Good and bad financial advisors alike tell worried clients to “ride it out,” and to wait for the markets to return before selling securities or exiting the market altogether. That advice is great sometimes, and other times it’s simply a cover for a bad financial advisor caught out in the down market. The rising markets hide all sorts of ill-conceived investments. All too often, the cliché “a rising tide lifts all boats” rings true. Investors don’t tend to raise questions when their portfolios are growing in value, even when those portfolios are filled with lousy investments that happen to be riding the wave of a rising market.

What Should You Do When the Stock Market Drops?

What about when the stock market crashes? Selling good investments in a panic during a down market may not be the best idea. How, then, can the average investor who trusted their financial advisor know whether their losses are simple and unavoidable market losses or the product of their advisor’s wrongdoing? That’s not so easy to do.

One common way to tell is when the markets recover (and they almost certainly will). Did your investments recover their losses as the markets rose again? Or, instead, are you hearing about your friends’ portfolios returning to their previous highs while yours remains depressed? If it’s the latter, you may have fallen victim to an advisor who sold you products that weren’t in your best interest, or who built a portfolio poorly suited for you.

Another key thing to look for when evaluating your portfolio is a concentration in a single or a few securities, or a concentration in a particular asset class, like stock. Concentration adds risk, and that may be the cause of your losses. Another thing to keep an eye out for is a significant holding in private placements and non-traded securities. Securities not traded on the stock or bond markets are commonly called “alternatives.” They may or may not be correlated with the stock market, and often carry far greater risk than a well-diversified portfolio of publicly traded securities. They’re sold as a way to divorce returns from market fluctuations or as a way to produce steady income that stocks and bonds cannot provide. Those alternatives are often illiquid, meaning you can’t exit them if you later realize they aren’t right for you, or if you recognize the signs of a failing investment and want to cut your losses.

The Complexity of Modern Investments

Both good and bad portfolios typically have many moving parts, and today they are more likely to include complex non-traded alternatives than they were twenty or thirty years ago. To determine what went wrong, if anything, requires a strong understanding of investment theory, financial advisor standards of care, and mathematics.

Fortunately, the team at McCarthy Lebit understands these issues and, more importantly, understands how devastating an investment loss can be for an individual, a family, or a business. However, not all losses are the result of wrongdoing. Our team of experienced attorneys can help you identify the cause of your losses. If your damages resulted from a stockbroker’s or investment adviser’s misconduct, they’ll inform you and discuss your options in detail.

To seek counsel from our Investor Claims practice group, please reach out to request a consultation or call us at 216-696-1422.

The post Is Your Investment Loss Market Volatility or Something Worse? appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Your Investment Adviser Owes You A Fiduciary Duty

Your investment adviser was right – they are held to a fiduciary standard as a matter of law. But what they didn’t tell you is that they consider that duty for marketing purposes alone. When it’s time to actually do the job, they’re going to sell you on ideas that line their pockets first. Unfortunately, greed will always serve to corrupt a number of people and lead to bad results.

Determining whether the investment advice offered was appropriate for you isn’t terribly difficult for a disinterested party to determine. Attorneys, experts, and subsequent financial professionals are all capable of reviewing a portfolio and reaching a conclusion regarding the quality of the adviser’s work.

But Your Investment Advisor Might Have Breached That Fiduciary Duty By Trying To Make Accountability Impossible

An insidious, but common, breach of fiduciary duty is often found buried in the advisory services agreement(s) you signed when you hired the adviser. The language of those agreements could potentially serve to prevent you from ever seeking a recovery from the adviser who acted wrongfully.

Had you decided to do business with a stockbroker, your efforts to recover the money they lost you would proceed before a panel of arbitrators in the Financial Industry Regulatory Authority’s (“FINRA’s”) arbitration system. While not perfect, the FINRA arbitration program offers modest expense and a known structure for fact-finding and evidence presentation. FINRA prevents its members from including class-action waivers or hedge clauses meant to scare investors away from bringing claims. An example of a hedge clause we see too often is a provision that says, “If you bring a claim against me and lose, you’ll pay my legal fees.” FINRA members are barred from forcing you to travel across the country for the arbitration. They’re also forbidden from including choice of law provisions that would deprive you of rights your local law would otherwise provide.

Your investment adviser isn’t subject to such explicit prohibitions. That said, it is not uncommon for investment advisers to use the contract that you signed as a shield against liability. Too often, investment advisers attempt to:

• Require you to select an arbitration forum that could alone cost you hundreds of thousands of dollars just to have your claim heard;
• Include contractual terms that require you to travel across the country to participate in the arbitration for a chance to recover your money;
• Forbid you from participating in class action lawsuits; and,
• Include contractual provisions that would put you at great risk if you attempted to file a claim against them.

In short, while your adviser told you (correctly) that they have a fiduciary duty to you, they often violate that duty by making it difficult, if not impossible, to file and prosecute a claim against them.

These are not hypothetical scenarios. In fact, they are so important that they gained the attention of the Securities and Exchange Commission, which addressed the issue in a report issued in June 2023. Late last year, the SEC’s Office of the Investor Advocate’s year-end ‘2023 Report on Activities’ included the Ombuds’ message in which she recommended that the SEC consider “temporarily suspending the use of mandatory arbitration clauses in advisory agreements until further exploration of the associated costs and benefits to advisory clients is undertaken.” What the SEC itself will do with that recommendation remains to be seen. However, the fact remains that countless investors may find themselves subject to fundamentally inappropriate dispute resolution requirements until, and unless, the regulators step in to level the playing field.

