Texas Securities Fraud Lawyer
No One Should Be Tricked into Making Unfair Investments
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.
Dealing with fraud? A securities lawyer can bring the expertise and resources necessary to build a strong case. Contact Arnold & Itkin for a free, private consultation.
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 Schemes - 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 naïve 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 or asked for it.
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.
What Is Stock Fraud?
Stock fraud occurs when corporations and corporate insiders prioritize profits over shareholder interests. By misleading shareholders, corporations put shareholder investments at risk.
Corporate stock fraud by misrepresentation occurs when investors or insiders:
- Manipulate stock value by falsifying information on financial statements and SEC filings
- Lying to corporate auditors
- Through the public statements of misleading information.
Insider trading, another form of corporate stock fraud, is the trading of a corporation's stock or other security by corporate insiders such as officers, key employees, directors, or holders of more than 10% of shares. In illegal insider trading, an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise misappropriated.
Fraud involving corporate stock options is increasingly common. Stock options grant the holder the opportunity to buy stock a date in the future with the purchase price being fixed at the date the option is granted. If the stock's value increases before the purchase option is exercised, the holder profits from exercising their stock purchase option. Stock options fraud occurs when corporate executives backdate the granting of their stock options, virtually guaranteeing a profit as soon as the option is granted. This manipulation is unfair and defrauds other shareholders.
Data Theft Costs Investors Billions
From 2017 to 2018, hackers committed serious data breaches at Facebook, Paypal, and other major databases of private information. These breaches were often followed by admissions of "guilt," or varied admissions that the company's security was not as robust as they promised.
Those announcements usually occur alongside precipitous drops in stock value. For instance, Facebook's data scandal involving Cambridge Analytica, who weaponized user data for political reasons, led to a loss of over $100 billion through the course of the scandal.
Data Breaches May Count as Stock Fraud
Plaintiffs have brought more cases forward that claim data breaches as a form of securities fraud. But how can that be? Their argument relies on the relationship between a data company's security and it's stock value. The more secure a platform is, the higher its value as a company–especially in today's data-driven world. If a company presents its security as more robust than it really is, then they're essentially inflating the value of their stock artificially, which is why data breaches are followed by massive losses.
Will it work? That remains to be seen. Very few of these companies have subjected themselves to a regulatory investigation, making it difficult to prove that the security issues were a known issue prior to the breach. Plaintiffs would need evidence that the company deceived the public when presenting itself as secure, which would make investors able to claim stock fraud. In legal terms, that's known as "scienter," or the knowledge of wrongdoing. That would require confidential witness allegations or the findings from a regulatory investigation, which (as we mentioned) is rare—for now.
However, cases like these prove that stock fraud is rarely straightforward–proving your case will require a deft and experienced lawyer at the wheel and a well-funded investigative team behind them. That's why many of our clients called us in the first place.
Contact a Stock Fraud Lawyer in Houston, TX
At Arnold & Itkin LLP, our Houston business attorneys fight aggressively for the rights of our clients. If you have been a victim of stock fraud perpetrated by officers, shareholders, directors, or other company insiders, you have rights. We can help you recover losses from the corporate fraudsters who are responsible.
We Pour Everything into Helping Clients Recoup Investment Fraud Losses
Investment fraud occurs when investors are enticed to make investments based on misleading information, when the risks of a particular investment are not fully disclosed, or when an advisor makes inappropriate recommendations. When representing an investment opportunity, securities professionals such as brokerage houses, investment advisors, financial planners, and stockbrokers are legally and ethically obligated to several important duties. Among these professional obligations are the duty of disclosure and the duty to provide suitable recommendations. The duty of disclosure requires that securities professionals inform investors of the risks associated with an investment.
The duty to provide suitable recommendations requires that securities professionals recommend investments that are appropriate for and consistent with the following:
- Financial condition of the investor
- Their investment objectives and priorities
- Their tolerance for risk
Investment Fraud in Mutual Funds & Hedge Funds
Several high profile instances of investment fraud have occurred recently resulting in hundreds of billions in losses for defrauded investors. In the wake of the crumbling subprime mortgage market, the values of mortgage-backed securities with ties to subprime mortgages have plummeted. Unfortunately for many investors, mutual and hedge funds were heavily invested in mortgage-backed securities which, in turn, had ties to risky subprime mortgages. As a result, the funds experienced precipitous declines in value resulting in massive losses for their investors.
