The Most Common Forms of Breach of Fiduciary Duty (And What to Do)

Breaches of fiduciary duty are unfortunately common. Since the fiduciary duty is the highest legal standard of care, however, there are severe consequences for a breach of fiduciary duty. With the help of an investment loss recovery attorney, you can hold the fiduciary accountable for his or her misconduct. What Is a Fiduciary Duty? A fiduciary is a person entrusted to act in the best interests of another (i.e. the principal). Once the fiduciary agrees to the relationship, the fiduciary is bound by a set of legal and ethical obligations, known as fiduciary duties.  In general, all fiduciaries owe a duty of loyalty and a duty of care. Some fiduciaries will owe additional duties based on the relationship and the industry in which they are in.  The duty of loyalty requires fiduciaries to act in the best interest of the principa, avoid any conflicts of interest, and refrain from self-dealing. The duty of care means the fiduciary must make informed decisions based on all information available.  Fiduciary Duties of Financial Advisors  While all financial advisors have a duty of care to their clients, only registered advisors have a fiduciary duty. It is important to know whether your financial advisor is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulating agency. Financial advisors who are not registered can make investments that benefit them, as long as the investment is within your stated objectives. A registered financial advisor, on the other hand, can invest only if it is in your best interest. For registered financial advisors, the fiduciary duties owed vary by state. However, the following fiduciary duties apply to all registered financial advisors in all states Duty to Recommend Suitable Investments Prior to recommending an investment, the financial advisor must study and understand the investor’s objectives, tax status, and financial situation, among other things. Any investments that the financial advisor recommends must be suitable to the investor’s needs.  Duty to Inform Investor A financial advisor must fully inform the investor of the risks associated with the purchase or sale of a security. The advisor cannot misrepresent any material facts regarding the transaction. Duty to Act Promptly and with Authorization  All client orders must be performed promptly and with investor’s express consent. The advisor must obtain separate authorization for each investment unless the investor has a discretionary account.  Duty to Refrain from Self-Dealing  A financial advisor cannot initiate a transaction where he or she personally benefits. Duty to Avoid Conflicts of Interest For any recommendations made after June 30, 2020, financial advisors have a fiduciary duty to avoid any conflicts of interest. If unavoidable, the advisor must disclose the conflict to the investor.  What Constitutes a Breach of Fiduciary Duty? A breach of fiduciary duty occurs when the fiduciary fails to act in the best interest of the principal. This can happen through an intentional act or failure to act.  There are four elements to a valid breach of fiduciary duty claim. Duty A fiduciary relationship must exist for the fiduciary to owe a duty. You must show that the fiduciary knowingly accepted that role to hold them to the fiduciary standard of care. This is typically shown through a written agreement between the parties, such as a customer agreement. Breach The fiduciary must act contrary to your best interests. A breach of fiduciary duty can be shown through deliberate acts, such as making decisions on your behalf without consent. You can also prove a breach through the fiduciary’s failure to act—for example, not disclosing a conflict of interest.  Damages You must suffer actual harm or damages from the fiduciary’s breach. Proving there was a breach is not enough for a valid claim of breach of fiduciary duty. Damages can be either economic or non-economic, such as mental anguish.  Causation There must be a direct causal link between the fiduciary’s breach and harm to you. Despite your damages, if they are unrelated to the fiduciary’s misconduct or an unforeseeable result of the breach, you cannot recover your losses.  What Are Common Forms of Breach of Fiduciary Duty? Below are just a few examples of how a financial advisor can breach his or her fiduciary duty. In each instance, the fiduciary fails to act in the best interest of the investor. Misrepresentation or Failure to Disclose Information If a financial advisor does not present a client with all material information about an investment, this is a breach of fiduciary duty. Material information is what a reasonable investor would consider important when deciding whether to invest.  Sometimes financial advisors will mislead investors by omitting information, such as risk factors or any negative information about a stock.  Excessive Trading Excessive trading, also known as churning, in your account is a breach of fiduciary duty. Financial advisors will make large numbers of trades solely to generate more commissions for themselves.  Unsuitable Investments Financial advisors must “know their customer” before making investment recommendations. This includes understanding the client’s investment objectives, risk tolerance, time horizon, financial standing, and tax status. The advisor breaches their fiduciary duty if they make an unsuitable investment, even with the best intentions.  Failure to Diversify Your financial advisor must recommend a mix of investments so that your assets are properly allocated among various asset classes and industries. Failing to diversify your portfolio puts you in a position of great risk and is a breach of fiduciary duty. If your assets are over-concentrated in a particular stock or sector, you may experience significant losses if the company or industry does not perform well.  Failure to Follow Instructions When you give instructions to your financial advisor, they have the fiduciary duty to promptly perform your orders. If your advisor fails to follow your instructions in a timely manner and you suffer financial losses, you can recover.  What To Do If Your Financial Advisor Breached a Fiduciary Duty If you lost money at the hands of your financial advisor, there are several potential courses of action. An experienced investor loss recovery attorney can walk you through the different options and...

