Investment Advisor Fraud – Who You Gonna Sue?

Here’s something you probably don’t think about when you hire an investment advisor: who will I be able to sue if this person steals my money?

Maybe you should think about it.

Investment Advisor Fraud

If you’re dealing with a major brokerage firm like Merrill Lynch, Morgan Stanley, UBS or Charles Schwab, the answer is simple. You can sue one of those giant companies and, if you win, the odds or pretty good the giant, multi-national corporation will have the money to pay you. (They will also have the money to fight you tooth and nail before paying you a dime).

If you are dealing with a small independent investment advisor, however, the answer could be different. As thousands of Bernie Madoff investors discovered, your supposedly “big shot” investment advisor might be a house of cards, with no money to pay you back when the cards tumble to the ground.

It is important to understand the difference between brokerage firms and investment advisors, sometimes referred to as Registered Investment Advisors or “RIA’s.” Brokerage firms are usually large companies that buy and sell securities on the major securities exchanges and issue account statements to you with the brokerage firm’s own name and logo on the account statement. Examples include Merrill Lynch, Morgan Stanley, UBS and Charles Schwab. These are some of the largest, wealthiest and most powerful companies in the world.

In contrast, Registered Investment Advisors are typically small, one or two person shops that provide investment advice to individual clients. The Registered Investment Advisor does not have his own seat on the stock exchange, nor does he issue his own account statements. Instead, the Registered Investment Advisor opens an account in your name at a traditional brokerage firm, maybe Merrill Lynch, UBS or Schwab, and the advisor takes discretion over your account. This means the advisor has power-of-attorney to make trades in your account.

When something goes wrong with a Registered Investment Advisor, recovery can be quite difficult. The advisor might not have as much money as you think. Just ask the Madoff investors. Many Registered Investment Advisors carry insurance to cover them from lawsuits, but most insurance policies do not cover fraud. Accordingly, if the investment advisor steals your money or commits an intentional fraud against you, the insurance company will not pay the damages.

This can leave a defrauded investor with very few options. One option is to sue the brokerage firm where the advisor conducted his or her trades. These cases can be quite difficult because the client has given full authority to the advisor to place trades. To find a brokerage firm liable in these circumstances, the client must usually point to red flags that the brokerage firm ignored or should have noticed in connection with the advisor’s trading patterns.

If you have been victimized by a dishonest financial advisor or stockbroker, feel free to contact our firm for a free consultation at 877-915-4040.