Q: My father is a retired former business owner in his late seventies. Dad has been active in the stock market for many years. As he has aged, he has relied on stockbrokers for investment recommendations. I recently discovered that my Dad lost a substantial amount of money in a non-traditional investment recommended by his stockbroker. Dad is embarrassed and cagey, but it seems that the stockbroker was personally involved in the enterprise Dad invested in. This feels like a scam to me. Does my Dad have any options?
A: You are right to be alarmed. What you are describing has the hallmarks of a practice known as “selling away” and it is one of the more serious forms of financial fraud committed against investors, particularly older ones who have placed deep trust in their stockbrokers over many years.
More investigation is needed, but it appears that your Dad’s stockbroker lured him into investing in a speculative business venture in which the stockbroker had a personal financial interest. The money your Dad invested has likely been squandered and the stockbroker could be broke or otherwise judgment-proof. But that does not mean your Dad is without recourse.
Your Dad may have significant claims against the brokerage firm that employed the stockbroker, and that firm may have far deeper pockets than the stockbroker himself. Federal financial industry regulations enforced by FINRA, the Financial Industry Regulatory Authority, require brokerage firms to supervise the activities of their registered representatives, detect investment irregularities and red flags, enforce written supervisory policies, and take affirmative steps to deter representatives from soliciting private or self-interested investments from their clients. A brokerage firm cannot simply look the other way when a red flag arises and then claim ignorance when a client is harmed.
If the brokerage firm failed to supervise the stockbroker, knew or should have known about the fraudulent transaction, or failed to warn your Dad when warning signs emerged, it may be held liable for your Dad’s losses. Claims can include negligent supervision, breach of fiduciary duty, negligent misrepresentation, and violations of state and federal securities laws.
It is also worth noting that these cases are typically brought through FINRA arbitration rather than in court—a process that can be faster and less expensive than traditional litigation, but that still requires skilled legal representation to navigate effectively.
Your Dad should not let embarrassment stand in the way of protecting what remains of his retirement savings. Cases like this are, sadly, not uncommon, and experienced attorneys handle them regularly.
Time does matter in these cases, as legal deadlines apply. If you suspect your Dad has been the victim of investment fraud, do not delay in seeking legal advice.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.