The vast majority of investment advisers mean their clients no harm. It’s a business relationship that, in an ideal world, provides benefits to both adviser and client alike. The problems with investment adviser arbitration are increasing thanks to the fact that the number of investment advisers is growing (44% growth in ten years according to the SEC), and the number of clients has grown accordingly.  

Do yourself a favor and if you’re already using an investment adviser, review the terms of your agreement. If things go wrong, are the dispute resolution terms in your agreement fair? If not, and if the adviser won’t change those terms, you may want to consider whether you want to continue to do business with them. If you’re considering hiring a new investment adviser, check the agreement for the same thing: what happens if they violate their duty to you? If you find that you’d have to travel across the globe just to pursue your claim, consider whether that adviser really has your interests at heart.

Our Team Has Experience With Investment Adviser Claims

As the number of advisers and advisory clients steadily increases, we are receiving more and more calls from investors questioning whether they were the victim of an adviser’s wrongdoing. We have experience in not only working through the investment portfolios, but the advisory contracts themselves, and helping investors determine whether they can, or should, pursue a claim. And our input in that process costs the investors nothing until they decide to hire us to pursue a claim. If we need an expert’s help in assessing the case, expenses can be incurred in the claim review process, but our time and input before we’re hired is free.

Advertising a fiduciary duty is great marketing. Honoring the duty is more difficult. If you believe you’ve been the victim of your investment adviser’s wrongdoing, let’s discuss your particular circumstances.

For more information or to seek counsel from our investor claims group, please reach out to request a consultation or call us at 216-696-1422.

The post The Irony of Investment Advisers appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

The vast majority of stockbrokers try to put their clients’ interests first, offering advice with each client’s unique needs in mind. Unfortunately, because brokers are often paid a commission to sell particular products, there’s an incentive for a broker to put their own interests first and foremost. The problem is particularly acute when dealing with non-traded non-public securities, like promissory notes, non-traded real estate investment trusts (“NTRs”), or other private placements not registered with any regulator, all of which tend to pay much higher commissions than would standard investments like listed stocks, bonds, or mutual funds. While all brokerage firms understand the tension such alternative investments present – high payment to the broker versus what’s best for the client – good brokerage firms maintain a culture that promotes supervision to ensure that rogue brokers aren’t out selling improper or fraudulent investments.

It should be obvious that visiting the site where a broker works is a key element in ensuring that the broker is acting appropriately.  FINRA’s new rules undercut that concept to a meaningful degree.  In the wake of the COVID shutdowns, brokers started working at home and firms struggled with how best to supervise those folks.  FINRA, charged with oversight of the brokerage industry, proposed four different versions of rules that relaxed their member firms’ obligations to conduct in-person site visits for remote offices.  Ultimately, the SEC approved the proposed changes to FINRA’s Rule 3110 regarding supervision.  We’ll avoid getting into the weeds on the details regarding the new rule changes, but the conclusion is inescapable: the new rules will make it easier for brokers to hide their wrongful conduct from the prying eyes of the firms for which they work.

How, then, does this rule change affect YOU?  In the simplest terms, you’ll need to be more vigilant when you work with a broker who isn’t working in the brokerage firm’s offices.  When your broker works out of their house, or a far-flung single office, and offers you an investment opportunity that sounds too good to be true, it probably IS and you should stay away.  If the pitch is that the investment provides guaranteed income and no meaningful risk, it’s very likely that the truth is that the promised income is guaranteed to fail and there’s tremendous risk you’ll never see your investment again. 

Private placements – securities that aren’t traded on a securities exchange like the New York Stock Exchange – pay a much higher commission than you’d see with a stock, bond, or mutual fund that are traded every moment of every day.  A broker might be paid 1 or 2% to sell you shares of Apple, but 7% to sell you NeverTradedCo’s private security.   If your broker is offering you such a security, you need to confirm a few things before saying “yes” to the proposal.  Be sure to ask: (1) Did your firm approve this transaction?  (2) Can I see your due diligence report concerning this offering?  (3) How much are you being paid if I buy this security?  (4) If I need my money back, how do I get it back and how long will that take?  If any of the responses seem “off,” or even vaguely wishy-washy, you’d be well served to decline the invitation to invest.  And, if your broker told you to sign forms that are blank (since the broker will fill them in later for you), or if the broker told you to inflate your reported income or net worth so that you’d be eligible to buy what they’re selling, those are huge red flags, and you should absolutely decline the invitation to invest.  If, however, you said “yes,” and now find that you weren’t sold a high-quality investment, but rather a bill of goods, now would be a good time to engage the expertise of an attorney.

For more information or to seek counsel from our investor claims practice, please reach out to request a consultation or call us at 216-696-1422.

The post Securities Regulators Remove Safeguards: Heightened Risks for Investors appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

While stockbrokers often call themselves “financial advisors,” there is a type of professional who is officially called an “investment advisor.” There is a difference between the two, and it could have a huge impact on individual investors because when things go wrong the difference between the two becomes stark and meaningful.

Stockbrokers

• Stockbrokers are regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that sits under and is subject to SEC oversight
• A stockbroker can effectuate a trade on behalf of a client
• Some stockbrokers are fiduciaries by operation of law

Investment Advisors

• Investment advisors are regulated by the SEC or their local states – depending on how much money they’re managing
• An investment advisor makes a recommendation that is ultimately carried out through a broker dealer
• All investment advisors are fiduciaries as a matter of law.