Continue Reading

What Is Selling Away?

The securities industry is one of the most regulated, largely because of the high potential for fraud and abuse. Various laws and regulations protect investors by imposing requirements on securities transactions and the people who facilitate them. Individual brokers and brokerage firms must be registered and licensed with the Financial Industry Regulatory Authority (FINRA) before they are permitted to conduct securities transactions. FINRA also administers a number of exams that provide certification for selling specific kinds of securities. All of these regulations exist to protect investors from fraudulent conduct by brokers. Nevertheless, brokers occasionally attempt to skirt the rules and offer private deals to their clients. Not only do these transactions violate FINRA rules, they also pose additional risks for investors. What Is Selling Away? “Selling away” describes the practice of selling securities in unauthorized private transactions outside the regular scope of the broker’s business. Brokerage firms maintain a list of approved securities their brokers are allowed to offer. By approving products ahead of time, brokerage firms ensure that their brokers sell only securities that are vetted and verified as legitimate products. Brokers sell away when they offer their clients securities not on the firm’s approved product list. Brokers may sell away if they want to make extra commissions without sharing with their firm. Selling away is not always malicious; sometimes, a broker means well but isn’t able to offer the securities a client wants through normal channels. Regardless of the broker’s intent, however, FINRA prohibits selling away and sanctions brokers for doing so. Common Examples of Selling Away While there is no specific form a selling-away transaction takes, they frequently involve certain types of investments. These investments include: Private placements involving unregistered securities; Private deals involving promissory notes; and Real estate deals conducted privately and away from the broker’s regular business. Deals that involve selling away often exhibit the same red flags as other types of investment fraud, like Ponzi schemes. Excessively high or consistent returns are indicators that the deal is probably too good to be true. What Are the Risks of Investing in Securities That Are Sold Away? Investments of all kinds carry a certain level of risk. However, investing in a selling-away deal carries more risk because they come without the safeguards that accompany approved investments. Lack of screening First, selling-away deals involve securities that are not screened by the brokerage firm. Brokerage firms screen the products they offer for a reason: to make sure that their customers have access to solid investments. Without these safeguards, investors are taking on significantly higher risk. Lack of disclosures Second, selling away deals rarely include the formal risk disclosures found with approved brokerage products. There is no review of the investment by the brokerage’s compliance department, and the exact nature of the risk involved may be unclear. Less accountability Finally, it may be harder to recover losses. When a broker engages in an approved transaction, the brokerage takes on liability for the broker’s activity. Because brokerages are often completely unaware of selling-away transactions, it is much harder to prove liability on the part of the brokerage. In the case of significant investor losses, this can mean less money recovered overall. Selling-Away FINRA Regulations There are two main FINRA regulations that cover selling away: Rule 3270 and Rule 3280.  FINRA Rule 3270 prohibits brokers from engaging in activities that are outside of the broker’s relationship with their brokerage firm unless written notice is provided to the firm.  FINRA Rule 3280 is similar, and prohibits brokers from engaging in private securities transactions (including selling away) without first providing written notice to their firm. After receiving that notice, the member firm may approve or disapprove the transaction. If the firm approves, then the firm supervises and records the transaction. Disapproval, on the other hand, prohibits the broker from participation in the transaction either directly or indirectly. What Are the Penalties for Selling Away? Both brokers and brokerage firms can be held liable when a broker sells away. FINRA regulations require brokers to offer securities products suitable for each of their client’s needs. Brokers must account for their clients’ objectives, level of investing sophistication, and risk tolerances. When a broker fails to fulfill this obligation, FINRA may sanction, suspend, or bar the broker from the financial industry. According to FINRA’s Sanctions Guidelines, Brokers who engage in selling away open themselves up to monetary sanctions between $2,500 and $77,000 for each rule violation. For serious violations, FINRA may suspend the broker for up to two years or permanently bar them from practicing as a broker. The severity of the penalty depends on several factors: Whether the selling away involved customers of the broker’s firm; How directly the selling away relates to the injury caused to investors; How long the outside activity occurred; The amount of money involved in the sales; Whether the broker misled their firm or clients with respect to the transactions; and How important the broker was in facilitating the transaction. Because selling away involves transactions outside of a broker’s relationship with their brokerage firm, holding the firm responsible for investor losses is more difficult. Nevertheless, a brokerage firm may still be liable for the conduct of its brokers under FINRA regulations. Brokerage firms have an obligation to supervise the brokers with which they are associated. Failure to do so may result in the firm’s liability to the investor. How Do I Recover Losses from Selling Away Deals? Investors can try to recover their losses through several formal and informal methods. Speaking with a securities attorney is the best way to determine which method is right for your situation. FINRA Arbitration Many brokerage firms require their customers to sign mandatory arbitration clauses. If this is the case, then the investor must use FINRA’s arbitration process rather than filing a lawsuit.  Arbitration starts when the investor files a claim. From there, the parties go through similar procedures to those in the regular court system. Each side will engage in discovery and present their...

