Chicago Securities Arbitration Lawyer - Bond Fraud - Recovers Investment Losses through NASD Arbitration - Brokerage Attorney, Stockbroker Fraud

Helping individuals recover their investment and retirement plan losses.

At Stoltmann Law Offices, we've represented many clients in arbitrations or lawsuits to recover losses from bond related fraud and negligence. Bonds and bond mutual funds are often one of the most frequently misunderstood investment products stockbrokers and financial planners sell to investors. Fraud in the offer and sale of bonds to individual investors cost billions each year. As interest rates continue to fluctuate the value of investors' bonds and bond mutual funds have plummeted. More egregiously, the subprime implosion has sheared billions off of what were supposed to be safe fixed income bonds and bond funds. Typically, these risks were simply never disclosed.

Stockbrokers and financial advisors at firms like Merrill Lynch, Morgan Stanley, Smith Barney, Prudential, Morgan Keegan, Edward Jones, Wachovia and AG Edwards were pitching these bonds as rock solid, safe investments that would not lose money. Unfortunately, many times these representations were false. The true risks of these bonds were not disclosed. Even the safest bonds sold to investors have lurking, undisclosed risks that often went undisclosed to clients.

FINRA (formerly known as the NASD), the venue through which investors can recover bond losses, is currently experiencing a surge in bond related arbitration actions. We have only seen the tip of the iceberg. Investors, retirees and pension plans are often looking at their statements and seeing the value of their bond holding plummet in short periods of time. Fortunately, these losses may be recoverable (See III: Recovering Bond Losses below).

There are a number of bond related claims investors may have when they've suffered losses. These claims are discussed below.

Under both federal and state law, financial advisors and brokers have an obligation to disclose all material risks associated with bonds purchased. Unfortunately, many brokers and advisors failed to disclose the bonds and bond funds solicited had subprime related, high risk toxic waste. In recent months, the most common bond claims relate to the failure of an advisor or stockbroker to disclose all material risks related to the bond or bond mutual fund purchased.

False statements in the purchase and sale of fixed income products often include guaranties, price predictions, or purported "special information" regarding merits and safety of the underlying company. Fraud, however, may also take the form of omission by failing to disclose, among other things, the actual quality of the bond, the underlying risks inherent in the bond purchase or other material, relevant information that the client is entitled to before purchasing the bond. Many bond mutual funds were exposed to subprime holdings and this was not told to investors. Over the next 12-18 months, the surge of arbitration claim filings at FINRA will be related to these sorts of claims.

The FINRA Conduct Rules require that in recommending to a customer any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to their other security holdings and as to their financial situation and needs. All securities, not just stocks, must be suitable for an investor. For example, if an investor wanted rock solid, safe returns, and a stockbroker recommended lower quality bonds, (also known as junk bonds), then the advisor may have made an unsuitable investment recommendations. If a broker has willfully disregarded his clients stated investment objectives by recommending low priced or speculative bonds, the firm and the broker could be found to have made an unsuitable investment recommendation.

Most brokers are compensated by transaction based commissions or markups charged to the client. Sometimes financial advisors effect transactions not for the purpose of reasonably fulfilling the clients stated investment objectives, but instead in an effort to generate excessive commissions or markups for themselves and their firm. Under no conditions are bonds to be utilized as a trading vehicle. Bonds are intended to be long term investments. Bond don't have commissions but rather have markups embedded in the price of the securities. In other words, a bond may be held in the inventory of a brokerage firm at a cost of $950 per bond. The firm, prior to selling the bond to a client, imposes a markup on the bond. Generally, the lower the quality of bond, the higher the markup. Also, the longer it takes the bond to mature, the larger the markup. So a junk quality bond maturing in 20 years may have a $80 markup. A short term government security, on the other hand, may have a markup of only $5.

Stockbrokers often may recommend to a client that he or she buys lower quality bonds on margin. The purported logic is that if a broker can get his or her client 10%-12% on a lower quality bond purchased on margin and the client pays margin interest of 8%, then the client is in effect receiving free money. This logic is tragically flawed and often leads to massive losses for the investor.

Many investors do not understand margin accounts. When you purchase securities on margin, your brokerage firm is lending you money to pay for these securities. Initially, you may use cash equal to half the securities purchased, or pledge certain fully paid securities. Either way, you owe the brokerage firm, or most likely its clearing agent, the debit balance, or the amount borrowed to pay for these securities. In general, unless you purchase more securities or pay down the balance, the debit or the amount borrowed does not change. Bond prices, however, change and if the market value of the securities (bonds or stocks) in your account declines in value, you will be required to meet margin calls and will be called upon to deposit additional cash, or fully-paid securities, into your account. If you fail to meet a margin call, or if your account falls below minimum maintenance levels, even in the absence of notice of a margin call, by contract, your broker is able to liquidate your investments.

However, many unscrupulous brokers use margin to increase the purchasing power in your account in order to facilitate excessive activity or churning. Aside from this practice, unless you are able to make and meet margin calls, and have the financial ability to satisfy the debit balance in your account, based on your overall financial condition, you may be unsuited for a margin account. If your broker has placed your account on margin, and you do not understand, or are unwilling to trade on margin, you should have your account evaluated by a professional. Such practices are usually the warning sign of other inappropriate activity in your account.

Unless you have signed discretionary papers giving your broker permission to trade your account without your authorization, a broker is required to obtain his clients permission before buying or selling bonds (or any other securities) in the account. It is not uncommon for unscrupulous brokers to buy and sell bonds in a clients account without authorization. If the client calls to complain, the broker might blame it on a "computer error" or some other excuse.

Brokers are obligated to follow their client's instructions when selling or buying bonds. Actions may exist based on your broker's failure to execute certain orders. Actions may also be based upon your broker's dissuading you from selling particular bonds.

Brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of bond suitability, unauthorized trading, or excessive bond trading activity. But for the performance of these duties, most cases of bond fraud may have been reasonably prevented. The failure to supervise is a violation of self-regulatory rules. Courts have recognized a cause of action for the negligent failure to supervise, and brokerage firms are liable for the acts of their registered representatives under the common law doctrine of respondeat superior, and as control persons under Section 20(a) of the Exchange Act

Investment disputes between investors and their brokerage firm and brokers are generally subject to arbitration. Most brokerage firms use arbitration agreements as a condition to establishing a brokerage account. Additionally, the rules of the major national stock exchanges and the NASD (National Association of Securities Dealers) and NYSE (New York Stock Exchange) require that members and member firms (i.e. brokers and their companies) submit their disputes with customers to arbitration. If you suffered losses due to investments in bonds recommended by your financial advisor, some or all of those losses may be recoverable. Please review this website. For more detailed information on arbitration and recovering bond losses or other investment losses, please contact Chicago based attorney Andrew Stoltmann at either 312.332.4200 or Stoltmann1234@hotmail.com.



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