Almost every brokerage firm requires clients to agree that any disputes will be heard in a FINRA-overseen arbitration process, as opposed to in a court of law. FINRA’s arbitration process isn’t perfect, but it has made great strides toward being a fair, efficient, and fairly priced forum. FINRA requires its members, including firms and individual brokers, agree to arbitrate if the client requests, even if the firm’s customer agreement doesn’t require arbitration. If a client proceeds in a FINRA arbitration, one of the best aspects is that the hearing will be held in a FINRA hearing location closest to the investor’s residence, with the brokerage firm subsidizing a significant portion of the arbitration forum expenses. FINRA has hearing locations throughout the country and are convenient for the vast majority of Americans.

Investment advisors, on the other hand, are free to include whatever dispute resolution provisions they want in their client agreements. They can require that a client travel across the country in order to pursue a recovery. They can require the client use a dispute resolution forum that’s tremendously expensive (some require tens of thousands of dollars to be deposited before they’ll even start administering the case), to the point where it’s simply not economical to pursue claims under $100,000. They can require that the dispute be heard under some other state’s law, when the client had every expectation that the advisor providing services would be subject to the investor’s local law. The bottom line is that investment advisors can make arbitration so difficult or expensive that only large claims could be heard, and even then, at great expense and difficulty to the investor. Those investment advisors use their arbitration clauses as a shield against potential claims.

The number of investment advisors is growing, and growing quickly. Where there were slightly more than 10,500 registered investment advisors in 2012, that number has grown to more than 14,000 in 2021. At the same time, the number of firms serving as broker-dealers alone fell from 3,545 to 2,921 over the same period. McKinsey reports that registered investment advisory firms represent the fastest growing category in the US wealth management market since 2016. There’s no doubt that the investment advisory space is growing by leaps and bounds, and there’s no doubt that the lack of a standardized dispute resolution forum for those increasing number of investment advisors means that an ever-growing number of investors could have unexpected difficulty in seeking recovery if they have the misfortune of having dealt with an investment advisor who did not take their fiduciary duty seriously. Well-informed investors using investment advisors would do well to check the dispute-resolution terms in their account agreements before any sort of problem arises. If the terms seem offensive, or heavy-handed, there may be an opportunity to renegotiate the terms in order to keep the business with that advisor.

An investor who was trying to be careful with their money likely spent time researching to find a well-regarded, trustworthy financial advisor. If the investor later has questions about whether they made the right choice or not, it is best to address the question without delay. If the advisor’s answers are unsatisfactory or just plain confusing, we stand ready, willing, and able to work with you to figure out whether you were the victim of a lousy market, or a lousy advisor. If it turns out we believe the advisor is at fault and responsible to you, we’ll work with you to determine the best, or perhaps only, avenue to pursue a recovery. Our initial review is performed at no cost to you, though if we require the use of an outside expert, we’ll talk to you about that expert’s cost before we retain them.

Time is of the essence in these situations. If you have concerns or questions, reach out now to request a consultation, call us at 216-696-1422, or visit Hugh’s bio for his contact information to reach out to him directly. And, for more information about investor claims and securities fraud, visit our partner website, StockMarketLoss.com.

The post The Market, Brokers, and Advisors, Oh My appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Robinhood Service Outages

When the Robinhood platform went down in early March 2020, it left 12 1/2 million account holders unable to trade.  Worse yet, there were no human beings with whom angry customers could speak to try to get more information and emails went unanswered.   On June 30, 2021, it was announced that the Financial Industry Regulatory Authority (“FINRA”) – the regulator charged with overseeing the brokerage industry – levied nearly $70 million in sanctions against Robinhood for a variety of problems, including its instability and tendency to lock clients out of their accounts.  While Robinhood agreed to pay the penalty, and $12.6 million is to be paid as compensation for harmed investors, it is unlikely that any individuals who were locked out will see any of that money.

Our office received dozens of calls in March of last year with complaints about the platform.  We continue to receive calls almost any time the platform is unavailable, and investors are prevented from buying or selling their securities.  The complaints are almost identical: “I would have bought X, but I couldn’t.” “The stock is up 50% and I missed out!”  We also hear the flip side: “I wanted to sell Y but couldn’t.”  “It’s now trading for half of what I could have gotten had I been able to sell it.”  To date, we’ve declined every single one of those potential client claims.  Why?

Documentation Is Key If You Want to Bring A Claim

Claims against Robinhood, like any other brokerage firm, are heard in FINRA-sponsored arbitrations. The arbitrators assigned to decide these cases act like judges and juries.  As such, they want evidence that will support an investor’s claim.  A simple claim that “I would have bought X at $3.50 and it’s now at $5.00” isn’t enough to convince the arbitrator that the investor was wrongfully deprived of an opportunity.  Simply put, it’s too easy to look back in hindsight and pick a stock that would have jumped had you had a chance to buy it but for Robinhood being down that day.  The only meaningful chance an investor has to win a claim is to present evidence of what they were trying to buy, in what amount, at what time, and at what price.  How would one do that?  The best evidence would be an email to Robinhood’s customer service department that says something like: “I tried to buy 300 shares of Company X at 3:15 PM today at $14.75/share, but I couldn’t because your platform is down.”  If the email is sent at 3:16 PM, it serves as good evidence that you really were trying to buy the security.   Presuming you had enough money (or access to margin) to complete the purchase, a contemporaneous, detailed email should demonstrate to a skeptical arbitrator that you really were deprived of the opportunity to buy or sell a particular security as you’ve claimed.

