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BROKER AND ACCOUNTANT LIABILITY Fraud, Greed, Misinformation, and Negligence Turn the Investment World Upside Down

May 1, 2003  To be sure, the stock market and other industries driven by speculative investment practices have never been for the faint of heart or financially insecure. As a result, highly qualified experts have always been available to offer their professional analyses and advice to the public as well as their own clients regarding such variables as:

    * Market trends and volatility;
    * A company’s solvency, stability, competitiveness, and overall financial health;
    * Anticipated future performance and potential return on investment with respect to individual companies, and particular industries; and
    * Investment strategies including the timing of purchases and sales.

However, in the past few years, these already chancy forms of investing have taken on the characteristics of a carnival shell game as a result of unscrupulous, deceptive, unethical, and often careless actions on the part of the very professionals who are supposed to protect the public in general and the individual investor in particular. Many stock brokers, financial analysts, bankers, and accountants have allowed self-interest, undisclosed collusive relationships or conflicts of interest, unorthodox practices, and their own professional negligence or malpractice to cause widespread financial damage of catastrophic proportions to investors of every level of sophistication. Individuals have lost their life savings including everything they had set aside for their retirement. Investment groups have been wiped out. Institutional investors such as major pension and welfare funds and colleges have been devastated. How did this all happen so quickly, and before anyone (other than the “insiders”) knew what was coming? Consider the following scenarios:

    * A major brokerage house hypes the stock of a company without disclosing its relationship with that very company in other financial or business matters.
    * A top accounting firm signs off on questionable financial statements and gives a clean bill of health to a company as a result of highly unorthodox accounting practices suggested by the company and known to be unreliable and dubious by the accounting firm.
    * A trusted and highly reputable stock analyst, with a syndicated cable television program, gives misleading investment advice about a company with which the analyst and/or his employer have an undisclosed financial, business, or personal relationship.
    * A broker engages in excessive trading (frequency or size) in a customer’s account in order to generate commissions for himself or his company and without regard to the customer’s financial situation.
    * Based upon a customer’s financial status, investment objectives, risk tolerance, and level of sophistication, a broker makes what he knows or should know are unsuitable investment recommendations for that particular customer.
    * A brokerage house expands its business to include banking services (or vice versa) causing investors pay bigger loan fees, and suffer greater losses due to a failure to diversify or as a result of maintaining dangerously imbalanced portfolios.
    * A broker enters into unauthorized transactions as a result of failing to obtain a customer’s approval prior to those transactions or without having obtained prior written discretion.
    * A stock analyst misleads the public and his firm’s customers as a result of his allegiance to friends and colleagues in the investment banking business.
    * A major brokerage firm pays a number of its rivals to publish positive reports with respect to companies whose shares the firm issues to the public.
    * An accounting firm, aware of the possibility that a company it audits is headed for financial collapse, continues to issue highly positive financial statements for that company thereby implying the company is a solid investment. The accountants may even openly encourage investment in the company. The firm receives millions of dollars in accounting fees from the company and is fully aware that the officers and directors of the company are divesting themselves of their holdings in the company.
    * A broker brags that he “knows someone” in the company whose stock he is recommending.
    * A broker induces clients to switch to mutual funds outside of their initial mutual fund family in order to generate additional or increased commissions for the broker.
    * A broker sells his customers investments not held or offered by his company
    * A broker “mis-marks” order tickets or confirmations to protect himself from the scrutiny of compliance officers at his firm or client litigation against the firm.
    * A broker fails to disclose his commissions, or the fact that he has liquidated his position in stock also held by his customers at the same position.
    * A broker fuels positive interest in a stock by instigating or perpetuating rumors, failing to disclose negative information, or intentionally misleading customers about the potential negatives in a particular investment.
    * A broker enters into an arrangement wherein he agrees to share profits and losses with customers.
    * An Internet Broker suffers one or more on-line breakdowns or “outages” due to the incapacity of the system to cope with the level of activity, a virus, or a security breach.
    * A wife (stock analyst) and husband (stock trader) are suspected of collusion with respect to stock trades made by the husband based upon information received from his wife. The husband is suspected of using advance knowledge of both positive and negative research reports and other nonpublic information for personal financial gain and to generate enormous profit to the hedge fund by which he was employed.

While the foregoing situations may seem extreme or even contrived, they reflect actual occurrences that have prompted recent civil litigation (individual and class actions), arbitrations, and criminal investigations and prosecutions. Small investors have suffered terribly as a result of these improprieties, negligence, and malpractice. Their damages have been further amplified by the host of corporate debacles such as the ones at Enron, WorldCom, Tyco, Adelphia, HealthSouth, and Arthur Andersen.

