Texas Securities Fraud Lawyer
Securities fraud occurs when an investor is enticed to make a purchase or sale decision with false information, often resulting in financial losses. Securities laws prohibit operators in the stock and commodity markets from misleading investors to part with their money based on false statements. When they do, they are breaking the law and an attorney can hold them accountable for their actions. We can help victims of securities fraud recover damages from those responsible for their losses. By their nature, securities fraud cases can be complicated. Recovery of assets from the proceeds of securities fraud is a resource intensive and expensive undertaking because of the cleverness of fraudsters in the concealment of assets and money laundering. A securities lawyer can bring the expertise and resources necessary to build a strong case.
Types of Securities Fraud
The securities attorneys at Arnold & Itkin LLP represent clients in issues related to the following:
- Investment Fraud - Investment fraud occurs when investors are enticed to invest in a security based on false or misleading statements. Recent examples include the fraudulent representation of some mutual funds as conservative investments despite the fact they were heavily invested in risky subprime mortgages of dubious value.
- Stock Fraud - Stock fraud occurs when corporations prioritize profits over shareholder interests. Illegal insider trading, another form of fraud, is the trading of a corporation's stock or other security by corporate insiders based on material non-public information obtained during the performance of the insider's duties or misappropriated.
- Ponzi Scheme - A Ponzi scheme is an illegal investment campaign in which a person seeks ways to create revenue for themselves illegally. They are made by fabricating an investment plan and marketing it to naive investors.
When a stockbroker places their own or the brokerage firms interests above the interests of their client, they violate their fiduciary duty and may be guilty of stockbroker fraud. Investing in anything can be risky. Investment losses are common and usually the result of normal market forces. However, when investment losses are the result of wrongful action or stockbroker fraud, those responsible should be held accountable.
Stockbrokers have a fiduciary duty that includes responsibility of care, disclosure, and loyalty. They have a legal and ethical obligation to put the financial interests of the client ahead of their own. When stockbrokers violate their fiduciary duty by giving inappropriate or unethical advice, they engage in stockbroker fraud. A stockbroker has a fundamental responsibility for fair dealing. The securities industry requires a stockbroker to treat his customer fairly and honestly. Stockbroker fraud can be as subtle as giving bad investment advice or recommending risky investments without explaining the risks, or as overtly fraudulent as making trades without your authorization or excessively trading your account.
Duties Imposed on Stockbrokers
Fiduciary Duty (Duty of Loyalty)
Fiduciary duty is the responsibility of care, disclosure, and loyalty that a broker/brokerage firm must provide to its customers.
Duty of Disclosure
A stockbroker must disclose all material information related to investment recommendations. This includes informing them of clear measures of risk; informing them of conflicts of interest in a financial relationship between an investor and their broker-dealer or account representative; and informing them when an investment is inappropriate for their objectives and tolerances.
The duty to give suitable recommendations requires that all investment recommendations be consistent with the customer's financial and tax status, investment objectives, level of understanding, and risk tolerance. This obligates a stockbroker to maintain an accurate and up-to-date profile of their clients. Furthermore, a broker must refrain from making an unsuitable recommendation even if the customer has expressed interest in it or asked for the recommendation.
Duty to Prevent Financial Suicide
Stockbrokers have a duty to refuse unsolicited transactions when they are inappropriate or inconsistent with the financial condition of their client. This means that a stockbroker must not automatically do whatever a client asks. When asked by a client to do something that is inconsistent with their financial condition, the broker has an affirmative duty to refuse.
Mortgage-Backed Securities Fraud
Undisclosed risks associated with mortgage-backed securities with ties to risky subprime mortgages have cost investors more than $1 billion as those securities lost value. According to some reports, up to 35% of all mortgage securities issued in 2006 were of the risky sub-prime variety. In this risky mortgage environment, many banks and brokerage firms failed to perform adequate due diligence on mortgage loans before including them in tranches of Collateralized Debt Obligations (CDOs) and other mortgage-backed securities. As a result, many tranches contained risky sub-prime mortgages of questionable and likely over-represented value. Consequently, investors were misled into investing in illiquid securities closely tied to the doomed sub-prime mortgages. As the foreclosure rate of sub-prime mortgages has soared, the securities tied to them have experienced sharp declines in value resulting in hundreds of billions of dollars in financial losses for the investors.
How Our Houston Business Lawyers Can Help
The fallout from collapsing mortgage-backed securities has had a devastating impact on investments that were touted by brokerage firms as being safe, stable investments. Hedge funds and mutual funds that were heavily invested in mortgage-backed securities have experienced staggering losses as mortgage-backed securities lost their value and became illiquid. By investing so heavily in mortgage-backed securities tied to risky subprime mortgages, fund managers were operating at odds with fund objectives thereby misleading their investors who reasonably believed, based on representations made by fund managers, that they were making more conservative investments.
By misleading investors to invest in funds that were much riskier than advertised, fund managers and brokerage houses violated their legal and ethical duties to disclose risks to investors. The result is that many individual and institutional investors have suffered huge financial losses. If you or your business has suffered a devastating financial loss due to mortgage-backed securities fraud, call a Houston business attorney from our office today to get a free consultation. Many mortgage-backed securities fraud cases, such as the Wachovia Evergreen Ultra Short Opportunities Fund or the Morgan Keegan funds, have opportunities for investors to seek some of the damages.
Arbitration or Litigation?
Securities arbitration is the usual method of resolving securities-related disputes between brokerage firms and their customers. In the United States, securities arbitration is the preferred method of resolving disputes between brokerage firms, and between firms and their customers. The securities industry uses a pre-dispute arbitration agreement, where the parties agree to arbitrate their disputes before any such dispute arises.
A pre-dispute arbitration agreement is included in virtually all Customer Agreement forms used when opening a new account. Because it may be buried in fine print and is, regardless, a requirement to open an account, customers may not realize they are waiving rights to litigate and agreeing in advance to arbitration. Even so, those agreements were upheld by the United States Supreme Court in Shearson v. MacMahon, 482 U.S. 220 (1987) and today nearly all disputes involving brokerage firms are resolved in securities arbitration.
Securities arbitrations are held primarily by the Financial Industry Regulatory Authority. Because brokerage firms and brokers are members of NASD and various securities exchanges, they are obligated by the rules to those organizations to submit to arbitration of customer disputes at the demand of the customer. Consequently, the majority of disputes between stockbrokers and their customers are resolved in arbitration.
Contact Our Houston Securities Attorneys to Schedule a Free Consultation
If you have incurred substantial financial losses in connection with fraudulent acts or advice of a financial planner or advisor, stockbroker, investment advisor, or corporation, our attorneys may be able to help you claim compensation for your losses. You should contact an experienced securities attorney to learn more about your options. Contact a TX securities fraud lawyer from our office today to discuss your case.