What, then, are your damages?  If you claim that you wanted to buy a security, but couldn’t because the platform was down, the arbitrator is most likely to award you the difference between what the security was at the time you were prevented from buying it and its price when Robinhood started working again.  If you were dying to buy Company Z at $10.00 per share, but couldn’t, and Company Z was priced at $11.00 per share when Robinhood started working again, it’s most likely the arbitrator would award you the $1 difference multiplied by the number of shares you were trying to buy.  That said, the arbitrator should (but might not) give you some reasonable period of time after Robinhood came back online, figuring you wouldn’t know the exact moment it did, so there’s no reasonable way you could use the app at that exact moment to buy the stock at $11/share.  Accordingly, the price of the stock for the day or so following Robinhood’s return would be relevant in the damage calculation.

The permutations are seemingly endless.  Robinhood allows customers to trade options, sell short, trade on margin, and trade a variety of publicly traded securities.  An outage could affect an investor’s strategy for any of those.  Regardless of the sort of security you were locked out of trading, the one constant is the need to document to Robinhood (and the arbitrators) exactly what you were prevented from doing, and when.  If you have that evidence in hand, you have a reasonable claim to present to a FINRA arbitrator.

What To Do Next

If you lost thousands of dollars as a result of Robinhood’s technological problems, please feel free to call us for a free consultation.  We’ll let you know what we think and whether we believe we can help you recover some or all of your losses. There’s no cost for that initial conversation. Call Hugh Berkson today at 216-696-1422.

The post Robinhood Service Outages Create Headaches – But There’s a Cure appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

We have learned, however, of a strategy Robinhood has been using to drum up business that might well expose it to liability.  While it touts itself as a platform simply designed to fill customer orders, it appears that it has actually been making recommendations and may be exposed to liability when those recommendations are not in the customer’s best interest.

What’s the Big Deal About Recommendations?

Up until June of 2020, brokerage firms had an obligation to ensure that recommendations made to customers regarding particular securities transactions were suitable for those customers.  The Financial Industry Regulatory Authority (“FINRA”) had a rule on the subject:  Rule 2111, which required that a firm or broker have a reasonable basis to believe that a recommended transaction or strategy involving securities was suitable for the customer, based on information obtained through the firm or broker’s reasonable diligence to determine the customer’s investment profile.  What does that mean in plain English?  Brokers were required to make recommendations that were consistent with the customer’s investment objective, risk tolerance, tax status, experience, and other customer-specific details.  Recommending a risky stock for a retired person living on a fixed income who said they didn’t want any avoidable risk in their portfolio was unsuitable.  A loss related to the purchase of that risky stock could be recoverable.

Brokers and customers worked under a version of the suitability rule for decades.  The parameters of what was, or was not, suitable was well understood (if often debated in arbitration hearings brought by aggrieved customers).  But there’s a new sheriff in town: Regulation Best Interest (“Reg. BI”).  The SEC imposed Reg BI on June 30, 2020.  The rule is simply too new at this point to have any understanding of how arbitration panels will apply it when customers complain.  FINRA and the SEC have both gone on record, however, as stating that Reg BI is intended to be more broad than was the old suitability rule.  Under Reg BI, not only must an investment recommendation be suitable for a customer, but it must actually be in the customer’s best interest.  Thus, if there are two investments, both of which could be considered suitable, the broker’s analysis must go further and they must recommend the one that is objectively better for the client.  Consider a very basic (and simplified) example: say that two investment products were identical in every regard save one, since one had an internal cost charge of 2% and the other had one of .5%.  The product with the higher charge cannot perform as well as the other for the simple fact of the drag that charge applies to the performance.  Under that (highly unlikely) scenario, a broker would be said to violate Reg BI in recommending the more expensive product since it would not be in the client’s best interest.

Online Brokers and Recommendations

Brokers are held liable when their recommendations are made in violation of the applicable rule.  What happens, then, for an online broker when a customer logs on, picks a security, and asks that a transaction be made?  Where is the recommendation there?

The question of whether online brokers were making recommendations to clients is not a new one.  The principal regulator, the National Association of Securities Dealers (“NASD,” the predecessor to FINRA), addressed the subject in Notice To Members 01-23 (“NTM 01-23”).  For those not familiar with the naming convention for these notices, please know that this one was the 23^rd notice issued in 2001.  That’s right – this Notice came out nearly twenty years ago.

NASD was addressing the then-new proliferation of online brokerage firms and assessing when those firms could be deemed to be making recommendations when the stated idea of online brokerage portals was to serve as simple “order takers,” not full-service brokers.  NASD stated that the NTM was meant to address two questions: (1) whether the suitability rule should apply to online brokerage firms at all; and, (2) what sorts of online activity would constitute “recommendations” for purposes of the rule.  The NASD addressed the first question quickly and without ambiguity:  the suitability rule applied to recommendations, whether they were made electronically or not.  The answer to the second question was, however, more nuanced and NASD explicitly refused to craft a bright-line test for whether certain conduct would be considered a “recommendation.”  Rather, NASD stated that all of the “relevant facts and circumstances” would be taken into consideration when determining whether a particular communication constituted a recommendation or not.  NASD stated:

The determination of whether a “recommendation” has been made, moreover, is an objective rather than a subjective inquiry.  An important factor in this regard is whether – given its content, context, and manner of presentation – a particular communication from a broker/dealer to a customer reasonably would be viewed as a “call to action,” or suggestion that the customer engage in a securities transaction.

Continuing, NASD told its members that the more individually tailored a communication was (be it to a specific customer or group of customers, regarding a security or group of securities), the more likely it was the communication would be deemed a “recommendation.”

