Tag Archives: Broker

Treat Your Brokerage Account Like Your Car? Absolutely.

01 Friday Aug 2014

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Believe it or not, your car provides a perfect analogy of how you should handle your investment account and the broker working with you. Most people have little if any knowledge of cars or how they work. Similar to how you have your broker guide you with your investments, you bring your car to your local mechanic.

Cars receive oil changes every 3,000 miles, and when it is time for your oil change, you bring the car to the service station. When getting the oil changed your mechanic tells you instead of every 3,000 miles, you should get your oil changed every 500 miles.   This just doesn’t make any sense, but you decide to go ahead anyway, because in your mind, the mechanic is the one who does this work for a living, so he must know what he’s talking about.

Stop there. If it doesn’t make sense to you, chances are, you are right on point.  You don’t need to be an expert in the field to know when something is simply off.  First thing you should do: ask to speak to the supervisor.  This should be no different with your stockbroker.

The Financial Industry Regulatory Industry (“FINRA”) recently filed charges against the New York broker-dealer Newport Coast Securities and five of its current and former brokers, charging them of “knowingly engaging in a manipulative and deceptive and fraudulent scheme to churn the accounts of some two dozen customers to boost their commissions.” FINRA alleges rampant churning of customer accounts and other misdeeds that caused significant losses to retirees and other investors.

FINRA is taking action to correct the alleged wrongs of the firm and brokers, and if the firm and brokers are found to have violated both securities law and FINRA rules, there will be be heavy fines issued, as well as the possibility of suspensions and perhaps expulsions from the industry.   This action by FINRA is similar to what the district attorney’s office does with a criminal that steals money from someone.

The present enforcement action by FINRA relating to churning should be a warning to all investors, old and young. Churning is the act of over-trading an account where an exorbitant amount of commissions are generated from the trading.    By way of example, presume an investor has $100,000 in her account. The broker opens the account with a buy of $100,000 of Facebook stock. The broker then repeatedly sells, buys and then sells again the stock twenty times over a one-year period. Each sale is quickly followed by a repurchase.

When one of the sales results in a quick profit, the broker will undoubtedly call and tell you how happy you should be that he made you money on the trade. But did he? Here’s where the churning analysis comes into play. If the broker did not overly trade the position, but rather bought and held, the position would have grown with the market movement of the stock. Instead, the investor’s portfolio has decreased because the broker’s commissions on the buys and sells have actually eaten into the profits in the account, and in many cases simply decrease the portfolio value. The only parties making money on this trading are the broker and his firm.  This type of trading should raise questions – – questions that must be asked before allowing the activity to continue.  And like your mechanic, ask for the broker’s supervisor before things get out of hand with your account.

In addition to enforcement proceedings, FINRA provides investors the ability to bring a civil action against the broker and his employing firm through the arbitration process, a very condensed court-like action. Those who lost money from Newport Coast or any other firm through churning, or other improper acts and omissions, have the opportunity to seek a remedy on their own. Those investors get their proverbial “day in court” in an expedited arbitration process that streamlines both cost and time to have the merits of the claim heard by a panel of arbitrators.

The Law Offices of Barry M. Bordetsky represents parties in arbitrations involving churning, unsuitable trading and other investment related claims. If you have questions relating to investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

 

 

Is FINRA Hurting Investors?

30 Wednesday Jul 2014

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Negotiating a settlement of any dispute is difficult. Parties often have an emotional attachment to the claim, and when the claim involves the loss of money, emotions run that much higher. This money could have been targeted for retirement, a child’s college education, or simply an account meant to grow in value over time. An arbitration between an investor on the one hand who lost money and the broker on the other hand who was handling the account, is resolved before the Financial Industry Regulatory Authority (“FINRA”).

Because of the very personal nature of the claim, in many cases a mediator is brought in to work with the parties to try to reach a settlement. It is not unheard of during a mediation the parties will not even meet to say hello at the day and place of the mediation.

You have undoubtedly heard the phrase “thinking outside the box”, something which can result in a good settlement in the course of a mediation. One important tool in settlement discussions is to give away something that does not cost anything, but get something of value in return. A good settlement is often one that both sides are unhappy with; and to get to that point the attorneys and the mediator must be able to use all tools necessary to reach a settlement agreeable to all.

