Investing can be a valuable and essential tool for establishing long-term financial security in which a legacy can be passed down to the next generation. Unfortunately, the failure of investment professionals to conduct "due diligence" has swallowed up some of the most venerable institutions on Wall Street and obliterated the retirement nest eggs of an entire generation. Although commentators have identified a vast array of causes for the crisis, one of the greatest questions raised by the recent financial market turmoil is, "Who was conducting the due diligence?"
While many different individuals and circumstances have contributed to the recent financial crisis, many broker-dealers, banks, investment advisors, and pension fund trustees have failed to conduct due diligence, which is one critical factor. The lack of adequate due diligence has been regarded as one of the predominant failings in several enormous Ponzi schemes that have been uncovered in the financial crisis. However, the lack of due diligence has been reported in many other areas as well, including auction rate securities and financial services mergers.
In the context of investments, investment advisors owe fiduciary duties of care and loyalty to their clients. For example, when an investment advisor represents that he applied a rigorous due diligence to a hedge fund before he recommended its purchase to his advisory clients, failing to follow the process of due diligence before recommending it could be viewed as a breach of fiduciary duty.
While a broker-dealer may not believe it owes fiduciary duties towards customers for whom they do not exercise discretion, the recommendation of an unsuitable investment can be construed as a violation of self-regulatory suitability rules. For example, under FINRA Rule 2111, when a broker-dealer is recommending the purchase, sale or exchange of a security, he or she is required to have "reasonable grounds" for believing that the transaction would be suitable for the specific customer. Part of any suitability analysis requires the exercise of reasonable due diligence by the broker.
Consequences of Lack of Due Diligence
The U.S. Securities and Exchange Commission imposes due diligence obligations on investment advisors and other financial institutions when investing clients' money. The highly publicized Ponzi schemes including Madoff, Stanford and Dreier have illustrated the serious consequences involved in failing to perform due diligence. In effect, the failures to conduct due diligence can result in regulatory enforcement actions and litigation with clients who suffered serious financial losses.
The failure to conduct due diligence has been a serious component of several enormous Ponzi schemes that have been revealed as a result of the financial crisis.
If an investment professional has failed to conduct due diligence at your expense, we urge you to contact The Law Offices of Jonathan W. Evans & Associates to discuss your legal remedies.
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