Stockbroker Fraud & Securities Arbitration Lawyer

For the past 35+ years, Attorney Howard Rosenfield has assisted thousands of victims of stockbroker fraud in State and Federal Courts, FINRA Arbitration and Mediation and recovered millions of dollars that were lost through stockbroker fraud or stockbroker/advisor misconduct.

He offers a free initial consultation and a free claim evaluation!

Howard M. Rosenfield, an Attorney with offices in Farmington Connecticut and in Boca Raton, Florida, has helped thousands of investors throughout the United States and from other countries including The Netherlands, United Kingdom, France, Ethiopia, Isle of Man, the Philippines, Brazil, and others, recover losses due to stockbroker or financial advisor misconduct.

Prior to starting his own practice in 1983, Attorney Rosenfield was Corporate Counsel to Warehouse Foods and Specialized Management Services, Inc. so he brings a business perspective to the representation of Investors.

Through arbitration and mediation, Attorney Howard Rosenfield, a preeminent stockbroker fraud lawyer, assists investors in state and Federal Court and in many alternative dispute resolution fora including, but not limited to:

• FINRA Dispute Resolution.
• American Arbitration Association Dispute Resolution
• JAMS Dispute Resolution
• ADR Center

Attorney. Rosenfield has also been an arbitrator for FINRA Dispute Resolution [formerly NASD] for more than 25 years. With more than 35 years of experience assisting investors, Attorney Rosenfield provides assistance to individuals, institutions, trusts, estates, pensions plans, profit sharing plans, and others.

Over the decades, the elements of a viable stockbroker fraud claim in Court or Arbitration, have changed due to social and economic factors:

• During the 1970’s – mostly Tax Shelter Litigation in Federal Court
• During the 1980’s – claims for misrepresented Income Limited Partnerships predomiated
• During the 1990’s many claims alleged Microcap Fraud
• During the 2000’s—many claims involved The Tech Wreck and/or the Telecom Wreck
• From 2008 – 2011 many claims for portfolio declines emanated from the Financial Crisis

Wall Street has looked to arbitration to resolve financial disputes from more than 100 years. Although through its history, arbitration was mandatory only between Stock Exchange members, for the last 20 years it has also become mandatory for brokerage firm customers as well, both foreign and domestic. Arbitration has become the mainstay of dispute resolution by virtue of broad, enforceable pre-dispute arbitration agreements contained within standard customer contracts required to be signed by all retail and institutional customers of broker-dealer firms.

The consolidation of the arbitration facilities of the New York Stock Exchange, National Association of Securities Dealers [NASD], American Stock Exchange, and others through FINRA, the Financial Industry Regulatory Authority, has resulted in a greater uniformity of the rules which govern arbitration and mediation of customer and industry disputes [See FINRA website].

Most investor claims have a basis in the violation of sales practice conduct rules; these claims for restitution for stockbroker fraud are typically alleged as violations of suitability rules, excessive trading, unauthorized transactions, and misrepresentation in connection with the purchase or sale of a security. To determine whether investor losses are recoverable, an examination of the relationship between the customer and the financial advisor of the brokerage or investment advisory firm is required. The circumstances surrounding the relationship will need to be examined to determine whether or not the advisor was may be deemed to be a fiduciary or a mere “order taker,” and what duties arise from the relationship, and the nexus between alleged “wrongful conduct” and the losses suffered.

FINRA Dispute Resolution provides arbitration and mediation facilities that attorneys for retail customers may resort to for the recovery of losses due to stockbroker fraud. The process commences with the submission to FINRA of a Uniform Submission Agreement, together with a Statement of Claim, along with the required filing fee [See FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12300 et. Seq.]. The nature of the controversies decided by the Courts and more recently by arbitrators reflect the product and process issues in the financial services industry. Since the U.S. Supreme Court's decision in McMahon v. Shearson American Express, the majority of sales practice claims by customers have been resolved through arbitration.

Today’s claims, in addition to unsuitable retirement portfolio claims, include claims resulting from Leveraged ETF’s, Improper Variable Annuity sales and exchanges, Structured Financial Products, Mis-Marketed Volatility Products such as the LJM Mutual Funds ,Financial Exploitation of the Elderly, Failure to Diversify [for example, Overconcentration in Oil & Gas] ,Improper Promissory Note Investments, unregistered securities, IRA Abuse, Business Development Companies [BDC’s], Non-Traded REIT’s, Margin Account Abuse, Mutual Fund Switching, Closed End Funds [Puerto Rico Funds], Unit Investment Trusts [UIT’s], Reverse Convertible Notes, Misrepresented EB-5 Programs, hedge fund claims, and others.

