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Stockbrokers and Brokerage Firms Can Be Held Liable for Negligence

By Scott C. Ilgenfritz | Categories: Litigation | Share April 2014

One of the most common misconceptions of individual investors is that they must prove that they were intentionally misled about their investments or otherwise defrauded to recover investment losses from a stockbroker or the firm for which he or she works.  Intentional wrongdoing by financial professionals, such as stockbrokers, can take many forms, including churning, unauthorized trading, misrepresentations or omissions, and selling away.  However, investors can recover their investment losses from their financial professionals and the brokerage firms for which they work upon proof of simple negligence.

The most common claim asserted in securities arbitration proceedings is the recommendation of investments or investment strategies that are unsuitable for investors.  When an investor opens an account through a stockbroker at a securities broker/dealer, the stockbroker and the firm for which he works have an affirmative obligation to get to know their new customer.  They have an affirmative obligation to gather such information as the new customer’s employment status, annual income, source of income, time horizon, liquidity needs, net worth, liquid net worth, tax bracket, and, most importantly, risk tolerance and investment objective.  Risk tolerance is generally expressed as “conservative”, “moderate”, or “aggressive”.  Investment objectives are frequently expressed in terms such as “preservation of capital”, “income”, “income and growth”, “long term growth”, and “speculation”.

Once this financial, risk tolerance, investment objective, and other information has been gathered from a new customer, the stockbroker and the brokerage firm for which he works have an affirmative obligation to recommend to the customer only those investments or investment strategies that are suitable or appropriate for the customer based upon his or her profile.  These obligations are set forth in FINRA Conduct Rule 2111, “Suitability”.

An investor can prove a negligence claim against a stockbroker and the firm for which he works by establishing that the investments or investment strategy recommended by the stockbroker were too risky or aggressive for the investor based on his or her profile, and the investor suffered losses as a result.  Such claims can be based upon unsuitable individual investments, the over concentration of an investor’s portfolio in certain investments or in a sector of the stock market, an overly aggressive asset allocation, or an unsuitable investment strategy, such as trading on margin.

For over 22 years, Scott Ilgenfritz has been representing investors and other victims of negligence, fraud, or other wrongdoing by brokerage firms, stockbrokers, and other financial professionals.  He is the immediate past president of the Public Investors Arbitration Bar Association, a national voluntary bar association of lawyers who represent investors and advocate investor rights.


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