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Going After Your Broker. NASD Arbitration Claims Rise with Market Drop

CBS Marketwatch

It happened to Ben Affleck, and to Matt Damon, too.

Investment losses. They hurt, and they often spawn a rash of lawsuits waged at financial advisers.

If you just reviewed your finances for the past year, paid your taxes, and realized how bad off your portfolio really is, you’re not alone. If you’re looking for someone to blame and are picturing the face of your stockbroker, you’re not alone either.

The National Association of Securities Dealers reported a 19 percent jump in the number of arbitration cases filed against brokers and brokerage firms in January.

Legal recourse

Industry trade magazines are cautioning brokers about “the dreaded arbitration word,” as Registered Representative calls it. “What do you do to protect yourself?” the magazine asks its readers. That’s against, you, the investor.

Brokers will tell you that if you’re knowledgeable and signed off on an investment plan, you have no business suing, which is what arbitration amounts to.

On one hand, they’re right. If an investor goes in with eyes wide open and ears tuned to all the right financial channels, they have no good reason to sue an adviser when the market goes south.

“In the United States, if you make money, you’re a genius. If you lose money, you sue your broker,” says David Bartholomew, an attorney in Long Beach, Calif., who represents brokers and brokerage firms.

“People have wild expectations,” says Bartholomew. “I know a guy who said, ‘Look, I’m very conservative. I can live with a 25 percent annual return,” says Bartholomew. He says when that 25 percent return doesn’t come in, the guy will sue.

But what about those who turned a deaf ear to the warnings that investing is a risky business. Indeed, how often do you hear, “Past performance is no guarantee of future results?”

“We are calling it the ‘tech wreck,'” says Robert Uhl, a lawyer in Beverly Hills who represents individuals in claims against brokerage firms. “No one was paying attention. Virtually everyone over-concentrated in technology and that’s wrong.”

It’s their job

Brokers and financial advisers have a fiduciary duty to stop investors from making bad decisions, Uhl says. “It’s what they get paid to do.”

Then there is the case of the exuberant client pushing his or her broker to invest in what seems to be the new, hot investment area.

Says Uhl: “If someone goes to their brokerage and says I’m 60-years-old, I want to be a speculative investor and I want to over-concentrate in technology, and even if the firm has them sign a new account form that clearly states ‘speculative’ on it, I’d go so far as to say they are unsuitable. It doesn’t depend on whether the person is sophisticated or not. They [the firm] have to do the right thing. They have to say: ‘No.'”

Of course, Bartholomew would argue that case differently. After all, who didn’t catch the tech fever that was sweeping the nation, wondering if the Dow was indeed on its way to 36,000, as some economists have predicted.

Short-term memory lapses can mirror market downturns.

Uhl argues that a good broker is supposed to protect people, like a doctor he’s representing, from losing two-thirds of their retirement savings. Sames goes for the retiree whose assets were wiped out by the tech sector’s collapse.

Not alone

Of course, Microsoft’s Bill Gates lost half his fortune over the past year and’s Jeff Bezos lost 84 percent of his net worth. The market dives, people get hurt. Take your knocks.

But then there are legitimate cases. One woman in her 60s whom Uhl represents was highly concentrated in technology — on margin. And another client’s 401(k) assets were margined, he says, even though that’s illegal. “There was widespread abuse,”

Hiring an attorney to represent a legitimate claim may be good step in recovering some damages, but not all. You’ll have to pay that attorney. And because of that, smaller claims of $5,000 or $10,000 won’t even be considered by most securities lawyers.

The NASD does allow do-it-yourself claims. Investors can write in, provide back-up statements and evidence of their claim, and seek awards for damages.

A success rate of this type isn’t known. Nor is the success rate for arbitration claims made nationally.

What is known is that markets do drop and people do sue to recover part or all of their losses, legitimate or not.

Sophisticated investors know they can’t beat the market all the time. They know that if the market is down 30 percent and they have 10 or 15 years until retirement that they can withstand the risk. They realize that their investment plan takes into account down periods. They just have to decide whether this was one of them, or whether they were given bad advice.