In an effort to promote better understanding of its intent, NASD then provided a series of examples of conduct that would, or would not, be deemed a recommendation.  Simply making research reports available was not considered a recommendation, where allowing an investor to request search results tailored to their particular interests, investment objectives, and risk tolerances was deemed a recommendation.  Of particular interest is NASD’s description of the following as an example of a recommendation:  “A member sends a customer-specific electronic communication (e.g. an e-mail or pop-up screen) to a targeted customer or targeted group of customers encouraging the particular customer(s) to purchase a security.”  Thus, if a firm sought out a client to suggest the client consider a security, that would be deemed a recommendation.  NASD described another example, where a firm was actively seeking particular clients:  “A member uses data-mining technology (the electronic collection of information on Web Site users) to analyze a customer’s financial or online activity – whether or not known by the customer – and then, based on those observations, sends (or “pushes”) specific investment suggestions that the customer purchase or sell a security.”   Thus, should a firm look at its customers’ trading habits and use that information to send targeted suggestions that those customers consider certain securities, the suggestions would be deemed “recommendations” subject to the suitability rule (and now Reg BI).

Robinhood’s Recommendations

Robinhood is obviously an online-only brokerage firm.  But is it making recommendations?  It appears that its strategies to drum up business fall within the sorts of conduct NASD stated would be considered a “recommendation.”

Robinhood has allegedly been engaging in data mining and sending targeted communications to customers who aren’t trading enough, in an effort to promote trading.  Why would it do that?  While Robinhood famously promotes its “commission-free” trades for customers, it is well compensated when its customers trade.  How?  It sells its customers’ orders to market-makers for execution.  The practice is commonly called “payment for order flow.”  The more orders Robinhood customers generate, the more money the firm makes.  It should therefore come as no surprise that Robinhood has a vested interest in encouraging its customers to trade.

Robinhood’s efforts to encourage trading utilize a variety of methods.  A list of “biggest movers” available at login is equally available to all customers.  The provision of such a list is unlikely to be deemed a recommendation  since it is made equally to all customers, much like a billboard on a highway.  But it has recently come to light that Robinhood is engaging in data mining to encourage its customers who aren’t trading (enough) to trade (more).  In a complaint filed late last year, the Massachusetts Securities Division alleged that at least one customer who hadn’t yet traded received a push notification from Robinhood stating “Top Movers; Choosing stocks is hard. [flexing bicep emoji]  Get started by checking which stock prices are changing the most.”  The click-through took the customer to Robinhood’s top movers list.  In a similar vein, Robinhood allegedly sent another push notification that read “Popular Stocks: Can’t decide which stocks to buy? [thinking emoji]  Check out the most popular stocks on Robinhood.”  The click-through was directed to the Robinhood 100 Most Popular List.

Robinhood’s push notifications are undoubtedly calls to action targeting select customers.  As such, they are exactly the sorts of communications NASD said in 2001 would be considered recommendations.  Thus, those communications could (and should) be deemed recommendations of the stocks found on the lists presented when customers follow the click-through links.  What’ the problem, then?   It appears that Robinhood engages in absolutely no suitability analysis whatsoever when making the suggestions.  Regardless of a customer’s stated risk tolerance or investment objective, Robinhood pushes them to a list of securities identified simply by the volume of trading in those particular securities.  This is the very definition of a suitability rule / Reg BI violation.  Suggesting stocks based solely on the volume of trading for those stocks cannot under any circumstances be deemed suitable or in a client’s best interests.

What can you do?

If you received a push notification from Robinhood, recommending you consider trading one of its “biggest movers” or “top movers,” and you lost money on that trade, you may be able to recover if that security was, in fact, unsuitable for you.  If you lost $25,000 or more on stocks you purchased in response to a Robinhood push notifications, please reach out to your McCarthy Lebit attorney to discuss your experience and we’ll see whether we’ll be able to offer our assistance.  There’s no cost for that initial conversation.  You’re welcome to use our contact form, or call our office at 216-696-1422.

The post Robinhood May Be Liable If You Lose Money Based On Its Recommendations appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Robinhood, TD Ameritrade, and other online platforms have prevented retail investors from entering buy orders in Gamestop, AMC, Nokia, Blackberry, and other securities.  Those investors are understandably angry at missing out on the opportunity to buy and ride the stocks up (presuming they were to continue to climb in price).  Do the firms have the right to refuse the orders?  Have the investors suffered compensable losses?

There are no quick or easy answers.  In short, the exchanges themselves shut down trading off and on for these securities.  In other instances, the clearing firms shut down the trading.  Accordingly, the inability to process an order may have had nothing to do with the brokerage firm.  Where the firms themselves shut down trading, the opening account documents typically gave them the power to do so at their discretion.  We’re not aware of any evidence the firms abused their discretion.  But, presuming there is such evidence, proof of damages could well be an insurmountable hurdle in prosecuting a claim.  We believe that an investor would have to show written proof of their intent to buy a security on a certain date and time at a certain price, and written proof of their intent to sell those shares at a date, time, and price.  We do not believe that any arbitrator, judge, or jury would take an investor at their word that they lost money because they would have traded if they’d only had the chance.

We’re in the business of helping investors recover if they’ve been the victim of wrongdoing at the hands of bad brokers, firms, and investment advisors.  While we understand a lot of people are angry at what’s happened with the online brokerage firms, we don’t currently see a viable claim to be brought.  For a more thorough explanation of our thought process, read on:

What happened?

The securities trading platform Robinhood is under fire – again.  In December 2020, the trading platform agreed to a cease-and-desist order from the SEC, based on allegations of misleading customers regarding order execution quality and the hidden higher costs to its users compared to other broker’s prices.  Robinhood agreed to pay a $65 million civil penalty as part of that agreement.