While some of these claims of stockbroker fraud have been filed in court as class actions, the nature and size of the individual investments involved in these products should persuade customers holding these claims to seek a stockbroker fraud lawyer with extensive FINRA arbitration experience.

Customer protection law provides remedies for investors who have investment losses due to stockbroker fraud, and has developed through case law and regulatory proceedings for almost 100 years. Sales practice rules, including the “Know your Customer” and “Know your Securities” rules, have provided a high standard of care that an aggrieved investor can assert to support a claim for recovery of investment losses.

FINRA rules require that brokers and advisors have reasonable grounds for believing that a recommendation is suitable for you based on facts disclosed by customers after an inquiry by the advisor as to your other security holdings and financial situation and needs. The Consolidated FINRA and NYSE "Know Your Customer Rule" requires that members use due diligence to learn the essential facts relative to every customer. "Know Your Securities".

A corollary to the "Know Your Customer" is the requirement that brokers know the nature and risks of the securities they recommend. The duty to know the investments recommended to customers, stems from a 1962 SEC release, which states that: The making of recommendations for the purchase of a security implies that the dealer has a reasonable basis for such recommendations, which, in turn, requires that, as a prerequisite, he shall have made a reasonable investigation. Cases also have held that a broker cannot recommend a security unless there is an adequate and reasonable basis for such recommendation.¹ In Mihara v. Dean Witter & Co.², the court stated that brokers have a duty to investigate the stocks they recommend, because without such an investigation they cannot tell if the stocks are suitable for the particular customer.

See, NYSE Rule 405, FINRA Rule 2090,. (“Every member . . . is required . . . to [u]se due diligence to learn the essential facts relative to every customer, every order . . . . carried by such organization”).

“Test is whether [representative] fulfilled the obligation he assumed when he undertook to counsel the customers, of making only such recommendations as would be consistent with the customer’s financial situation and needs.” In re Phillips & Co., 37 S.E.C. 66, 70 (1956) the broker has a duty to act with caution and to make recommendations based on concrete information rather than on speculation. Erdos v. Securities and Exchange Commission, 742 F.2d 507 (9th Cir. 1984). "NYSE Rule 405 imposes a clear duty on the broker to learn essential facts regarding his customer and his account.” Rolf v. Blyth Eastman Dillon & Co., Inc., 424 F. Supp. 1021, 1042 (S.D.N.Y. 1977), aff’d and remanded, 570 F.2d 38 (2nd Cir.) cert. denied, 439 U.S. 1039 (1978). “The making of recommendations for the purchase of a security implies that the dealer has a reasonable basis for such recommendations, which in turn, requires that, as a prerequisite, he shall have made a reasonable investigation.” SEC Securities Act Release No. 4445 (February 2, 1962). See, Hanly v. SEC, 415 F.2d 589, 597 (2nd Cir. 1969); Kahn v. SEC, 297 F.2d 112 (2nd Cir. 1961).

Structured finance has led to the securitization of many species of instruments which were created for a particular purpose. However, the “leftovers” of such engineered products were often opaque and inside these instruments lurk many credit risks which were not disclosed by the advisor. [See Goldman, Sachs & Co and Fabrice Tourre SEC Litigation Release LR-21489].

These products include “secured” promissory notes, reverse convertibles, REIT’s, Collateralized Debt Obligations, “Principal Protected” notesand Private Placements, often Regulation D offerings. A stockbroker fraud attorney will be able to recognize these improper sales.

As the “baby-boomers” age, many claims asserted are for the loss of retirement funds. The nature of these claims range from the improper concentration of retirement portfolios in speculative securities such as Oil & Gas, to the failure to conform a portfolio to the retired investor’s investment objectives and risk tolerance, or limit portfolio losses.

