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HAVE YOU BEEN MISLED?
There are a variety of ways in which
investors have been taken advantage of by their financial professionals.
Fraudulent schemes
Some investors are victims of fraudulent schemes which may involve
outright theft, unlawful trade allocation or other types of Ponzi
devices. Perpetrators invariably keep losses hidden from clients
through issuance of false statements of performance and solicitation
of new money. Fraudulent schemes can take place in hedge funds
and at securities or commodities brokerage firms.
Mismanagement of Investment Portfolios
Brokers and investment advisors have a fiduciary duty to recommend
only those securities which are suitable for their customers'
investment needs and objectives. A common abuse of investors
is the recommendation of over-concentrated positions in a particular
security or class of securities, such as a 90% concentration
in technology and telecommunications stocks. Such recommendations
create undue risk for many types of investors. Retirement accounts
of older employees should rarely be placed in risky investments.
Hedge Fund Suitability
Hedge funds are becoming increasingly popular among a wider range
of individual investors. These unregulated funds sometimes engage
in highly risky investment strategies which many not be suitable
for many investors. Due to the lack of regulatory oversight,
an investment professional's performance of due diligence prior
to recommending a hedge fund to a client is essential.
Other Hedge Fund Issues
Hedge fund problems may include undisclosed turnover of money
managers, undisclosed commissions and fees and conflicts of interest
by investment professionals recommending and selling hedge funds
to clients.
Excessive Trading
and Churning
Brokers have an obligation not to trade a customers' account
excessively for the purpose of generating commissions or other
fees for himself and his firm.
Mutual Fund Abuses
Firms have a duty to recommend appropriate mutual fund classes
to their clients. For example, Class B mutual funds are ordinarily
inappropriate for clients investing large sums because of their
high management fees and contingent deferred sales charges (CDSCs).
Firms must also provide investors the ability to receive breakpoint
discounts. Class B mutual fund switching (the buying and selling
of Class B mutual funds on a regular basis) is improper due to
the significant costs to clients.
Variable and Fixed Annuities Abuses
Some investment professionals recommend variable and fixed annuities
to clients which may be unsuitable because of the extremely high
commissions, administrative charges and fees in return for unnecessary
benefits. Variable annuities are very often inappropriate for
elderly investors and are often over-concentrated in risky equities.
Annuity swaps or exchanges are often improper due to the significant
costs to clients.
Research Analyst Fraud
It is improper for a research analyst to fail to disclose a conflict
of interest which undermines the integrity of his research. Sometimes
an analyst may not even believe in the statements within his
research reports. If an investor actually and reasonably relies
on such improper research to his detriment, an investor may have
a claim against the analyst and his firm.
Employee Stock Options
Employees who are compensated with large amounts of stock options
must be careful how the options are managed. There are a variety
of ways in which investment professionals can protect their clients'
employee stock options, which if not utilized may constitute
negligence or a breach of fiduciary duty.
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Employees of financial firms sometimes also need legal assistance.
Employees of Financial Institutions
Brokers, financial advisors, investment bankers, analysts, traders
and institutional salespersons sometimes have compensation disputes
or other issues with their employers when they leave or are terminated.
For example, employees who are terminated prior to receiving
year-end bonuses may have a claim. Others who are terminated
for unlawful reasons such as discrimination based upon age, race,
gender, disability or sexual orientation may have claims against
their employers. Firms who terminate salespersons or brokers
for the purpose of retaining their books of business may be liable
for such actions. Firms may not fraudulently induce employees
of other firms to leave their positions with false statements
about the existence of certain working conditions or business
arrangements at the new firm. Firms cannot issue false
and defamatory statements concerning an employee in regulatory
documents upon their termination of an employee.
Regulatory matters
Registered representatives of the securities industry who are
the subject of regulatory investigations need counsel experienced
in protecting employees' interests.
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