In a FINRA setting, when a broker is named in an arbitration, the proceeding is on the broker’s permanent record maintained on FINRA’s central registration depository (“CRD”). This is a record that is generally available to the public. The arbitration can only be removed from the CRD if there is an award of expungement from a FINRA arbitration panel, and that award is subsequently confirmed by a court.

Parties to an arbitration will engage in settlement discussions prior to discovery, during discovery and often times on the day of an arbitration hearing.  For the investor involved in the settlement process, the goal is simple: get back as much of the money that was lost as possible. A tool referred to above for the investor, giving something that is of no value to the broker to get more settlement money, was the expungement tool. Said differently, in exchange for giving the investor money for the settlement, the broker would secure an agreement from the settling investor that he or she would not contest the broker’s expungement request. Keep in mind, this expungement request requires an independent hearing before a panel of FINRA arbitrators.  Simply including language in a settlement agreement was no guarantee the expungement would be granted.

The SEC recently approved FINRA Rule 2081, a rule that summarily removes this critical tool utilized by both sides when settling customer complaints. The rule reads “No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.”

In a word, FINRA Rule 2081 is foolhardy.  To answer the question raised in the title of this article, this rule not only works against the investing public, but hurts  investors trying to settle a claim. The expungement tool was used in the past to put together a good settlement for an investor, trading off the agreement not to oppose an expungement for a higher dollar settlement, or perhaps a settlement payment in a quicker time period.  It was a good trade-off for all the parties involved, and now it has been removed, making it that much more difficult for an investor to procure a better settlement.

If you have questions relating to expungement or investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

The Importance of The Activity Letter

23 Wednesday Jul 2014

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You have a brokerage account. One day you open up your mail (you are responsible for opening the mail) and find a letter from your brokerage firm. The letter thanks you for being a customer of the firm.  The letter then begins the process of reiterating the trading objectives you selected when you opened the account or when the account information was updated. The letter may contain additional information such as the amount of trades in your account over a three-month period of time or the commissions generated from the account (the money the broker and firm is making from the trading in your account). Most likely the letter ends with a request that you countersign the letter to confirm your objectives have not changed, that you authorized and approve of the trading in your account. In some instances the letter will end with a statement indicating the firm will presume all is okay with the trading in the account unless the firm hears anything to the contrary from you. If written correctly, the letter invites you to call with any questions.

Gee, isn’t this nice, you’re thinking. The brokerage firm is checking in on me.

Actually, the brokerage firm is checking in on your broker. The firm is utilizing a very important tool to determine whether the activity in the account is what you have directed and is suitable for you. The letter is aptly called an Activity Letter.

The Activity Letter seeks to determine, for instance, if you are controlling the account or if the broker is controlling the account. To be clear, while there is such a thing as de facto control, if your broker is calling you and recommending a buy or sell, you are demonstrating a manner of control over your account when you agree or disagree with the recommendation. Unless your account is discretionary (meaning your broker trades without the need to speak to you) the broker must discuss, on the day of a trade, the particular recommendation to buy or sell.

The Activity Letter also allows the firm to confirm, independently from the broker, whether it is your intention to trade your account aggressively, conservatively, or somewhere in the middle. The Activity Letter confirms you are not only aware of the trading in the account, but approve of it as it takes place.

The Activity Letter is an important tool not only for the firm, but also you. In most instances the letter is from a compliance officer, branch manager or supervisor at the brokerage firm. If you have any questions relating to your account, take the opportunity to call and ask the questions. The benefit of the Activity Letter from someone other than your broker is you should not feel uncomfortable with the call, but rather emboldened to make sure your investments are being handled as you have instructed.

When you sign and return the Activity Letter to the firm, the firm is relying upon that information in terms of supervising both the account and the broker. Do not sign something that is not accurate. As I have written in the past, you are responsible for reading a document, knowing its content and will be bound by the terms of the document that bears your acknowledgement signature. An informed investor is a smart investor. If you have questions, whether to the broker or supervisor, take the time to ask them. Do not assume. We all know what happens then.

If you have questions relating to this topic or other investment matters, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.