Asset allocation is the process of developing a diversified investment portfolio by mixing different assets in varying proportions among the various classes of financial assets. At the primary level, it refers to the mix of assets between stocks, bonds and cash. For example, A financial advisor should be certain that a portfolio has a proper mix of large cap growth and value, small cap growth and value, international stocks and emerging Market stocks. Each of these sub-classes may meet the customer’s need to diversify and limit risk.

Brokerage firms, investment advisors, and those who study and teach basic principles of finance and portfolio management agree that proper asset allocation determines the behavior of a portfolio. It is by far the most important factor in determining the expected returns of a portfolio. Market timing and security selection plays a minor role. Asset allocation models are based on the seminal conducted in 1986 by Gary Brinson, Randolph Hood and Gilbert Beerbower. They looked at the investment results of pension funds over a multi-year period. Their study showed that asset allocation was responsible for 92% of the behavior of a portfolio.

Diversification is necessary for prudent investing. "One of the time-honored investment maxims is that risk can be reduced by diversification. The Nobel Prize in economics was awarded to Harry Markowitz in 1990 for a rigorous explanation of this phenomenon. It is important to have in one's portfolio stocks that do not all depend on the same economic variables, such as consumer spending, business investment, housing construction, and so forth." Burton Malkiel & William Baumol, Redundant regulation of foreign security trading and U.S. competitiveness, in Kenneth Lehn & Robert Kamphuis (eds), Modernizing U.S. Securities Regulation 45 (Irwin, 1992). “The single most important step most investors can take to immediately improve the long range performance of their portfolios … is to properly diversify their common stock investments.” Norman Fosback, Stock Market Logic 252 (Institute for Econometric Research, 1985).

A financial advisor’s duties increase if the broker is a fiduciary. It is black letter law that a fiduciary must diversify a portfolio unless it is clearly prudent not to. "Diversification is a uniformly recognized characteristic of prudent investment and, in the absence of specific authorization to do otherwise, a trustee's lack of diversification would constitute a breach of its fiduciary obligations. See “Restatement (Third) of Trusts § 229(d)." Robertson v. Central Jersey Bank and Trust Co., 47 F.3d 1268, 1275 (3rd Cir. 1995). ERISA §404(a)(1)(C) states that a fiduciary shall “diversify” the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.” “Breach of the duty to diversify constitutes an independent basis of liability, separate from a breach of the general duty of prudence.” Liss v. Smith, 991 F. Supp. 278, 301 (S.D.N.Y. 1998). See also James Lockhart, Annotation, "Fiduciary Duty to Diversify Investments of Benefit Plan as Required by §404(a)(1)(C) of Employee Retirement Income Security Act (ERISA) (29 U.S.C. §1104(a)(1)(C))", 155 A.L.R. Fed. 349 (1999). A stockbroker fraud attorney will recognize the breach of a fiduciary duty to a customer.

In most states, the obligation to diversify is codified in their adoption of the Uniform Prudent Investor Act. “The long familiar requirement that fiduciaries diversify their investments has been integrated into the definition of prudent investing.” UPIA § 3 states, “A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.” The comment to § 3 says, “Case law overwhelmingly supports the duty to diversify. New York has adopted the uniform rule in Estates, Powers and Trust Law § 11-2.3. See Annot. "Duty of Trustee to Diversify Investments, and Liability for Failure to Do So,” 24 A.L.R. 3d 730 (1969).

As can be seen, diversification is the norm, the default condition. Whether or not the broker is a fiduciary, the expected treatment in the broker-customer relationship is a diversified portfolio. Anything that deviates from the diversified portfolio needs to be fully substantiated and justified. The decision not to diversify must be consistent with the customer’s investment objectives and risk tolerances, as well as fully grounded in the broker’s research into (a) the portfolio design and (b) the specific securities selected. It should not be sufficient simply to have a reasonable basis for recommending a particular security; rather, the broker must also have reasonable grounds for deviating from the norm of prudent investing if the portfolio is over-concentrated in one security or one sector.

If the broker is a fiduciary, the threshold of justification is even higher: The broker must make a reasonable determination that because of “special circumstances” it is more prudent not to diversify. Note that the test is prudence: not whether the broker thinks he can make more profits by not diversifying, but whether under the “special circumstances” relating to this client it is more prudent to forgo the protections and risk diminution afforded by diversification. Note also that the language “reasonable determination” implies an objective standard, not just the subjective opinion of the broker. In an ERISA plan, the threshold is even higher: the fiduciary must have a compelling reason not to diversify—it must be “clearly prudent not to do so.”

