Recovering Losses from Securities and Investment Fraud

Over Forty Years of Experience Handling Securities and Investment Fraud Claims

We have extensive experience litigating cases involving claims of securities and investment-related fraud. Many of those cases have involved claims under the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq., and Rule 10b-5, arising from deceptive and manipulative conduct in connection with the purchase or sale of securities. Many of the securities cases handled by Mr. Betts also have involved claims under Pennsylvania statutes, such as the Pennsylvania Securities Act of 1972, 70 P.S. §§ 1-101, et seq., and the Unfair Trade Practices and Consumer Protection Law, 73 P.S. §§ 201-1, et seq., and common law claims (e.g., fraudulent misrepresentations and nondisclosures and breach of fiduciary duties). Securities litigation can arise in a variety of contexts, given the broad interpretations of courts and securities regulators concerning products and transactions that can constitute “securities” under federal and state laws.

FINRA ARBITRATIONS

Most claims by “customers” of securities firms that made against those firms (“broker-dealers”) against their registered representatives (“brokers” or “financial advisors”) are subject to arbitration based on arbitration provisions found in the account agreements between customers and the firms.  Most securities arbitrations are administered by the Financial Industry Regulatory Authority (FINRA).

FINRA arbitration cases classified as “customer disputes” involve claims by customers that they suffered financial losses due to the wrongful conduct of the broker-dealer and its representatives responsible for handling the customer’s account.  These cases are governed by FINRA’s Code of Arbitration Procedure for Customer Disputes.  Cases involving claims in excess of $100,000 are decided by a panel of three arbitrators; cases involving claims in excess of $50,000 up to $100,000 are decided by one arbitrator unless the parties agree to have the case decided by a panel of three arbitrators; and cases involving claims of $50,000 or less are decided by a single arbitrator under FINRA’s “simplified arbitration procedures” outlined in FINRA Rule 12800.

The FINRA arbitration process provides parties to a dispute with the opportunity to have the case decided through a process that is generally faster and more efficient than a case that proceeds through the court system. Motion practice is much more limited in arbitration and discovery generally consists of document exchanges, with depositions taken only in rare cases. In addition, the grounds for challenging (“vacating”) an arbitration award are very limited and there is no general right to appeal an award. According to FINRA statistics, the average duration of a case that proceeds to a final hearing is sixteen months.

Under FINRA rules, the location of the final hearing usually takes place at the FINRA hearing location that is nearest to the claimant’s residence at the time of the events that gave rise to the dispute.

Types of misconduct that can form the basis for a FINRA arbitration case on behalf of a customer include:

  • Violations of Regulation BI

  • Fraudulent misrepresentations and nondisclosures

  • Portfolio mismanagement (e.g., lack of diversification)

  • Excessive trading (“churning”)

  • Claims based on annuities and other insurance products

  • Breach of fiduciary duties

  • Over-concentration

  • Unsuitability

  • Failure to supervise

Regulation BI (“Reg BI”)

Regulation Best Interest (“Reg. BI”), adopted by the Securities and Exchange Commission (SEC) on June 30, 2020, provides a significant tool available to customers of securities firms who seek to recover investment-related losses caused by the mishandling of their brokerage accounts.  Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when recommending securities transactions or investment strategies to retail customers.  Reg. BI is found at 17 C.F.R. § 240.15l-1. The best interest obligation is set forth in subparagraph (a)(1) of Reg. BI, which provides:

A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or other natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.

17 C.F.R. § 240.15l-1(a)(1).

In order to comply with the Reg. BI’s best interest obligation, brokerage firms and their associated persons must in turn comply with four component obligations:

(1)     Reg. BI’s Disclosure Obligation.  Among other things, the firm and the broker must disclose, prior to or at the time of the recommendation, the material fees and costs that apply to the transaction.  17 C.F.R. § 240.15l-1(a)(2)(i).

(2)     Reg. BI’s Care Obligation.  Under this obligation, the firm and the broker must, among other things, have a reasonable basis to believe that the recommendation is in the best interest of the customer “based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or [associated person] ahead of the interest of the retail customer.” 17 C.F.R. § 240.15l-1(a)(2)(ii)(B).  The Care Obligation also includes the requirement that the firm and broker “[h]ave a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the broker, dealer, or [associated person] making the series of recommendations ahead of the interest of the retail customer.  17 C.F.R. § 240.15l-1(a)(2)(ii)(C).

(3)     Reg. BI’s Conflict of Interest Obligation.  Under this obligation, the firm is required, among other things, to (i) establish, maintain and enforce written policies and procedures reasonably designed to identify and disclose all conflicts of interest associated with recommendations, and (ii) identify and mitigate any conflicts of interest that create an incentive for a broker to place his or her interest ahead of the interest of the customer.  17 C.F.R. § 240.15l-1(a)(2)(iii).

(4)     Reg. BI’s Compliance Obligation.  In addition to the policies and procedures required by the Conflict of Interest Obligation, the Compliance Obligation of Reg. BI requires that the firm establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Reg. BI.  17 C.F.R. § 240.15l-1(a)(2)(iv).