Almost invariably, investors that fall prey to cold-calling boiler-room operations, find themselves on what best can be described as a “Suckers List.” The pitches are generally all the same: we are a Wall Street firm that specializes in certain investment research, we are formerly an “institutional” firm, but we are now offering our services to higher net worth investors, we are following some high name recognition security, that doubled last month, and now are recommending some other high name recognition security, that is guaranteed to go through the proverbial roof. Because these securities are often household names, the unknowing investor perceives them as being lower risk. Generally once the investor agrees to open an account, they are passed along to a more “senior” broker, and the cold-caller goes back to making cold calls.
However, once the investor purchases the subject security, and sends in the cash, the high name recognition securities are immediately sold, and the investor generally finds themselves on margin, owning a series of house stocks, whose names may be difficult to pronounce, often purchased with the investor’s prior authorization. Investors are sometimes told that they are not paying commissions, when in fact, they are paying sometimes undisclosed mark-ups and mark-downs, which exclusive of firm inventory profits, can be as much as 5% of the total investment.
Within months, generally, the account becomes worthless, the firm is closed by regulators, or the “crew” of offending brokers, often with extensive customer complaints, and prior associations with rogue or expelled firms, “cockroach” en masse from one firm to another.
Meantime, the investors new account forms are passed along from broker to broker, from brokerage firm to brokerage firm, and these investors find themselves being cold-called, and “pitched” sometimes more than once a week, by some fast talking cold-caller that is going to make them money in the stock market.
Welcome to the “Sucker’s List.”
However, recently, or not so recently, these investors are not getting cold-calls from brokerage firms, but instead from organizations that promise to recover the customer’s investment losses. These persons are not lawyers nor are from law firms, but generally are in fact former boiler room operators themselves, brokers barred from the business, seeking to further exploit investor victims. Because they have a list, they generally know the exact securities and the exact firm or firms where the investor lost money. Much like the boiler room pitch, they tout their experience, and how much they have been able to recover for investors, by simply writing letters, or filing complaints, because after all, based upon their inside knowledge, the brokerage firms are supposedly afraid of them.
They are not lawyers, they do not try cases, but they do offer their “services” often in consideration for an up-front fee of as much as $5,000 to $10,000 to perform an “analysis” of the account, and sometimes as much as 50% of whatever they may be able to recover for investors.
In December 2007, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 07-57, and changed its prior Rule, which allowed “anyone” accept a disbarred attorney from representing investors in arbitration claims to the present Rule 12208 (c), “Representation by Others,” which provides or allows parties to be represented in an arbitration by a person who is not an attorney, unless: “the person is currently suspended or barred from the securities industry in any capacity, or the person is currently suspended from the practice of law or disbarred.”
However, on September 19, 2016, FINRA issued an Investor Alert, entitled “It can be hard to recover from Recovery Scams.” According to the Investor Alert:
You hear from someone who claims to be able to help you recover money you lost from a previous investment. The information sounds credible and the organization sounds legitimate. Documents you receive also look authentic, and the money that’s promised is not only welcome, but seems well-deserved compensation for previous losses.”
The catch? They want you to pay money upfront for the recovery “services,” which in some cases are purely fraudulent. In addition to the original money you lost, you now may lose more money at the hands of professional con artists.
On August 9, 2016, the United States Securities & Exchange Commission issued a similar Investor Alert: “What You Should Know About Asset Recovery Companies,” observing that:
The SEC regularly receives questions and complaints from investors who have been contacted by asset recovery companies with promises to recover money lost to financial scams or investment frauds. The companies often charge a substantial fee – from hundreds to thousands of dollars – to provide these services. These companies typically find potential customers by pulling names and contact information of victims from court filings and other lists of investors.
In December 2015, The North American Securities Administrators Association (“NASAA”) also issued a Bulletin regarding Third Party Asset Recovery Companies. According to NASAA:
Victims of investment scams are wise to use caution if approached by companies promising to help them recover their lost investment funds and bring the perpetrators to “justice.” A third-party asset recovery company is a company that charges a fee to assist individuals in recovering money lost in scams. The company claims to gather information on the scam and assist the individual in recovering lost investment dollars. Many of these self proclaimed recovery companies are not law firms, although they may advertise that they can provide legal assistance. Typically, the targeted investors have lost thousands of dollars, perhaps even their entire life’s savings, to fraudulent investment schemes.
Investors seeking to recover damages in FINRA Securities Arbitrations as a result of misconduct by their stockbroker or brokerage firm, are strongly urged to hire a lawyer. FINRA suggests that the process is “user-friendly,” and in fact, suggests among the “Options for Investors,” that:
Your first course of action should be to report the matter in writing to your broker’s manager or the brokerage firm’s compliance department,” and “If you are not satisfied with the brokerage firm’s response or you seek monetary damages or other restitution, you may file a claim against the broker, brokerage firm or both in arbitration.
We however believe that if you have a claim or complaint against your broker or brokerage firm, the last thing you ought to do is write your own complaint. Often clients, even sophisticated clients, complain about the wrong issues.
The client or customer’s written complaint is also an admission and can be used to impeach the client at the time of hearing, “well you complained about this, but did not complain about that.” More importantly, a brokerage firm seldom, or almost never decides to write a customer a check based upon a complaint letter. Invariably, the customer will receive a response, sometimes after considerable delay, “thank you for you letter, at the time you opened your account, you stated your net worth was [sic], your income was [sic], and your investment objective or risk tolerance was [sic].” “You had a non-discretionary account, approved the transactions at issue, and although we are sorry for your loss, we cannot help you.”
In fact, in “selling away” cases where the offending broker is selling unregistered investments or some form of Ponzi scheme, the brokerage firm sometimes will reach out to the customer to deny liability or request information or documents, under the guise of offering restitution, just to obtain free discovery and gather evidence that the customer should have known these were not official brokerage firm sponsored investments.
As a general rule, never complain. Also don’t get your hopes up about complaining to securities regulators. They often do not do anything, and generally, they will never help you get your money back.
Hire a lawyer. Hire a securities lawyer or a lawyer that has experience in securities arbitration matters. The brokerage firms and their insurers have good lawyers, often highly experienced securities arbitration lawyers. Investment law is complex and highly nuanced. The FINRA Securities Arbitration Process is not easily navigable. Cases are won and lost in discovery, and probably more importantly, cases are won and lost based upon arbitrator selection and who gets to decide your case.
Hire someone who knows what they are doing. The best resource for finding the right lawyer in any securities arbitration matter is the Public Investors Arbitration Bar Association (“PIABA”). The PIABA website provides a searchable database of lawyers with securities arbitration experience, and its members with minor exceptions, are only allowed to represent investors.
And if you are cold-called by an investment recovery service, simply hang up the phone.
The Guiliano Law Firm
Nicholas J. Guiliano has over twenty years experience representing investors before the Financial Industry Regulatory Authority, the New York Stock Exchange and before the National Association of Securities Dealers, Office of Dispute Resolution. Over the last twenty years, he has represented more than a thousand investors from all across the United States and from several foreign countries, in claims against stockbroker and broker-dealers for fraud, breach of fiduciary duty, churning or excessive trading, the sale of unsuitable investments, the sale of defective investments, the sale of unregistered securities, and the failure to supervise. He is frequently quoted in the national media on securities and investment related issues, most recently on National Public Radio. He offers his services on purely a contingent fee basis, and is also a member of Public Investors Arbitration Bar Association.