Loss management is a critical element in the managing of portfolio risk.. There are various ways to control unsystematic risk. Stop loss orders or percentage loss triggers, though not foolproof, may be the simplest. However, whatever loss management tools the broker puts in place, it implies that there was a discussion with their client about the matter or that they have taken discretion over the decision of when to sell. If there was no discussion with the client and no discretionary action, the broker has failed:

• (a) To alert the client about the possible consequences of the nonsystematic risks they have put in the portfolio; and
• (b) To take necessary and prudent measures to safeguard their client’s money.
• A stockbroker fraud attorney will be able to explore whether the advisor properly used loss management discipline.

The “shingle theory,” as set out in an SEC proceeding, provides that brokerage firms, by hanging out their shingles and holding themselves out as financial planners, advisors and brokers, impliedly represent that they will deal fairly with their customers in accordance with the standards and practices of the profession.

The shingle theory covers a wide variety of activities. It governs relationships between brokers and advisors, on the one hand, and their customers and applies with equal force to brokerage firms, and its salespersons or stockbrokers³. In fact, “[t]he shingle theory’s implied representation can reach any act the SEC or the courts believe a broker should not perform.”⁴

To pursue a federal claim in connection with the purchase and sale of stocks in accounts, a customer may be required to show that the stockbroker willfully, intentionally and recklessly violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, directly or indirectly, by making use of the facilities of the United States mail and the means and instrumentalities of transportation and communication in interstate commerce by:

• i. Employing devices, schemes and artifices to defraud;
• ii. Making untrue statements of material fact or omitting to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; and
• iii. Engaging in acts, practices and a course of business, which would and did operate as a fraud and deceit upon Claimant to their respective detriment.

To succeed under this cause of action, demonstrated stockbroker fraud lawyer will show that the broker represented that he would exercise his fiduciary duty to the benefit of the customer when in fact the conduct with respect to the account at issue was undertaken for the purpose of generating compensations.

Section 20(a) of the Securities Exchange Act of 1934 provides that:

Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.⁵

The courts interpret both of the foregoing sections similarly. Since it is generally recognized that the relationship between sales personnel and the brokerage firm is that of controlled person to controlling person⁶, the control person provisions have been interpreted to either expressly create or imply a cause of action against a brokerage firm for fraud committed by its sales personnel.⁷

Generally, a person is deemed to be in control if the person has some means of discipline or influence, either direct or indirect.⁸ Although some courts have not imposed liability unless the plaintiff could show that the alleged controlling person exercised actual control over the controlled person in relation to the transaction in question⁹, the majority view is that liability can be imposed on the sole basis of the alleged controlling person’s authority to control the conduct of the person primarily liable.

¹See, e.g., Hanley v. SEC, 415 F.2d 589 (2d Cir. 1969); Kahn v. SEC, 297 F.2d 112 (2d Cir 1961).

²Mihara v. Dean Witter & Co.619 F.2d 814, 820-21 (9th Cir. 1980).

³A. Jacobs, Litigation and Practice Under Rule 10b-5, at Pt. 9, 210.03.

⁴A. Jacobs, Litigation and Practice Under Rule 10b-5, at Pt. 9, 210.03.

⁵15 U.S.C. 78t(a) (1989).

⁶See, e.g. Hecht vs. Harris, Upham & Co., 430 F.2d 1202 (9th Cir. 1970).

⁷SEC vs. Lum's, 365 F. Supp. 1046 (S.D.N.Y. 1973); Anderson vs. Francis I. Du Pont & Co., 291 F. Supp. 705 (D.C. Minn. 1968); Moscarelli vs. Stamm, 288 F. Supp. 453 (E.D.N.Y. 1968), Lorenz vs. Watson, 258 F. Supp. 724 (E.D. Pa. 1966). But see SEC vs. Geon Indus., 531 F.2d 39 (2d Cir. 1976).

⁸Strong vs. France, 474 F.2d 747 (9th Cir, 1973); Klapmeier vs. Telecheck Int'l, 482 F.2d 247 (8th Cir. 1973).

⁹See, e.g. Ingenito vs. Bermec corp., 441 F. Supp. 525, 533 (S.D.N.Y. 1977).