Now, retail investors are slamming Robinhood, TD Ameritrade, and other platforms for restricting purchases of GameStop, AMC, Nokia, Blackberry, and other securities.  A significant portion of the news reporting this week has addressed various brokerage firms’ refusal to accept orders on those securities, and whether there’s any sort of recoverable loss associated with the refusals.  Legislators are posting on Twitter and demanding explanations in support of angry investors, and the SEC is “monitoring” the situation.

There’s a lot going on, and no singular answer to the question.

Share values have zoomed upwards over the past few days.  Notably, this isn’t a total restriction on all trading of these shares.  The platforms are at least currently still allowing sales.   Given that the trading price surge appears to have been in large part due to retail investors rallying to snub institutional investors (like hedge funds) who have been shorting these companies, and thus profit off of falling stock value, this limited trading restriction appears to benefit the Goliaths over the Davids.   The prohibition of buy orders, and allowance of sell orders, has naturally driven the stock prices down, thereby protecting those who shorted the stocks.

Can investors take action against the platforms for the purchase restriction?  The internet is buzzing with talk of class action lawsuits.  Our office is fielding inquiries.  But – from a claimants’ attorney perspective – there are high hurdles to overcome.

But isn’t this “market manipulation” by the platforms, for the benefit of the institutional Goliaths?

 We see five hurdles for retail investors wanting to sue these platforms:

First, not all of the refusals to execute trades are the result of the firms’ refusal to accept buy orders.  The New York Stock Exchange has instituted a number of temporary trading halts on the securities.  If you look at the NYSE’s web page, you’ll see that it has continued to shut down trading for both GameStop and AMC and it seems that trading in those securities is open for only a few minutes at a time.  The halt is imposed, orders build, and when trading opens, the execution of the pent-up orders serves to move the stock price to a degree that triggers yet another market-based trading halt.   The cycle shows no signs of stopping.  The NYSE is allowed to impose those halts under a number of different regulatory rules.  There’s no wrongdoing there.

Second, some of the refusals are coming at the hands not of the brokers, but their clearing firms.  The president of WeBull has gone on record as saying that his clearing firm shut down the trading in those securities.  And to bolster the argument, the user agreement you signed when you opened account probably had you expressly acknowledge and agree that the brokerage firm isn’t liable if a third-party clearing firm causes the problem.

Third, for Robinhood, the very nature of their structure makes it difficult to fill orders on highly volatile stocks.  If you review the contract you signed with them to open your account, you’ll see language that says the firm will not actually accept traditional market orders.  Rather, every “market” order is really a limit order, to be filled at a price up to 5% higher than the last traded price.  Thus, if the stock price is moving upward quickly, it’s possible if not outright likely that the price will never be within that 5% band, and the order will therefore never fill.

Fourth, if you’re trading on margin, the brokerage firms have tightened margin restrictions on highly volatile stocks, and GameStop, AMC etc… are no exception.  Where you might have to maintain a 50% cushion for some securities, the restriction for these securities is now far higher.   It makes sense.  Firms aren’t willing to loan money to buy super-volatile securities.  You would be hard-pressed to win a claim that the decision to not extend margin in these circumstances is an unreasonable decision.  By tightening margin requirements, the firms can shut down trading without actually shutting it down.

Fifth, consider the contractual agreements that users of these online platforms must agree to when opening accounts.  These contracts generally allow the brokerage firm to use its discretion to decline trades.  A quick look at Robinhood’s user agreement finds language “I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.”   Contractual terms may be challenged for various reasons, and the SEC can prohibit regulated firms from certain exculpatory and other types of language.   But broadly speaking – this kind of authorization to refuse trade instructions tends to hold up.

Beyond this argument that users authorized the platform to refuse a trade order, for any reason, online brokerage firms are still required to make commercially reasonable decisions and potentially reject trade instructions that don’t line up with an account’s trading objectives.  Meaning, if you have marked a “moderate” risk tolerance for your account, the firm should theoretically reject a trade in AMC or Gamestop since those trades under current conditions are beyond speculative and are instead pure gambling.

What are the damages?

Finally – even if there are potential private causes of action for retail investors to sue the platforms for restricting purchases, there may be a high hurdle to cross regarding determining what damages may be recoverable.   Investors are understandably angry that they can’t buy shares, and are losing the opportunity make money (presuming that unfettered buying will only continue to drive the stock price up).   But, even if the firm should not have rejected your trade instruction, can you recover damages?  The problem there is that the damages calculation is purely speculative.  Your complaint is that you couldn’t buy the stock at “X” price.  Unless you have documentary evidence that you had the intent and ability to buy “Y” number of shares, you’d have to ask the arbitrators to take your word for it that you would have bought in at a certain price.  Equally problematic is the issue of when you would have sold the securities.  No court, jury, or arbitration panel is going to believe that you would have magically sold at the high point before the stock inevitably crashed to the appropriate valuation.  Once again, you’d have to have something in writing to show that you would have sold on date “X” at price “Y.”  The problems inherent in calculating damages could also well serve to defeat an attempted class action case.

What now?

There are, of course, other harms caused by wild market volatility and trading platform restrictions.  Public confidence in our securities industry erodes when it looks like the rules and regulations that are supposed to protect the Davids out there are doing more harm than good.   However, as should be clear now, securities regulation is incredibly complicated and can’t respond on a dime.  Current market movements on GameStop, AMC, and these other stocks have nothing whatsoever to do with investing, and everything to do with emotion and gambling.  We believe that it’s almost certain we’ll see regulation that addresses these issues and tries to ensure that pricing anomalies like these don’t happen again.

