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Communication via personal text messages or personal email could be a major warning sign that your stockbroker or investment advisor is engaging in investment and securities fraud. While not all uses of personal devices for broker-client contact are cause for concern, these messages are often difficult to regulators and firms to monitor. Because these parties need to monitor communications to prevent fraud both internally and by external enforcement, the use of unapproved devices has become a fineable offense. Regulatory authorities are cracking down on these practices to better protect investors and their holdings. Firms are responding with internal compliance measures—or paying the price.

Morgan Stanley is the latest firm to be slapped with a hefty fine for the use of unapproved personal devices, according to a recent report. In its second-quarter 2022 earnings statement, Morgan Stanley disclosed a $200 million fine “related to a specific regulatory matter concerning the use of unapproved personal devices and the firm’s record-keeping requirements.” This is in response to conversations the firm has had with the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC).

Morgan Stanley isn’t alone. Since the COVID-19 pandemic has moved more investment professionals to out-of-office settings, the use of personal devices has proliferated. As a result, major investment firms like JPMorgan, Citigroup, Deutsche Bank AG, and HBSC Holdings Plc have all reported a range of related concerns such as fines, regulatory scrutiny, or other internal actions because of regulators’ crackdown on personal device use.

Stockbrokers and investment advisors are trusted financial professionals. However, as they say, there is a bad apple in every barrel. And if you’ve been watching the news over recent months, the finance industry certainly has its share of bad apples when it comes to investment and securities fraud. But how can you tell if your broker is one of them? What may be some warning signs?

Brokers who engage in fraud or other types of illegal activity with client accounts need to shelter their communications with clients from the firm. One warning sign that a broker may be engaging in investment fraud is that the broker communicates with you through their personal email account about your investments or other potential investments, and not through an email account that is supervised by their employer

In most instances, brokers are required to use their email associated with the firm. Similarly, many firms prohibit brokers from texting with their clients, as it can be more difficult for a firm to police those private text communications. Communications with customers are also frequently reviewed by FINRA and other regulators. Thus, for brokers interested in selling products to clients outside of the firm’s offerings (selling away) or, even worse, trying to commit fraud against a client, using a work email only risks the broker’s misconduct is discovered by their firm.

Today, the Texas State Securities Board (TSSB) announced in a Disciplinary Order the suspension of Jason Anderson, a broker from Beaumont, Texas formerly working in the last two years with each of LPL, Kovack Securities, IFS Securities, and since March of 2017, was seeking registration as an investment adviser with IFS Advisory, LLC (later withdrawn), and then went on to seek registration as an investment adviser with Financial Management Services of America, LLC.   Last year, Mr. Anderson was “indefinitely” suspended by FINRA for failing to comply with an arbitration award, pay a settlement, and/or failing to tell FINRA about the status of that award.   Mr. Anderson has been very busy—-why?  Some of the answers may be found in Mr. Anderson’s BrokerCheck, which reveals a rather concerning string of customer complaints and other problems.  So, is Mr. Anderson suspended?  Yes as a FINRA broker, and yes in the State of Texas, just not for long.

Well, while Mr. Anderson was with LPL between 2007 and February 2016, and perhaps while at the subsequent firms, Mr. Anderson was recommending to many of his clients an active trading program pursuant to a technical analysis.  The Texas State Securities Board called the trading program the “Equity Strategy.”  Similarly, there have been a number of customer complaints, and even a lawsuit filed against Mr. Anderson for his practices with his customers.

Mr. Anderson’s, and hence LPL’s, Equity Strategy involved actively trading stocks based apparently on Mr. Anderson’s belief in his prescient technical analysis.  The Texas State Securities Board stated that Mr. Anderson “did not consider the trading costs, which included commissions…or the impact that such costs would have on the rate of return the Equity Strategy would need to earn to generate a positive return for a client.”  The TSSB noted that for one client, the costs were 30%, meaning that in order for the client to breakeven, the Equity Strategy would have to earn 30%–no small feat for an investor with a moderate risk tolerance!  Not surprisingly, the TSSB concluded that Mr. Anderson did not have a reasonable basis to believe that the Equity Strategy was suitable for his clients because of his disregard of the trading costs (his own commissions), and thus such practice was deemed by the TSSB to be “inequitable practices in the sale of securities” and it suspended Mr. Anderson’s registration.  Hmmm…

This week FINRA published a Recovery Checklist for Victims of Investment Fraud and at the risk of being called sensitive, it seems the Checklist seemed to omit, at least on its face, that hiring an attorney may be the most direct route to seeking any compensation that may be due from being a victim of a financial crime or a victim of investment fraud.  Granted, if you click through to the embedded links, you will find another page published by FINRA titled “Legitimate Avenues for Recovering Investment Losses.”  Therein you will find FINRA’s suggestion that “…You may want to hire an attorney to represent you during the arbitration or mediation proceedings to provide direction and advice.”  I guess it is nice to be considered a “legitimate” avenue by FINRA, as any suggestion of illegitimacy would not sound quite as nice.

But back to the “Checklist.”  FINRA provided a number of resources to report the crime, and victims of investment fraud and financial crimes should report these crimes to all appropriate agencies, as those agencies represent the only real process that can (whether they will is a different issue) bring criminal or regulatory charges against the perpetrator.  However, it is in my experience rare that the authorities responsible for enforcing the criminal and regulatory statutes will recover the victim’s damages, although it certainly happens from time to time.  That is not their real responsibility–they want to enforce the criminal laws and regulations and put deserving criminals behind bars or revoke licenses.  Yes, recovery will sometimes be the product of criminal enforcement, but hiring someone that has no purpose other than representing the victim in seeking the appropriate recovery is wise.

