerage house. Investing in securities outside of your brokerage account can be extremely risky, because investors will miss important investor protections that flow from the broker’s and the firm’s regulatory obligations, including the firms supervision of the brokers activities.

These investments are often presented as “alternative investments” or “outside investments.” Investors are often lured to these investments by promises of high returns with low risk. Another common theme in these cases is a representation by the broker that he/she has personally invested in the investment. Outside investments can take many forms including unsecured notes, limited partnerships, and limited liability companies.

Many of these alternative investments are in reality Ponzi schemes. Ponzi schemes are fraudulent alternative investment schemes that typically attract investors with promises of high returns and the investment initially produces some nice returns. However, these returns are money of subsequent investors. Ponzi schemes continue to pay investors with money received from subsequent investors, but eventually collapse when the well of new investors runs dry.

FINRA, the Financial Industry Regulatory Authority, takes these types of claims seriously. In April 2010, an arbitration panel in Kansas, awarded an investor more than $500,000 in damages flowing from her investment in two outside companies that her broker recommended.

If you think you have been a victim of one of these fraudulent investment schemes please contact Daniel Hanifin at (610) 692-1371.

By: Daniel Hanifin

What does an arbitration clause mean to me?

Most, if not all, customer account forms used by brokerage houses contain arbitration clauses.   An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause.  The vast majority of the clauses state that arbitration must take place before either the New York Stock Exchange (NYSE) or the National Association of Securities Dealers (NASD).  However, in 2007, the NASD and the NYSE combined their dispute resolution divisions into one body, known as the Financial Industry Regulatory Authority (FINRA).   (www.finra.org)

Arbitration before a FINRA panel is similar to going to court, but it is usually faster, cheaper and less complex.  FINRA has established discovery procedures that assist in simplifying the process.  In arbitration, the parties present their dispute through witness testimony and documentary evidence much as they would in court.   However, rather than a judge presiding over the proceedings, a panel of three arbitrators, two public and one industry, preside over the hearing.  The arbitrators study the evidence and render a decision just like a judge.  These decisions are binding upon the parties except in very limited circumstances where a court may overturn the decision; however, a reversal of an arbitration decision is rare.

This is part of an ongoing series of postings related to claims related to your investment accounts.  For more information on securities arbitration and claims against your investment professionals please contact Daniel M. Hanifin.