Securities Law

Negligence:
These are losses due to the negligent failure to follow express instructions given to a broker as well as the negligent failure of a broker’s firm to properly supervise the broker’s activities.  Negligence may also include a broker’s failure to recommend investments which are consistent with a customer’s stated investment objectives and a customer’s risk tolerance.

Suitability:
These are losses resulting from investments and investment vehicles, including stocks, annuities, bonds, and options which were unsuitable based upon a client’s risk profile and/or investment objectives, even if the customer ratified or otherwise acquiesced to the broker’s “suggestion” that he/she make the investment.

Failure to Supervise the Activity of a Customer Account:
A brokerage firm has an affirmative duty to formulate and implement layers of supervision to assure that a customer’s account is being monitored to prevent wrongful and sometimes abusive conduct which could result in customer losses.  If trading in a client’s account is inappropriate in light of the customer’s stated investment objectives and level of risk tolerance, proper supervision should identify any “red flags” in a timely fashion, and intervention by a supervisor should protect the customer against losses that flow from the unsuitable trading.

Failure of the Brokerage Firm to Adequately Supervise the Broker:
Brokerage firms must also formulate and implement systems of supervision over its individual brokers.  This includes closely monitoring the broker’s trading patterns across the broker’s entire “book of business”, usually on a daily basis.  If brokers’ supervisors negligently or intentionally choose to “look the other way”, notwithstanding obvious “red flags”, the brokerage firm may be held liable for the customer’s losses.

Breach of Fiduciary Duty:
In California, as a matter of law, a broker owes clients a fiduciary duty in the discharge of his duties.  This means a broker owes the “highest” duty of loyalty and “highest” duty to always act in a manner consistent with the client’s best interest ahead of his own.  Therefore the conduct of a broker is subject to heightened scrutiny insofar as how a recommendation to a customer might benefit the broker.

Misrepresentation and Fraud:
When recommending or soliciting the purchase or sale of an investment, a broker is obligated to make a full disclosure of all material facts including, but not limited to, any risk of loss of principal, all fees and costs associated with the investment product (including commissions), the existence and availability of other similar investments, and any other material disclosures which might reasonably impact the customer’s decision to invest his/her funds.

Overconcentration and Lack of Diversification:
Brokers have a duty to recommend a diversified portfolio.  Diversification manages and limits investment risk.  Investing a disproportionately large portion of a client’s portfolio in a single market sector (i.e. all technology or telecommunication stocks), a single investment vehicle (i.e. all stocks or annuities and no bonds or fixed income securities), or a single asset class (i.e. all funds invested in growth equity mutual funds and little or none in fixed income funds), creates unacceptable “concentration risk.”

Churning of an Account:
Churning is excessive trading or turnover of an account in order to generate broker commissions.  This may also include unjustified mutual fund switching or so-called IRC Section 1035 switching of variable annuities.

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