All investments involve a certain amount of risk and periodic losses are common. However, what makes these hedge and mutual fund losses constitute investment fraud is how the funds were represented. If a fund that is heavily invested in risky securities is marketed as conservative, a material misstatement of fact has occurred. Such misstatements constitute investment fraud and those responsible can be held accountable.
Recent Investment Fraud Cases
- The Wachovia Evergreen Ultra Short Opportunities Fund was pitched to investors as a fund that seeks "current income consistent with preservation of capital and low principal fluctuation." However, because the fund has invested over 70% of its assets in mortgage securities including subprime mortgages, it lost 20% of its value in 16 days. Such a significant loss in less than three weeks is inconsistent with representations Wachovia made to investors and represents a failure to disclose the underlying risks associated with the fund so heavily invested in subprime-related securities. Investors who incurred significant losses may be entitled to recover losses.
- Investors in some Regions Morgan Keegan mutual funds have suffered serious financial losses as a result of the funds' disproportionate investments in securities linked to subprime mortgages. Despite fund descriptions as having "conservative credit posture" and being "without excessive credit risk," several Morgan Keegan funds have lost between 50% and 75% of their values as a consequence of their substantial investments in mortgage-backed securities with ties to risky subprime mortgages. Investors who invested in these funds based on representations of them as conservative funds have been defrauded by Morgan Keegan and may be entitled to recover losses.
- Only days after Bear Stearns executives bolstered investor confidence by publicly downplaying the company's financial problems, Bear Stearns' stock value experienced one of the sharpest declines ever recorded for a blue chip stock—more than 96% in four days. On March 12, 2008, Bear Stearns stock was trading at more than $60 per share. Four days later, Bear Stearns agreed to be acquired by JP Morgan Chase for $2 per share to avoid bankruptcy. This egregious failure to disclose material facts about the company's actual financial statements resulted in tremendous losses for defrauded investors. Investors who lost money, as a result, may be entitled to recover losses.
- In May 2006, an NASD (now FINRA) arbitration panel awarded $22 million to ExxonMobil workers who were defrauded by an investment advisor who recommended inappropriate investments to them. The employees turned over their retirement savings to the broker who put the money in variable annuities and mutual fund shares. It turns out that the variable annuities were inappropriately recommended because the broker could make more commission on them. He also traded their mutual fund accounts without their knowledge, trading them into and out of very aggressive funds—funds that were too risky for the retirement savings of the workers who ranged from age 55 to 67.
The Madoff Investment Fraud Case
Bernard Madoff is a modern-day Ponzi schemer responsible for an estimated $50 billion in investor losses. He began his career on Wall Street in 1960 and his firm, Bernard L. Madoff Investment Securities, quickly became one of the largest and most trusted independent trading operations in the industry. Madoff was highly respected and looked to for advice. Madoff even spent three years as the Nasdaq chairman. Like other Ponzi schemers, Bernard Madoff attracted investors with promises of high returns and low fees. When, in these uncertain economic times, investors began to ask for their returns (this is done with redemption notices), Madoff was unable to pay them off.
According to authorities, $7 billion was requested in redemption notices and Madoff apparently did not have it. Like all Ponzi schemes, it collapsed when multiple investors simultaneously requested returns and Madoff was no longer able to pay one with another's money. It is said that his firm, Bernard L. Madoff Investment Securities, controlled over 25 funds and handled approximately $17 billion of investor money. After his arrest, however, it was reported that Madoff's investment losses are estimated to be as much as $50 billion. Bernard Madoff faces 20 years in prison and a $5 million fine for what is likely the largest Ponzi scheme in Wall Street history.
Stanford Investment Fraud
R. Allen Stanford of the Stanford Financial Group is accused of a massive, ongoing $8 billion investment fraud. If you have incurred a serious financial loss as a result of the Stanford investment fraud, you may be entitled to recover losses from those responsible. Contact a Houston litigation attorney to learn more about your options.