Continue Reading

FINRA Arbitration: What To Expect And Why You Should Choose Our Law Firm

If you are reading this article, you are probably an investor who has lost a substantial amount of money, Googled “FINRA Arbitration Lawyer,” clicked on a number of attorney websites, and maybe even spoken with a so-called “Securities Arbitration Lawyer” who told you after a five minute telephone call that “you have a great case;” “you need to sign a retainer agreement on a ‘contingency fee’ basis;” and “you need to act now because the statute of limitations is going to run.”

Continue Reading

EquiAlt Private Placement Investments

We are investigating and representing investors against FINRA-registered brokerage firms and financial advisors who offered and sold securities issued by affiliates of EquiAlt, LLC (EquiAlt), a private real estate company which organized at least four private placements: EquiAlt Fund, LLC; EquiAlt Fund II,LLC; EquiAlt Fund III, LLC; and EA Sip, LLC (collectively referred to as the EquiAlt Funds). According to a recent SEC Complaint, Brian Davison (Davison) and Barry Rybicki (Rybicki) offered and sold $170 million of unregistered debentures issued by the EquiAlt Funds to over 1,100 investors nationwide. The SEC alleged that Davison, Rybicki, and others committed securities fraud by misrepresenting the debentures as “secure,” “safe,” “low risk,” and “conservative.” Further, while investors were promised “that substantially all of their money would be used to purchase real estate in distressed markets in the United States and their investments would yield generous returns … EquiAlt, Davison, and Rybicki misappropriated millions in investor funds for their own personal use and benefit.” According to the SEC, the revenues that were generated by the EquiAlt Funds became insufficient to pay the interest owed to investors. As a result, the SEC alleged “the Defendants resorted to [a Ponzi Scheme] fraud, using new investor money to pay the returns promised to existing investors.” While many of the sales were solicited by unregistered EquiAlt salespersons, it is reported there were many sales by small offices of registered salespersons associated with large independent FINRA-registered stockbrokerage and insurance firms primarily located in Florida, Arizona, California, and Nevada, and many other states nationwide. It is alleged that EquiAlt salespersons received “commissions of anywhere between 10%-14%,” which is extraordinarily high for the sale of any investment product. Thus, there was such a strong incentive to sell these debentures by any means. It is likely that many of the FINRA registered brokerage firms did not authorize sales of the EquiAlt Fund debentures and that no due diligence or any other investigation of the company or its investment offerings were ever conducted. Consequently, it is very likely that the EquiAlt Funds were sold via misrepresentations and misleading statements. We have learned that investors who purchased the EquiAlt Funds debentures through FINRA-registered brokerage firm representatives also received the same sales pitch; that is, the debentures are “secure,” “safe,” “low risk,” and “conservative” investments, which was untrue which constitutes securities fraud. If you invested in any of the EquiAlt Funds private placements, you may be able to recoup your losses through a FINRA arbitration proceeding. Mr. Pearce has over 40 years of experience with private placement investment disputes and recovering money for investors lost in Ponzi Schemes. The cases we accept will be filed against FINRA registered broker-dealers for misrepresentation, omissions due to failed due diligence, unsuitable investment recommendations, and unauthorized private securities transactions otherwise known as “selling away.” If Attorney Pearce accepts your case there will be no attorney’s fee or arbitration expenses unless we recover funds for you in a settlement with the brokerage or through an arbitration award. Call 1-800-SEC-ATTY (1-800-732-2889) or email us now and get your questions answered and top notch representation in connection with your EquiAlt Funds private placement investments. If you purchased your investment directly from EquiAlt or BR Support Services, your recovery will probably be limited to what assets the Court Appointed Receiver is able to locate, liquidate, and distribute to investors. However, please call us to find out what recourse is available for this investment fraud.