At Parker & Waichman, we are committed to protecting the rights of those investors who have suffered financial damage as a result of corporate, broker, or accountant fraud, malpractice, or negligence. Whether the situation calls for arbitration, an individual lawsuit, or a class action, we stand ready to represent any party, group, organization, or class that has demonstrable damages caused by any of the following conduct on the part of a broker or accountant:

    * Churning or excessive trading: This occurs when a broker makes trades that are excessive in size and/or frequency in light of the investor’s objectives, resources, and risk tolerance. This is usually done to generate excessive commissions for the broker.
    * Misleading or knowingly false statements or rumors: A broker is not permitted to mislead a client and must disclose both the positive and negative aspects of a potential investment. A broker may not start or perpetuate a rumor for the purpose of influencing an investor.
    * Unauthorized transactions: Brokers are prohibited from executing an order without the investor’s express permission or written authorization to use “discretion” in making trades of a specific or general type.
    * Unsuitable recommendations: A broker must consider his customers’ financial resources, objectives, and risk tolerance when making investment recommendations. “Suitability” is one of a broker’s most important duties to his customers.
    * Insider trading: This occurs when a broker uses nonpublic information to pitch a stock or to recommend an investment. If an investor suspects such conduct, he or she should promptly question the broker about the source of his knowledge.
    * Switching mutual funds: Although most mutual fund “families” permit an investor to reallocate their investment throughout their family of funds for free or for a nominal transaction fee, some brokers attempt to induce their customers to switch their holdings to funds outside of the family. While this greatly increases the commissions to the broker and comes with considerable greater transaction fees, there is no real benefit to the investor.
    * Selling away: This occurs when a broker sells investments which are not held or offered by his company.
    * Sharing in accounts: A broker is not permitted to share profits or losses with a customer.
    * Parking securities: A broker is not permitted to hold or hide securities in a client’s account.
    * Disclosure of commissions: A broker is required to disclose his or her commissions.
    * Double dealing: This occurs when a broker disparages a stock in professional settings while recommending it to his customers.
    * Collusion: This occurs when a broker colludes with an analyst to have the analyst offer false positive reports about a particular stock or class of stocks.
    * Failure to place an order: Brokers are required to execute orders in a timely fashion.
    * High pressure sales: This occurs when brokers “push” relatively worthless stocks in order to artificially inflate the price of the stock. This tactic usually includes some degree of misrepresentation or nondisclosure.
    * Fraudulent internet promotions: Also referred to as “pump and dump.” This occurs when email spam is used to fraudulently promote stocks by flooding the internet with fictitious comments from bogus companies designed to drive up the price of a stock. Once the price surges, the defrauder sells his or her shares for a profit.
    * Over concentration or imbalanced portfolios: This occurs when a broker fails to use diversification as a strategy for managing and limiting an investor’s risk. Imbalanced investment in one stock or in a particular market sector may result in significantly higher losses for the investor when that stock or market segment is hit with a downturn. A broker is required to advise a customer of the strategic benefits of portfolio diversification as a tool to reduce risk.
    * Accountant fraud or conflict of interest: This occurs when an accountant or accounting firm engages in intentional conduct designed to hide or otherwise cover up significant accounting irregularities or financial problems in a company that induces the accountant to engage in such conduct directly (fraud) or indirectly (conflict of interest) as the result of a lucrative business relationship between the company and the accountant.
    * Reliance: This occurs when a party who is not a customer of the accountant in question relies to his detriment on financial records or statements of a company which are certified as accurate and complete by the accountant when the accountant knew or should have known through the exercise of professional expertise that the financial statements or records were erroneous, fraudulent, inaccurate, incomplete, or otherwise misleading, and that they would be relied upon by investors in their decision making process. This may also occur when an accountant fails to disclose financial weaknesses or other significant problems in a company which the accountant has audited.
    * Online trading errors: These include:
          unsuitable trades;
          improperly executed trades;
          improperly priced trades;
          computing errors due to lack of system capacity;
          outages caused by viruses, security breaches, or system inadequacy;
    * Breach of fiduciary duty: Brokers have a fiduciary duty to each of their customers which includes:
          managing customer accounts in a manner which comports with the objectives and needs of the customer;
          keeping customers informed of each completed transaction;
          keeping customers informed of market changes which affect their interests;
          protecting customers’ interests; and
          explaining, without equivocation, the impact and potential risks of any investment strategy suggested or adopted by the broker.

Parker & Waichman maintains an extensive online collection of securities fraud information that is updated on a daily basis on its website Our subscribers are invited to click on to Practice Areas and then Securities Fraud to review these entries. If you believe that you, your investment group, organization, institution, or a potential class of investors has suffered monetary damages as a result of any of the conduct discussed in this Newsletter, please contact us online or by telephone.

For further information regarding the rights you or your loved one may have with respect to this matter contact PARKER & WAICHMAN immediately by calling 1-800-YOURLAWYER or visiting
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