One of the most common claims made by customers against their brokers and brokerage firms is that of "fraud." Indeed, FINRA's arbitration website, which collects statistics about arbitration filings, shows that the number of claims filed with FINRA alleging securities fraud has steadily risen in the last three years.
"Fraud" is a somewhat generic term that covers a wide range of activity. Victims of securities fraud may not even know that they have been defrauded since the actor could hide the activities that constitute fraud or the fraud could consist of one or more omissions, not readily apparent to the ordinary investor. That is why customers who believe they may be the victims of securities fraud should consult the experienced securities attorneys at Lubiner, Schmidt & Palumbo.
Both state and federal law prohibit securities fraud. State laws, known as "Blue Sky Laws," are designed to protect public customers from the fraudulent activities of financial advisors and their firms. Typically, Blue Sky Laws provide for a "private right of action." That is, a customer can assert the violation of state laws as part of a claim and seek to recover damages as a result of the violation of state law.
SEC Rule 10b-5 is the primary federal rule regarding securities fraud. To establish fraud under the Rule, an aggrieved investor or regulator must show manipulation or deception through misrepresentation of a fact or omission to state a fact, that the fact was material, that the misrepresentation or omission occurred in connection with the purchase or sale of securities and that there was scienter (evil intent) or recklessness. Additionally, an investor must be a purchaser or seller and prove reliance on the misrepresentation, actual losses and that the losses were caused by the misrepresentation.
Clients also frequently allege that respondents committed common law fraud in the arbitration claims. Generally, the elements of common law fraud mirror Rule 10b-5 fraud - deception, materiality, intent to cause reliance, actual reliance and actual losses.
What conduct rises to the level of securities fraud? Some examples would be a broker who misrepresents the risks involved in a particular investment such as an exchange traded fund ("ETF") or a real estate investment trust ("REIT"). Certain types of option trading can be extremely risky; a misrepresentation of those risks, or the omission to fully disclose the risks, could constitute securities fraud.
Ponzi schemes are a type of securities fraud that unfortunately occurs. In such schemes, the actor induces customers to invest funds in some type investment, fund or financing idea (which may not even exist). The actor then takes funds invested by later investors to make "returns" to earlier investors. The actor also typically diverts a significant percentage of invested monies to himself. The Ponzi scheme gets exposed when the money runs out and people start complaining but unfortunately, after most or all the money is gone.
Does the name "Bernie Madoff" sound familiar?
As can be seen from the above, the successful assertion of a securities fraud claim may require a substantial amount of investigation by someone experienced in and knowledgeable about the financial services industry, such as the securities arbitration attorneys at Lubiner, Schmidt & Palumbo. If you are concerned about the handling of your brokerage account, or you have questions about what constitutes securities fraud, call us now.