Continue Reading

SEC Halts Alleged EquiAlt Ponzi Scheme: How do Investors Recover Their Losses?

On February 11, 2020, the United States Securities and Exchange Commission (“SEC”) filed a Complaint for injunctive relief to halt an alleged ongoing fraud conducted by EquiAlt LLC (“EquiAlt”), a private real estate investment company that controlled the business operations of EquiAlt and its four real estate investment funds: EquiAlt Fund, LLC (“Fund I”); EquiAlt Fund II, LLC (“Fund II”); EquiAlt Fund III (“Fund III”); and EA SIP, LLC (“EA SIP Fund”) (collectively referred to as the “EquiAlt Funds”). Simultaneously, the SEC and filed an Emergency Motion to freeze all of the Defendant assets and appoint a Receiver to marshall all of the assets and take control of EquiAlt and the EquiAlt Funds. The Court entered an Order that granted the SEC’s request for Temporary Restraining Order and Asset Freeze and another Order Appointing a Receiver.

Continue Reading

Wells Fargo Advisors Ordered to Pay $2.8 Million to Limited Partnership

By Dow Jones Business News, July 09, 2013, 04:07:00 PM EDT By Corrie Driebusch NEW YORK–An arbitration panel has ordered Wells Fargo Advisors to pay $2.8 million to a family limited partnership that accused the firm of negligence in connection with alleged thefts from its investment account. The Miami , Fla.-based partnership had sued a former secretary, accusing her of forging signatures to transfer money out of its accounts, and won a $21 million judgment in a Florida district court in 2010. That suit alleged the secretary, Esther Spero, took the money for her personal use from accounts at Wachovia Securities and elsewhere between 2005 and 2008. Wachovia was later acquired by Wells Fargo & Co. (WFC ). In its separate arbitration claim against Wells Fargo, the partnership, called College Health and Investment Ltd., said the brokerage was negligent in failing to detect the alleged theft. The Financial Industry Regulatory Authority arbitration panel found Wells Fargo to be liable and ordered that it pay $ 2.3 million in damages and prejudgment interest. Wells Fargo also must also pay $419,000 in margin interest and $35,000 in costs. College Health and Investment Ltd. had requested $4.4 million, according to the arbitration panel ruling. As is customary in the FINRA claims system, the written award did not explain the panel’s reasoning. Robert Wayne Pearce, lawyer for the partnership, said it showed the panel agreed with the negligence claim. A Wells Fargo spokesman said in a statement, “We’re disappointed in the panel’s decision and don’t believe it was warranted by the facts presented during the hearing.” Write to Corrie Driebusch at corrie.driebusch@dowjones.com. Dow Jones Newswires 07-09-131607ET Copyright (c) 2013 Dow Jones & Company, Inc.

Continue Reading