If you’re reading this because you feel like you fell victim to the trading in these stocks, know that you have our sympathies.  We’re sorry you suffered the experience you did, and we do wish there was something we could do to help.  We don’t currently see a viable claim to be brought, so we simply offer the explanation above and hope that it allows you to avoid similar issues in the future.  If you have other questions about your investments, please do not hesitate to reach out to the securities litigators at McCarthy, Lebit, Crystal & Liffman Co., LPA.  We’ll be happy to speak with you about your situation and determine whether we can offer our assistance.

The post Robinhood Restricts Purchases of GameStop, AMC, Other Securities – Do I Have a Claim? appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

There are certainly examples of rogue brokers running off into the night with their clients’ investments in hand. Happily, though, outright theft like that is a rare thing. So what happened when the number of shares you had yesterday disappeared overnight? In nearly every instance, you experienced what’s called a “negative split.”

The Split

Before going further, a reminder of how stocks are valued is useful. Each share of stock represents an ownership in the issuer, including its net assets and profits. We could go on at length about how stocks are valued, but in an ideal world, they’re priced based on an equal division of the net value of the company across the number of shares outstanding, modified by the market’s expectation of how the company will do in the future. If there are 100 shares, the value is divided by 100; and if there are 1,000 shares, the value is divided by 1,000. While this is an incredibly simplistic view of things, it’s necessary to understand how splits affect stock prices.

The news is certainly full of reports of stock splits – Apple comes to mind – where a number of new shares are issued for every old share held. Apple recently announced a four-for-one split. Thus, an investor who had 100 shares of Apple before the split would end up with 400 shares afterwards. Since the number of outstanding shares grows four-fold under that example, you’d expect the new per-share price to be ¼ of what it was before the split. But, since stock splits are typically a good sign of a company’s health, the markets tend to apply premiums to the post-split shares and they’ll often trade for more.

The Reverse Split

What, then, is a “reverse split?” It’s the opposite of a split. Instead of issuing more shares, the company issues less.

So, for example, a one-for-ten split would result in a situation where an investor who had 100 shares of Company X before the split would end up with 10 shares afterwards.

In that example, one would expect that a 10 – 1 reverse split would cause a 10x jump in the price of the stock (since there would be a tenth of the number of shares outstanding after the split). But reverse splits are often a negative sign of the issuer’s health.

Where the market often applies a premium on newly split shares, it tends to apply a discount on shares of companies undergoing a reverse split. Thus, the post-reverse split shares certainly trade higher than they did immediately before the split, but at a discount compared to the pure mathematical expectation. Thus, the per-share price after the reverse split might only be 9x instead of 10x.

Which brings us back to the start: the investor (or you) saw a higher per-share price with a lower number of shares. There was no theft involved.

If the investor checks the total value of their investment, it will likely be similar to what it was immediately before the split. But, and that said, the discount often applied to post reverse split stocks will result in the total investment value dropping to some degree.

How to Check for a Reverse Split

If you’re reading this because it seems your stock is valued much higher than it was yesterday, but you have far fewer shares than you did, do a quick Google search for the name of the issuer. If you see reports of the issuer having undergone a reverse split, you’ll know that nobody stole your stock. Instead, you simply have fewer shares in what’s likely a struggling company. The total investment value is almost certainly close to what it was yesterday.

But, if there are no reports of a reverse split, and a review of your statement shows that your shares were transferred elsewhere, there could well be a problem. If you didn’t authorize the transfer, it’s possible you have a claim against your financial advisor. We’re here and ready to help: please don’t hesitate to give us a call to discuss your experience and we’ll see what we might be able to do to help you recover your losses.

Blog originally posted on stockmarketloss.com

The post My Broker Stole My Stock! appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Who Was Qualified as an Accredited Investor

The SEC regulates public investment opportunities and generally only allows certain defined individuals (accredited investors) to subscribe to private investment opportunities. Because such private offerings are exempt from SEC oversight, they are deemed to be of higher risk and thus are “reserved” for investors the SEC considers better suited to protect themselves. Historically, such investors have generally been defined by their accumulation of significant wealth (greater than $1 million) or by earning significant dollars (greater than $200,000) annually with the ongoing expectation that such earning power shall continue.

The SEC also considers a person with certain leadership roles in the entity offering the private investment as accredited. The SEC assumed that high earners and the wealthy must be sophisticated and can afford to hire private lawyers or accountants to help them make prudent private investment decisions, thereby offering “self-protection” to the investor. Otherwise, the definition allowed for “insiders” who were deemed to have access to all necessary information to evaluate the risk of the private investment.  Access to such information reduces the need to rely on the SEC for investor protection.

Who Now Qualifies as An Accredited Investor

Considering this scope of permitted investors, the SEC’s accredited investor definitions excluded certain people with professional expertise who should also be capable of making prudent investment decisions, despite lacking the required personal wealth. To remedy this disparity, the SEC expanded its accredited investor definition to include those with professional certifications and credentials demonstrating knowledge, proficiency and competence with private investments. Individuals holding Series 7, 65 or 82 licenses now, by definition, qualify as accredited investors. Further, “knowledgeable employees” of private funds automatically qualify as accredited investors, as well, which includes executive officers, directors, trustees, general partners, board members, investment managers, or other employees (except those who exclusively perform clerical, administrative or secretarial functions) who have participated in investment activities within the fund for at least the prior 12 months.

