If you've recently suffered a noted drop in your investment balance, you may be concerned -- particularly when the broader market appears to be booming. Stories about unscrupulous advisers who pocketed client funds while taking lavish vacations and purchasing expansive properties may come to mind. However, not every drop in recommended investments can allow you to sue your adviser for fraud or misrepresentation. Read on to learn more about securities fraud, as well as a few specific situations in which you may have a valid claim against your investment adviser.
What is securities fraud?
Securities fraud is the term used to encompass a variety of fraudulent investor and firm behaviors -- from using non-public information to buy and sell specific investments to the failure by an investment firm to deposit investor assets entrusted to them in a timely manner.
Investment advisers are subject to a number of securities rules and regulations governing their fiduciary behavior, and these regulations are strictly enforced by the Securities and Exchange Commission (SEC). Investment advisers who violate these regulations can have their licenses suspended or stripped, be fined, or even spend time in prison. However, if the adviser has defrauded a large number of people, or if he or she has few available assets for the SEC to seize, those who were defrauded may not be able to recover even a portion of their invested funds.
What types of violations can subject an investment adviser to scrutiny or punishment?
Whenever you invest funds, you should be aware that these funds can lose value at any time. Although it's unlikely that the U.S. will ever see a stock market crash as severe as was witnessed during the Great Depression, mild to moderate recessions take place once or more per decade. In each case, by riding out the recession and rebalancing funds as needed, investors can recoup their losses and usually end up ahead.
In some cases, your investment adviser may have recommended a single stock or group of stocks for purchase -- if the company in which you invested later declares bankruptcy, your investment could be rendered worthless. Is your adviser liable for these losses?
The answer depends on a few factors. First, you'll need to establish that you were misinformed or falsely informed about the potential risks and rewards of the specific investment.
For example, an adviser who tells you that he or she recommends investing in Stock X might tout the stock's advantages while also being sure that you're aware that investing in a single stock is automatically riskier than investing in a broader market index fund or group of stocks. As long as the adviser ensures that you've been made aware of the potential for loss by taking a specific route, he or she is free to recommend even the riskiest investments.
However, if the adviser tells you that this stock is a "can't miss opportunity" and that he or she "guarantees" you'll double your initial investment within a certain time frame, or fails to inform you of a material fact that would impact your willingness to invest in a stock, these are almost certainly promises that would render the advice unethical or illegal.
Next, you'll want to find out whether (and to what extent) your adviser benefited from you taking his or her advice. Most advisers receive commissions based on the specific securities you purchase, which is permissible -- however, if your adviser fails to disclose that he or she owns a significant portion of the same investment, serves on the company's board of directors, or has inside knowledge about the company's odds of success, he or she could be subject to sanctions.
What should you do if you feel your investment adviser has violated securities regulations?
There are several steps you can take if you feel your adviser has unethically duped you.
First, you can anonymously report the suspected fraud to the SEC. Their staff will begin to investigate the allegations and have the power to take action against your adviser (up to and including criminal prosecution).
Next, you can hire a commercial or corporate lawyer to help you attempt to recover some of your losses. If your attorney is able to establish that your adviser defrauded you by providing you with deliberately false or misleading information, you may be able to receive a monetary judgment against your adviser, permitting you to garnish wages or seize other assets to satisfy the judgment.