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Broker May be Liable for Losses

Long Beach Press-Telegram, November 10, 2002 (Humberto Cruz)

Q: Many people rely on the advice of a stockbroker. When my wife and I got into stocks a few years ago, we did so without doing much research. That is our fault.

But our broker never said much about diversifying. We’ve seen many of our stocks go down. Many of the stocks his firm recommended to other clients have done quite poorly. Do we have a case against this broker and his firm? A: Without knowing more, I don’t want to go out on a limb. But based on what you tell me, you might have a case.

“Brokers have an obligation to see that their clients’ accounts are properly diversified,’ said Andrew Stoltmann, a former broker and now an attorney in the Chicago office of Maddox, Hargett & Caruso P.C., which represents investors in arbitration cases against brokerage firms. “To the extent a broker did not do this, he might be liable,’ Stoltmann said.

Claims against brokers are being filed at a record pace, and failure to diversify is the complaint Stoltmann said he has seen most often as part of the broad category of unsuitable investment recommendations.

Other common complaints include misrepresentation, such as a broker failing to properly disclose the risks of an investment; excessive or unauthorized trading, and a brokerage firm’s failure to su pervise a broker.

The number of claims is on a pace to break last year’s record of 6,915, according to figures from the National Association of Securities Dealers, a self-regulatory group for the brokerage industry. [For the latest numbers and to learn about the claim process, go to the NASD Dispute Resolution Web site].

The surge in claims is in lockstep with the steep losses many investors have suffered in what has become the second worst bear market in U.S. history. “The case filings are through the roof and will continue as the market continues to retreat and expose the misdeeds of brokers,’ said Stoltmann, who also worked as a law clerk at the NASD for two years.

Just because you lose money in an investment does not mean the broker is at fault, of course. And most brokers I know are caring and dedicated professionals. Even well-diversified portfolios have suffered in the broad-based market decline.

The question in deciding whether you have a case is whether your broker exercised his fiduciary duty to watch out for your best interests, including monitoring your investments.

“If you have a losing investment, the question is, should you have been in that investment?’ said Bruce Sankin, of Coral Springs, Fla., an arbitrator before the NASD since 1992 and a mediator since 1996. [Mediation is a less expensive and less formal procedure in which the investor and brokerage firm try to settle a dispute.]

The answer goes back to the suitability issue was the investment proper for the investor, given his goals and risk tolerance? But it also assumes that the broker kept an eye on your account and continued to advise you.

If the broker advised the client it was better to hold to his investments and ride out the market decline, that’s one thing provided the investments were suitable to begin with.

But if the broker never bothered to call the client while the market tanked the past two years Sankin said he knows of cases like that that’s another story.

“A broker has your account information and he sees your statement every month,’ Sankin said. “If a broker does not keep in touch, he cannot hold out himself to be a financial adviser. I cannot see an investor losing $20,000, $30,000 or $50,000 without their financial adviser talking to them.’

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