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When Can Investors Sue Their Brokers for Stock Market Losses?

Posted: Sep 07, 2015 | Posted in:

Every day, individual investors fall victim to errors, negligence and misconduct on the part of their stock brokers. When stock brokers’ improper actions result in stock market losses, investors may be entitled to financial compensation. If you are questioning your broker’s actions, an experienced securities lawyer will be able to help you conduct a thorough investigation to determine whether your losses can be tied to misconduct so that you can pursue a claim for damages.

A Word of Caution: Breach of Fiduciary Duty

We will actually start with when you cannot sue your broker – because, here, there is an important distinction to be made. While most people assume that their stockbrokers are fiduciaries (meaning that they are legally obligated to put their clients’ interests before their own), the reality is that not all brokers are subject to a fiduciary duty.

The U.S. Department of Labor has proposed a new rule that would raise the bar for brokers selling securities for retirement accounts, and the current chairwoman of the Securities and Exchange Commission (SEC) is advocating for a heightened standard across the board. However, until these changes come to fruition, individual investors need to be wary of unregistered brokers – who may not have their best interests in mind.

Failure to Execute Trades

Since stockbrokers work on commission, they have little incentive not to place “opening” orders (orders to purchase stocks or conduct short sales). However, mistakes happen, orders get lost and sometimes brokers just simply fail to do their jobs.

More common, brokers will actively refuse to place “closing” orders because they believe they can make more money if they wait and sell the stock later. If you requested a trade and your broker failed to execute it, you may be able to recover your stock market losses.

Unauthorized Trading

The opposite of failure-to-execute is unauthorized trading. Simply put, a broker cannot make trades on your account without your consent. Depending on your relationship with your broker, this may mean that you have the right to make decisions about individual trades or you may have given your broker limited discretion to place trades on your behalf. In either case, you have the right to be informed about how your money is being invested, and your broker must only recommend and make trades that are “suitable” to your investment strategy.

Unsuitability

The concept of “suitability” is an important one. When making investment recommendations, your broker must only propose trades that are consistent with your risk tolerance and investment objectives. Trades are generally considered unsuitable when they expose the investor to unreasonable risk, when they are contrary to the investor’s financial needs or when they are made without the investor’s informed consent. Unsuitable trades are some of the most frequent reasons why investors hire lawyers to sue their brokers for stock market losses.

Additional Reasons to Sue Your Broker

Along with these common forms of broker misconduct, other grounds to sue for stock market losses include:

• Churning (excessive trading)
• Margin account abuse
• Misrepresentations and omissions
• Negligence
• Overconcentration of investments
• Unregistered trading

Contact Zamansky LLC for More Information

If you have experienced sudden and unexpected losses in your brokerage account, the stock market loss lawyers at Zamansky LLC can help you determine if you have a claim against your broker. Contact us today to schedule a confidential consultation.