With an estimated net worth of $2.2 billion, R. Allen Stanford, is the 205th wealthiest person in the U.S. He began his career in the Houston real estate market in the early 1980s and claims he moved on to take over his grandfather's company, Stanford Financial Group. Although claims assert that Stanford Financial Group was established in 1932, there are no records of the bank before the 1980s. Stanford quickly expanded Stanford Financial Group into a global wealth management and investment banking firm, opening offices in North America, Latin America, and Caribbean. R. Allen Stanford has enjoyed an extravagant lifestyle with multiple homes, private jets, and high profile, political friendships.
Over the last decade, he has given millions to politicians and lobbyists, reportedly thought of as an attempt to preserve and expand tax breaks in the U.S. Virgin Islands and purport credibility. After news of fraud allegations and his offices being raided, many recipients of his donations vowed to forward the money to charities. Another indication of Stanford's luxurious lifestyle is his involvement in sports sponsorships. He is a title sponsor for many professional sports, particularly sailing, cricket, golf, and tennis. Some of his sponsorships include the PGA Tour, Stanford St. Jude Championship, and professional golfer Vijay Singh. Stanford also established cricket grounds and tournaments in Antigua for which he was knighted; his motivation for this is thought to be not only an exhibition of his wealth but also an attempt to appear charitable and good-hearted.
On February 17, 2009, the U.S. Securities and Exchange Commission raided Stanford's Houston, Memphis, and Tupelo offices, alleging $8 billion in investment fraud.
According to allegations, Stanford Financial Group convinced clients to invest in a certificate of deposit program that offered extremely high returns in short periods of time. Stanford duped affluent investors by presenting them with hypothetical investment results as historical results. It is believed Stanford has been selling "improbable, if not impossible" returns for 10+ years.
In 2000 the company claimed their Stanford Allocation Strategies Program, a managed mutual funds program, had positive returns of 18.04%, when, in reality, it lost 7.5%. In 1995 and 1996, the company submitted identical returns suggesting that the scam has been going on for at least 13 years.
Although Stanford told clients their investments were being handled and monitored by a large team of analysts, the majority of investments were managed by Stanford himself and James Davis, Stanford International Bank's chief financial officer, who is also being charged in the case. The third person charged in the case is Laura Pendergast-Holt, chief investment officer.
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 and stable. 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, 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 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 inShearson 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.
Securities Fraud FAQ
What are some warning signs of securities fraud?
In the investment world, if it sounds too good to be true, it's most likely some type of fraud or misrepresentation. Don't become a victim.
There are some warning signs you can look for, which could indicate securities fraud:
- Promises of extremely high guaranteed returns. All investments carry some risks.
- Aggressive tactics by your broker or adviser, pressuring you to act quickly or invest big.
- Difficulty getting detailed information or insight, such as a prospectus or offering circular.
If you notice these signs, act quickly and gather documentation of your accounts and what you suspect. Involve a law firm that has experience with securities fraud cases in your area, and get information about your rights and the next steps you can take to recoup your losses.
What should I do if I suspect that I’ve been the victim of securities fraud?
If you believe that you’ve been the victim of securities fraud, be sure to talk to an attorney. Your first instinct may be to ask your broker or brokerage firm, but if they’re in any way involved or are interested in protecting their interests first, you could find yourself at a loss when it comes to recovering your assets. Gather all the documents and information you have and talk it over with an experienced Texas securities fraud lawyer who can properly advise you of your rights and protect your interests.
How can I recoup my losses?
If you experienced significant losses as a result of securities fraud, the person or entity that committed fraud should be held responsible. In some cases, other interested parties can be legally responsible too, such as a brokerage firm that failed to properly supervise an employee who carried out a fraudulent scheme. By finding all at-fault parties and every source of compensation, you can seek to recover all the losses you experienced. Our lawyers can help you understand these proceedings and your rights in Texas securities fraud lawsuits, so you know what to expect and how to move forward.
Contact Our Houston Securities Fraud Lawyers
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 your options.
Contact a Texas securities fraud lawyer from our office today to discuss your case at (888) 493-1629.