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In theory, if you have lost money because your broker (or any financial institution) gave you bad advice, mismanaged your investments, misled you, or took other unlawful or unethical actions, you can sue for damages. If these breaches of duty are provable, the “merits of the case” are strong, as a lawyer would say.
Unfortunately, these merits may not be enough to get you fair compensation with a fair amount of financial outlay. No matter how good the case, the road to financial damages is a rocky one.
Key Takeaways
- If you lose money in the market, it may be easy to quickly blame your broker or financial advisor for your predicament; but suing your broker is not as easy as it may sound.
- Financial firms take allegations of fraud or misconduct seriously and have deep pockets to defend themselves. Winning a case can be costly and time-consuming.
- Meticulous record-keeping and maintaining an audit trail of what happened are key to proving your case and that the fault of loss lies with your broker.
- Still, brokers are beholden to strict regulatory guidance and ethical code that carry stiff penalties if they are found to have committed wrongdoing.
Theory vs. Reality
In an ideal world, if you have a good case, you or your lawyer would write to the broker explaining the situation and requesting that they pay a certain amount of compensation or make a fair offer. The broker would face the realities of the situation and act with integrity, offering you a reasonable sum.
If the broker genuinely believes you were mistaken, they would explain why, and back it up with financial and/or legal evidence.
Unfortunately, we do not live in an ideal world and nothing makes a broker’s blood run cold (or perhaps hot) more than a damages claim. The amount of money involved is generally not trivial and there is often a fear of “the floodgates opening,” as you are probably not the only client in this position.
It is also human nature that people are reluctant to admit they are in the wrong, no more so when this affects their pocket. Last, but very definitely not least, the civil law system has some intrinsic flaws that can be exploited by the unscrupulous and/or desperate.
So What Actually Happens?
In many or most cases, the broker will deny absolutely everything with arguments that will make your own blood either boil or freeze. The defenses will range from blaming you, the market, or both, to distorting the figures or the laws, the logic, or anything else that shifts the liability for the losses away from the broker. This first response will generally be presented as one of injured innocence.
If you push further, it will get nasty. Despite legal and ethical obligations to treat complaints fairly, this is also a theoretical ideal that is often totally disregarded in practice. The unstated and sole objective of the broker is to avoid (or evade) liability by any means available.
Do not, therefore, expect fairness or sympathy and understanding; the firm will regard you as an enemy and treat you accordingly. You will be told that “our position is clear,” which means “we will admit nothing and offer nothing, and if you want one dollar back then sue us if you dare.” The question is, should you dare?
Why It Would Indeed Be Daring
The odds are stacked against you, especially if you are dealing with a large firm. You will be stressed throughout the entire case and the firm will be as cool as the proverbial cucumber, because it will turn the case over to its compliance division and/or lawyers, who are familiar with all the tricks of the trade, have available resources of all kinds, and who know that the opposite applies to you.
Such cases are often complex, invariably very time-consuming, and truly draining on all of one’s resources; financial, mental, and physical.
The other side can and will run up massive legal fees, and if you back out partway you will owe them a frightening amount of money. The fees accruing on the other side are the real problem; they are used as a strategic weapon. The theory is that judges are infallible and if you lose, you were in the wrong, deserve no damages, and should, therefore, pay the costs of the other side.
Brokers are not typically held to fiduciary duty in the way that financial advisors are. Registered investment advisors are held to fiduciary duty while brokers are typically held to the suitability standard.
It is also common for the other side to try and avoid the real issues and merits of the case from ever being discussed openly and fairly. Thus, the civil process itself gets misused bureaucratically, through various administrative tricks and processes, while the actual financial mismanagement is either not dealt with at all or simply denied validity.
Furthermore, the less of a case the firm has, the more they will resort to such tactics. The other side will probably believe it has a better chance of escaping liability by mismanaging your complaint and manipulating (or taking its chances with) the civil system than dealing with you fairly out of court, especially if you are in the right.
In addition, you can still lose in court because the judge gets it wrong or the broker hires legal and financial “experts” who manage to convince them (often incorrectly) that the merits of the case are weak. There are a lot of financial people out there who will testify to anything for a not-so-modest fee. Justice is definitely not always done, hence the saying “on the high seas and in court, you are in God’s hands.”
The ugly reality is that investors generally lose money because the investment was too risky, but trying to get damages out of the broker or firm is also fraught with financial and other risks. This all sounds daunting and rightly so. The emphasis must be made that you can still win, but you need to be aware of the harsh realities. Litigation, just like investments, can be mis-sold.
On the Other Hand…
If you are not dealing with a big firm, there is a far more level playing field and you have a much better chance. Likewise, if you have legal insurance that will cover most of the cost, you can proceed more easily. It is also sometimes possible to get “after-the-fact insurance,” which is not cheap, but it does mean your potential losses have a ceiling.
Furthermore, if you do have a powerful case, are mentally and physically tough, relatively risk-friendly, and/or lost a lot of money (but hopefully still have a lot) and really want to see justice done, it may still be worth going for it, even against a big player.
Can You Sue Your Broker?
Yes, you can sue your broker if you have had losses in your financial account. There are two primary ways of suing your broker: filing a suit or filing an arbitration. Keep in mind that you cannot simply sue your broker and be successful in doing so if you have suffered financial losses. Suing your broker can only successfully be done under a few circumstances, such as a breach of fiduciary duty (if they are a registered investment advisor), trading that was not authorized, information that was misrepresented, investments that were risky and not in line with your risk profile, and churning.
What Are Examples of Broker Misconduct?
Examples of broker misconduct include high levels of trading in your account (churning), unauthorized trading, investments that don’t align with your risk profile, significant changes in your portfolio’s composition, lack of diversification, high uses of margin, poor performance when compared to the market, and lack of proper communication.
Can a Broker Steal Your Money?
Yes, a broker can steal your money. A broker is meant to care for your money and financial health; stealing your money is illegal. The way that a broker can steal your money is known as “conversion of funds,” which is illegal under Finra Rule 2150. This is a misappropriation of money whereby they use several strategies to move money from your account to their account.
The Bottom Line
A financial damages claim is not for the fainthearted, but it may be worth it in the end. Make sure you think things through very carefully before the cost “clock” starts ticking away, and bear in mind that you will probably not get objective advice from a lawyer who is keen to sell (or mis-sell) litigation. Suing a large firm is certainly difficult, but it is not impossible and it may be worth trying. The more level the playing field in terms of resources, the better your chances.
Either way, the unfortunate reality is that litigation is an investment in itself, with its own risks and rewards. There are substantial costs involved, both financial and non-financial. All these factors need to be weighed up in advance before a sensible decision is made. In some cases, it is better to live with the losses.