LOS ANGELES – The Guiliano Law Group, P.C. announced today it has filed an arbitration claim on behalf of certain investors before the Financial Industry Regulatory Authority or FINRA, against a national securities broker-dealer, and its purported Portfolio Managers, for the violation of the federal securities laws, the recommendation of unsuitable securities, negligence, common law fraud, breach of fiduciary duty, the failure to supervise, and the violation of Section §25401 of the California Corporations Code.
The highest duty or standard of care attaches to the management of a discretionary account. Unlike non-discretionary accounts, where an investment professional makes an investment recommendation that the customer is free to reject, (or routinely follow), no matter how misguided, customers are generally not involved in the management of a managed discretionary account. Accordingly, the highest standard of care is associated with discretionary transactions.In fact, most securities broker-dealers do not authorize their stockbrokers to accept discretionary accounts or engage in discretionary trading in customer accounts.
Discretionary trading authority must be in writing, signed by the customer, and approved by the firm. Discretionary trading is also subject to special, or at least closer supervision, and all confirmations (and electronic order tickets) are required to be marked “discretion used.”
Many firms, however, permit individual stockbrokers to gather managed assets, managed by outside or in-house investment managers, in exchange for a fee. Sometimes, the investment advisor or portfolio manager making investment decisions in the customer’s managed account is the stockbroker themself.
The management of these accounts must be consistent with the investor’s investment objective and stated tolerance for risk. Many, if not all firms, providing these services to retail customers, generally seek to determine the investor’s investment objective and stated tolerance for risk based upon a Questionnaire completed by the customer.
FINRA Rule 2111 requires that a member or an associated person must have a reasonable basis to believe that a recommended investment strategy, including an explicit recommendation to hold a security or securities, provides that:
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
b) A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
FINRA Conduct Rule 2111 (2023)(emphasis added).
As the US Securities & Exchange Commission has observed:
Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.
A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.
Securities Exchange Act Release No. 63325 (November 17, 2010).
In the particular case, despite the glossy brochures, the investors allege that they were not provided a portfolio of securities, allocated among stocks and bonds, or remotely diversified among economic sectors and sub-sectors, but that instead their broker was engaged in the short term trading or bets by the broker on individual securities, and a series of non-traditional or leveraged ETF funds.
The investors also allege they were provided a series of misrepresentations, and omissions concerning the inherent risks and the speculative nature of the broker’s discretionary trading and among other things, failed to disclose that:
a) the purchases and overall investment strategy presented a high degree of risk, and were fundamentally inconsistent with the investors’ known financial condition and stated investment objectives;
b) the investors’ accounts were not diversified, nor was it based upon a model portfolio. Instead, it was based upon the short term trading of individual equities and Exchange Traded Funds; and that
c) by allowing the stockbroker to exercise complete discretion and control over the investors accounts, the investors could suffer substantial losses.
The Statement of Claim alleges that these misstatements and omissions of material fact made in connection with the sale of securities were effected with known risk of deceiving Claimants and constitute violations of § 10(b) of the Securities Act of 1934, and SEC Rule 10b-5, as promulgated thereunder;
The Statement of Claim alleges that this conduct is also a violation of FINRA Conduct Rule 2110, and is actionable under §10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 as promulgated thereunder.
Recommendations made by stockbrokers without exercising reasonable diligence, care, and skill, to have a reasonable basis to believe the recommendations were in the customers’ best interest, based upon their investment profile and the potential risks, rewards, and costs associated with the recommendations, are a violation of Regulation Best Interest, Rule 15l-1(a)(1) of the Exchange Act, 17 CFR § 240.15l-1(a)(1).
In addition to compensatory and punitive damages, the Statement of Claim also seeks interest and reasonable attorneys’ fee pursuant to the antifraud provisions of the California Corporation Code §25403.
The Guiliano Law Group, P.C. is a national securities and investment fraud law firm representing investors across America and around the globe for more than thirty years with offices in Philadelphia, Pennsylvania, Los Angeles, California, and Miami, Florida.
We offer our services on a contingent fee basis, and there is never any cost or obligation for us to evaluate your claim. Offer void where prohibited. See Important Disclaimer.
For more information visit us at securitiesarbitrations.com.
