Kahn Gauthier Swick is investigating possible legal actions, against stockbrokers and other investment advisors, on behalf of investors who lost $100,000 or more. When an investor believes that his or her stockbroker or investment advisor acted improperly, the investor will naturally seek compensation for the losses suffered as a result of the broker's or advisor's misconduct. Most investor disputes against stockbrokerage firms and investment advisors are resolved through individual actions rather than class actions. This is because virtually all stockbrokerage firms and investment advisors require that investors sign mandatory arbitration agreements when a securities brokerage or advisory account is opened. The arbitration agreements do not allow for class actions; therefore, disputes between individual investors and their investment firms are generally pursued through individually-filed arbitrations, nearly 90% of which are filed through the National Association of Securities Dealers (NASD) arbitration forum.

Types of Claims against Stockbrokers

There are several types of wrongful activity by a stockbroker, investment advisor, or stockbrokerage firm that can be the basis for a claim. Some of the more common causes of action for which an investor may recover his or her losses are:

1. Unsuitability: This is the most common of all investor claims. It arises out of the Suitability Doctrine contained in NASD Rule 2310 and New York Stock Exchange Rule 405, the "Know Your Customer" rule. Before making investment recommendations, brokers have an obligation to learn the investor's level of investment sophistication, investment experience, investment objectives, net worth, and financial needs. Based on that information, the stockbroker or advisor has an obligation to make only those investment recommendations that are suitable for that particular investor based on his or her investment profile.

2. Misrepresentations and omissions: Sellers of securities have an obligation to provide accurate information about the investments they recommed to their investment customers, including the risks and benefits of the investment. Federal and state securities laws prohibit sellers of securities from making any "material misrepresentation" about investments that they are selling. Also, the laws impose an obligation not to omit any information that a reasonable investor would want to know in making an informed decision whether to invest.

3. Churning: Excessive trading in a securities account is known as "churning" the account. A successful churning claim requires that the investor prove that the stockbroker or advisor exercised control over the decisionmaking in the account, the trading was excessive, and the stockbroker or advisor acted in reckless disregard of the investor's best interests. Excessive trading is normally measured by cost equity or turnover ratios in the account.

4. Unauthorized trading: Unless the stockbroker or advisor has been given discretionary authority to make transactions in an account, he must first obtain the investor's permission prior to making any transaction. Without the investor's prior permission, the trade is unauthorized.

5. Breach of fiduciary duty: A fiduciary duty is a higher degree of care that the law imposes on certain relationships. The relationship between an investor and his or her stockbroker or advisor can be a fiduciary relationship if the investor relies and depends on the stockbroker/advisor for advice and the stockbroker/advisor is aware that the investor is depending on the stockbroker/advisor for that advice and explicitly or tacitly accepts that responsibility. When a fiduciary relationship exists, the stockbroker/advisor has an additional obligation to exercise good faith and care toward the customer.

6. Negligence: Negligence is the failure of a stockbroker/advisor to live up to the acceptable professional standards within the industry. Stockbrokers/advisors can be negligent in the handling of a investors's account by engaging in certain trading strategies, or in the allocation of investments, and the stockbrokerage firm can be negligent in the execution of securities transactions.

7. Failure to Supervise: Stockbrokerage firms have specific obligations to supervise the activities of their stockbrokers and their firm. Among other things, stockbrokerage firms have an obligation to review every trade that is submitted by stockbrokers in the firm. If a stockbroker's client accounts show a pattern of rules violations, such as excessive trading, or the sale of the same investments across the board to all types of clients, the firm has an obligation to investigate potential rules violations.

How the Arbitration Process Works

The arbitration agreement signed by the investor usually requires that the arbitration be conducted by the NASD, the New York Stock Exchange, or sometimes, the American Arbitration Association. A panel of one to three arbitrators acts as judge and jury, and the rules of procedure and evidence are less formal than in court. The discovery process--the exchange of documents and information prior to the hearing--is more limited in arbitration than in a court proceeding. For example, depositions are rarely taken in arbitration. The arbitration process attempts to provide a quicker and less expensive alternative to the conventional court process. The typical arbitration takes about one year from filing the arbitration claim to the actual arbitration hearing. Arbitration hearings are held in major cities throughout the United States.

Arbitration Statistics

The number of arbitration cases filed with the NASD keeps rising: 5,558 cases were filed in 2000, 6,915 in 2001 and 7,704 in 2002.

$139 million in damages (both punitive and non-punitive) was awarded in 2002 through the NASD arbitration process.

In 2002, investors were awarded damages in 55% of all investor NASD arbitration cases.