Securities Fraud Lawyer Blog
Might Just Be A Stockbroker’s Selling Away
And That Could Mean You Get Your Money Back.
We have seen a rise in PONZI schemes since the market dropped, but will they keep going with a strong market? A PONZI scheme is essentially when a con man robs Peter to pay Paul in order to keep the con going, all the while living off of the capital. However, many PONZI schemes involve the help from a Wall Street Stockbroker. Sometimes they are part of the con, and sometimes they are simply reponsible for introducing or referring the investor to the scheme, not even knowing it is a con. Either way, you have valid claims.
Most of the time, victim investors in a PONZI scheme get very little back, although occasionally a Receiver will recover assets that can be distributed to all. However, if any investor was simply introduced to the scheme by a registered stockbroker, such investor may be able to recover his investment.
All stockbrokers are required to be registered by FINRA, the regulatory and licensing body for all stockbrokers and brokerage firms. Fundamentally, brokerage firms are required to protect the public investor by detecting and preventing securities fraud and broker misconduct. When a firm fails to detect and prevent misconduct, it is called a failure to supervise. And in the context of a PONZI scheme that is aided by an unwitting stockbroker, brokerage firms can be liable to those clients. Most importantly, FINRA Rules require every stockbroker that participates in any manner in the sale of a security outside of his/her firm to notify the firm and get permission to participate in the deal. If permitted, the firm is responsible for supervising that broker’s participation. However, brokers often do these deals “away” from the firm, hence the term “selling away“, and when brokers get you involved in these schemes without the protection of their firm, both the broker and the firm can be liable. Why? Because the firm is supposed to detect and prevent the broker’s unapproved participation in the scheme.
Many investors think they have no recourse, but if the broker simply refers you or introduces you to the Ponzi con man, the firm can be held liable even if the broker wasn’t making a specific recommendation for you to invest in the scheme. Your claim is even stronger if the broker is getting paid for his referral. If you have been referred by a stockbroker to some investment that has gone south, contact a good lawyer that knows how to recover your money.
Bryan Forman’s Take: The Selling Away rules apply equally to hedge funds, start-up companies, limited partnerships, and any form of investment that is done away from the brokerage firm. If it involves a security, the laws are designed to protect the investor.