Further, the new rule enumerates other explicitly recognized accredited investors, such as: (1) Investment Advisors registered under the Investment Advisers Act; (2) LLCs that satisfy certain other accredited investment requirements; and (3) “family offices” that have at least $5 million in assets under management and have a designated, knowledgeable individual to manage the prospective investment. In amending the accredited investor definition, the SEC considered including additional options, such as broker-dealer customers, other credentialed professionals, or allowing individuals to self-certify they are financially sophisticated. These proposals were ultimately rejected by the SEC because of its continued focus on controlling what it believed to be a pool of accredited investors that are truly and demonstrably in a position to protect themselves.

Despite the rule expansion, private investments remain heavily regulated and often can be challenging to navigate. They will always present serious risk. Those offering, or seeking to subscribe to, private investments should be working closely with counsel to ensure compliance and to make the best-informed decisions possible.

The post SEC Expands Eligible Participation in Private Offerings appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

No investor or broker has a crystal ball. Nobody knows when the market is going to soar, or when it’s going to crash. While the common understanding is that the markets go up and the markets go down, we’ve seen a significant shift in the timing of those movements since the financial crisis of 2008 and the following market low seen in February 2009. The bull market that started in March 2009 has been the longest and best since the end of World War II.

And then, staring on February 19 of this year, we started experiencing massive volatility – the type of which we have not seen since 2011. We can talk about stock futures, or the VIX index (designed to measure the market’s expectation of future volatility), or other indicators of market volatility, but it’s easy to see how those concepts have had a real effect on the markets. The Dow fell more than 1,000 points on both February 24 and February 27, 2020. And then we saw a gain of nearly 1,300 points on March 2. That gain was followed by a loss of more than 700 points the day following. In the sheer number of points moved (without regard to the percentage of the market those points represent), the February 24 drop was the fourth-largest ever, and the February 27 drop was the third-largest ever.  We haven’t seen movement like that since the 2008 market debacle. The March 2 jump was the single largest point jump ever. And the volatility has continued since.

Your Broker Tells You To Stay The Course

An investor’s natural reaction to the massive market swings is to call his or her broker and demand to sell out of the market, in an effort to preserve the portfolio gains. And the broker’s frequent reaction to that call is to advise the client to “stay the course,” and not panic. The broker will typically tell his or her client that the market has good days and bad, but by staying invested in the market over the long term, the client will meet their objectives. The broker will continue, advising the client that missing the best days in the market will invariably lead to disastrous results. The worried investor will hear that missing the best five days between January 1, 1980 and December 31, 2018 would have cost them $232,550 on an original $10,000 investment. And missing the best thirty days would cost them $534,497 on that same original investment. The discussion continues: since nobody has a crystal ball to reveal in advance the upcoming best and worst days, the best thing to do is stay invested and wait it out.

Staying the course can often be the best course of action for someone with a well-diversified portfolio. But it’s also possible that the investor’s losses are the result of a poorly constructed portfolio built on lousy advice. And it’s possible that the investor who needs money in the short term would be best served by selling some portion of their portfolio before additional losses accrue. The broker is required to give advice that is suitable for each individual client. The advice to stay the course must take into consideration the particular investor’s time horizon, ability to withstand the loss, tax situation, risk tolerance, and other factors unique to that client. 

Should You Listen To Your Broker?

The advice to stay the course may be good for a well-diversified investor with a long time horizon and it may be bad for an investor whose portfolio is fundamentally flawed, or who needs their savings soon. The investor went to the financial advisor for advice in the first place, trusting the advisor knew more than they did. How is that investor to tell whether he or she is getting good advice to stay the course? Unfortunately, there’s no magic answer to that question. But our years of working with investors as they try to recover their losses has revealed a number of things that tend to drive those investors to call us in the first place:

1. The investor has been talking with her friends, who tell her that they’ve seen their portfolios bounce back as the market recovers. The investor, however, has not seen any sort of meaningful recovery and starts to wonder what’s going on.
2. The investor sees losses she never expected to see, since the broker told her there wasn’t much risk. The portfolio simply doesn’t perform as expected and the investor questions the broker’s advice.
3. The investor gets fed up with the broker’s advice and moves her account to someone new. The new financial advisor sheepishly (and in a very quiet voice) tells the investor that their portfolio is filled with garbage and the previous advisor did them no favors in building the portfolio as they did. The new advisor tells the investor they should consider meeting with an attorney to see whether it’s possible to recover the losses.
4. The investor, for the first time, comes to understand that her portfolio is concentrated in a particular type of investment, or a particular security, and starts to question whether that was a good thing or not.
5. The investor tries to sell her securities, and is told she cannot since those products are illiquid and nobody will buy them.

The current market volatility shows no signs of ending soon. If that volatility has caused you to suffer losses in your brokerage accounts, asking why you suffered those losses is a fair question. If your broker’s answers seem surprisingly vague, or simply don’t make sense to you, getting a second opinion can’t hurt.  

What Should You Do?

A broker’s failure to provide advice suitable to your particular situation is a violation of his obligation to you, and could leave him responsible for losses related to that violation. Advice to stay the course, if not suitable for you, is wrong. And advice to sell right away, if not suitable for you, is wrong. You may be able to recover your losses that resulted from the bad advice.

Determining whether the broker or firm is likely at fault is not easy. We review every case carefully before we agree to accept it, and offer our initial review at no charge for our time spent. Regardless of whether we take the case or not, you won’t pay for our time incurred for the initial review.

You have every reason to be concerned about the losses you see in your account. If you didn’t think this sort of thing could happen, if your portfolio isn’t performing as you thought it would, or if your losses seem to be unusually large, please contact us. We’re happy to take a bit of time to talk it through with you, review your documents if necessary, and let you know whether we think there’s something we can do to help.

The post When Is “Stay the Course” Code for “Please Don’t Sue Me?” appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.