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Bad Broker or Bad Luck?


     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

PhoneCall Lance Wallach at (516) 938-5007


You've lost money in the market – maybe a substantial amount. Money you thought was going to plan for your future, maybe put your kids through school is now gone. You're hurt and you're angry and we understand. Can you sue your broker, fund manager or financial adviser? It depends. The Big Question: Were You a Victim of Fraud or the Market? The big question is whether your broker did anything illegal.
You can sue only if what your broker did was more than just "bad" in the sense of "unfortunate" or even "awful." Instead, there must have been actual wrongdoing.

Losing money in today’s bad market, doesn't give you the right to sue. Sometimes it's just bad luck. After all, investing – even in blue chip investments – carries risks, and the main risk is that the value of your investment will decline. What if your broker gave you bad advice? Again, it will depend on "how bad" The advice was. If your broker recommended investments that were in line with your investor profile, and those recommendations were reasonable based on everything your broker knew or should have known, then no – you can't sue. Well what kind of bad behavior does leave them liable you ask? Basically, there are four kinds of bad behavior that may give you the right to sue:

1. Lying or misrepresenting claims;
2. Your broker acting in his interests, not yours, such as claims of misrepresentation, churning, unsuitability and lack of diversification;
3. Not following instructions, including claims of unsuitability, lack of diversification and breach of contract; and,
4. Unreasonable carelessness, like claims of duty and negligence.

There are a number of different claims that can come out of these bad behaviors, but fundamentally, if your broker didn't do one or more of these things, there is no claim. To put it another way: If your broker followed your instructions, was always honest with you and was reasonably careful, then you can't sue him – even if his advice or investments went horribly wrong.

So before suing or filing the paperwork for arbitration, take a deep breath and ask yourself if your broker lied, ignored instructions or was unreasonably careless by putting his own needs and interests ahead of yours. If you find yourself answering no to more than a few of these questions, then sadly He acted with the best intentions, and based on what he reasonably knew at the time there is no liability.

You'll notice that we did not answer the question of, "What if my broker stole or embezzled money from my account?" That's because the answer is simple – sue their assets off and report them to law enforcement. Theft is theft, whether it's by your broker, a guy on a street corner with a gun or that cousin you never really trusted anyway. Even so, in a later section, we cover two common criminal schemes involving investments and securities, the Ponzi scheme and the pyramid scheme. But the short answer is that theft is always actionable. For help with this, or if you are still not sure contact our offices today.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case.

Copyright Lance Wallach, CLU, CHFC

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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