I am glad FINRA acknowledges that the damage done by investment fraud not only includes the damages from financial loss, but also includes  “…at least one severe emotional consequence—including stress, anxiety, insomnia, and depression.”  These damages are real, and should be recoverable in arbitration, right?  Well, FINRA knows that it is not easy to recover from investment fraud, and states so plainly.  FINRA states, “While full financial recovery may be difficult to achieve…” and again states  “It can be difficult to recover assets lost to fraud or other scenarios in which an investor has experienced a problem with an investment. But there are legitimate ways to attempt recovery. In most cases, you can do so on your own—at little or no cost.”  Alas, is this a comment on the fairness/difficulty in recovering legitimate damages in its own arbitration forum?  Perhaps, but don’t expect FINRA to connect these dots.  But given this  admitted “difficulty”, why does FINRA seemingly encourage victims of investment fraud to go it alone?  FINRA is certainly aware of what can happen to the investor/claimant/victim proceeding on their own  against veteran Wall Street attorneys in its FINRA arbitration forum—something akin to throwing raw meat into a crowded lions’ den comes to mind.  Granted, experienced FINRA arbitrators will recognize a meritorious claim before them, but when it comes to recovering money from investment fraud, don’t go it alone!

As a Texas securities attorney I have been involved in the securities industry over much of the last three decades, and it seems the debate over the fairness of mandatory arbitration before FINRA between customers and firms or brokers has been heated, and near constant.  Periods of greater scrutiny seem to only coincide with any rule proposal or legislation which has the potential of tilting the playing field in one direction or the other. During this debate, FINRA statistics seem to used by both sides (the consumer advocates and the industry) to support their respective arguments, but do these statistics tell us anything about “fairness.”

For those that may not have had the pleasure of engaging in this titillating debate,  it may be generally summed up as follows:  “Is FINRA Arbitration Fair, And Does It Offer Any Compelling Advantage to Either the Industry or the Public Customer?”  It is not surprising that each constituency group argues zealously they are “right” in their analysis of fairness, or the lack thereof.  However, and more interestingly, these constituencies can sometimes be found to argue “Yes” before some audiences, and “No” before others, perhaps suggesting a more candid insight while their respective guard is down, if not some resignation, about the current process and maybe a “kiss your sister” type of fairness.

Some background may be helpful for those not familiar with the origins of the debate.  In 1987 the United States Supreme Court decided in the Shearson v. McMahon case that brokerage firms can contractually mandate arbitration for claims brought by their customers, thus forcing citizens to give up their right to the court system  and a jury.  It was heralded as a fair trade-off given the so-called fairness, efficiency, and economy of arbitration versus the court system.  Since then, the debate continues:  Is FINRA arbitration fair, and does it still offer compelling reasons to waive a right to a jury trial? Pragmatically speaking, the answer may not matter because it is likely, if not certain, that the customer agreement used by every brokerage firm contains a provision requiring mandatory arbitration before FINRA, and change to the status quo will only come, if at all, from the legislative and rule making process, or perhaps from a new decision from the Supreme Court, but don’t hold your breath.

Can I Sue My Stockbroker?

Well, yes and no.  The question is more appropriately “How do I sue my stockbroker?” or “Where can I sue my stockbroker?”  As I will explain shortly, the common denominator to all of these answers is that investors can (and should) seek recovery when their stockbroker breaches a duty owed to them and they suffer losses.

The short, but correct answer is “No,” you are likely prohibited from suing your brokerage firm in Court, and can only bring a claim in FINRA arbitration (which may look like a “Yes” answer…).  All broker-dealers (think Merrill Lynch, Edward Jones, LPL, Wells Fargo, and any company that employs a stockbroker) must be registered with the Financial Industry Regulatory Authority (FINRA), the Self-Regulatory Organization that is vested with the regulation of brokers and the enforcement of rules governing the brokerage industry.  All firms and their brokers are supposed to comply with FINRA’s rules and procedures, and these rules set forth many of the duties owed by the firm and the broker to the customer.  When one or more of these rules are violated, a customer can be harmed and lose money (account losses) or be prohibited from making money (missed profits).  One of these rules requires the broker-dealer to submit to a customer’s demand for arbitration using FINRA’s Dispute Resolution Forum–so even if there was no agreement to arbitrate, the customer could mandate that the firm submit to arbitration, but it is generally perceived that investors would prefer to be in a local court, before a local judge, and a jury of their peers.

Stockbroker Fraud and Investment Fraud: How Is It Discovered?

It should go without saying that it is rare that a stockbroker ever confesses to making unsuitable recommendations, illegally recommending private investments away from the firm, churning an account or switching annuities to generate commissions, pushing variable annuities, or telling the client that they didn’t have the authority to trade without first getting permission. Rare, indeed, it simply doesn’t happen, and with Wall Street refusing to adopt a fiduciary duty standard for its brokers, such confessions won’t happen anytime soon. So if it must be discovered by the client, how is it discovered?

In my experience stockbroker fraud and misconduct is usually noticed by someone other than the client: a CPA, a probate or estate planning attorney, a cynical friend not taken in by the broker’s charm and excuses, or even a new broker that recognizes the misconduct of the prior broker. Of course, the client probably has had suspicions, but acting on those suspicions calls into question why the client trusted the broker in the first place— not an easy self-analysis, and even harder to admit that your choice in brokers was wrong and you have been taken advantage of. Not to mention the fact that the broker is likely explaining that “everyone lost money”, “just hold on…it will come back”, making it even harder to face the problem. Hope springs eternal for many investors and if the markets rebound, thereby hiding the sins, everyone is OK, right? So many claims simply lay dormant while clients ignorantly go along their merry way. Isn’t that what Wall Street and the individual brokers secretly want? It certainly is to their advantage that valid claims go quietly unnoticed.

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