Can I sue my broker for losses in my account?

Employment attorneySometimes, yes. Any time the market dips, it inevitably leads to a string of suits against brokers for all sorts of reasonable and unreasonable theories. The attitude suggests people don’t care how their losses go away, as long as somebody else can foot the bill. Sometimes these suits are legitimate. Accountholders, seeing gains during the market boom were happy with what they saw and let the details get swept under the wrong, will then carefully go over the details to try to find any excuse to pin the losses on the brokers and find actual cases of fraud, theft, failures to disclose, unsuitable recommendations, etc. that are actual violations of civil and/or criminal statutes.

Sometimes those suits are less legitimate. Lawyers and their clients file nuisance suits or invent creative theories to blame a market-wide decline. It’s a telling sign about how the business of money really operates. What is more telling – and a different discussion on its own – is how the regulators fail to catch some of this stuff or ignore complaints when the market is booming. These types of lawsuits can be complex and often requires employment of an attorney to represent your interests.

Legal Claims against a Broker an Attorney May Help You Prosecute in Texas

As I said, sometimes there are legitimate reasons to pursue your broker for your losses. The financial industry is not perfect; nor is its workforce. It is largely a sales environment. Winning over new clients and keeping your current clients happy is how the firm makes money. It is how the brokers get their commissions and bonuses. There is often too little oversight. It’s tempting for brokers to do the wrong thing for personal gain.

Typically in cases of an outright crime the police, FBI, and federal regulators take care of the criminal side. Beyond that, accountholders are typically left to their own devices to be made whole. Laziness can also lead to brokers failing to disclose information, making unsuitable recommendations, not executing orders as instructions, etc. that can also result in losses.

Arbitration in Texas financial disputes

It is highly common in the financial industry for brokerage firms to require arbitration as a method of resolving disputes. Arbitration is a semi-judicial proceeding held in front of appointed individual(s) who decide the outcome of a dispute. The decision of the arbitrator(s) is then entered as a binding decision in a court. It becomes binding just like the case had been heard by a judge or jury. The purpose of arbitration is to allow a faster resolution than litigation often provides.

In financial disputes arbitration is typically handled through the FINRA arbitration process. FINRA is a quasi-governmental organization that regulates certain aspects of the securities industry. FINRA (FINancial Regulatory Authority) arbitrates disputes through a panel that is composed of both securities industry insiders (people who work in the business) and outsides (members of the general public) so that the panel can consider the interests of both the securities industry and the general public, as clients. If you have a claim under an arbitration agreement then you should discuss your case with arbitration lawyers in Texas.

Avenues to Prosecute a claim with a Texas attorney

Even when you have a legitimate dispute, you may not be able to sue in court because you agreed when you opened the account to settle disputes through arbitration. It is important to note that while arbitration is likely the most appropriate channel for resolution in most cases, sometimes arbitration clauses in client agreements may be inapplicable or nullified by certain conduct (particularly criminal) by the brokerage firm. Nevertheless, whether you can legitimately sue or arbitrate a dispute depends on the merits of the dispute. Unfortunately, most market losses are solely the result of poor performance of the investment, rather than any malfeasance.

Criminal acts

Although there are several things your broker can do to give rise to a legitimate dispute, five areas of malfeasance are the most blatant and common sources of losses that may be attributable to your broker. First is any criminal act. This is obvious. If you find money or investments mysteriously disappearing from your account, you need to ask questions immediately and assuming there is no legitimate explanation, contact the SEC to report fraud or theft. It is most likely you will want to contact a lawyer to discuss your options to recover the stolen amounts. Brokers must cover SIPC insurance which protects clients (to an extent) from broker malfeasance. You may be able to make a claim to recover under the firm’s SIPC coverage. Additional options may be available.

Failure to disclose

Second, a failure to disclose required information may lead to recoverable losses. Financial entities must release a long list of information to clients within specific deadlines and in specific formats. Failing to disclose the required information in accordance with the regulations does not by itself mean the firm will pay for any losses. A regulator may assess a fine – after a valid complaint – but the fine goes to the regulator, not the affected accountholder. To recover for losses related to a failure to disclose, the client must prove that the information was not made available as it should have been and had the information been correctly provided, the client would not have invested as he or she did and would have avoided a loss. It is a difficult standard to prove for many, many reasons.

In a market-wide downturn, it’s hard to show that had you had certain information on one investment you would have avoided the same downturn in any other investment you may have picked.

Failure to process

Third, a failure to process or correctly process orders may lead to recoverable losses. When you request an order to buy or sell an investment they must make reasonable efforts to execute the order. Sometimes clients place orders in ways they do not accept them. Or sometimes orders lack necessary information. Sometimes the investment cannot be bought or sold. Or sometimes the order lacks some information that permits the broker to reasonably execute the order without that information. All of these issues can affect order execution.

The standard is whether the broker processed the order within the confines of the instructions provided. If a broker misplaces an order or fails to attempt to fill it, then that would be a failure to process that may be recoverable for lost profits or losses from failing to sell. Similarly, if an order to buy XYZ bonds no higher than $900 and the broker buys at $925, the broker may have liability for lost profits – if the value continues to rise – or losses – if the value falls. On the other hand, if the broker took the same order and could not fill it at $900 because it sold at $925, the broker would not have liability for losses if the value rose to $1000 the next day because she could not fill the order as requested.


Fourth, brokers may have liability for creating transactions purely to generate trade commissions – called churning. Brokerage firms obtain some profits through commissions for processing trades. When brokers have trading authority over your account, they have the power to authorize transactions on their own. Their pay may relate not to account performance but how much money the firm makes from your account. That creates an incentive to churn. Brokers churn when they buy and sell investments purely for the benefit of generating commissions.

The problem in litigating or arbitrating churning is in many cases it is questionable whether the rapid transaction rate related to legitimate trading or churning. Given today’s focus on fast trading, it is even more difficult to prove transactions were not part of a legitimate investment plan. Often churning is easiest to prove when the rapid transactions do not meet the investment objective of the client. A client with an aggressive investment objective may desire rapid trading, so churning would be very difficult to prove. On the contrary, a client with a conservative risk tolerance likely would not desire the same strategy.

Unsuitable recommendations

Fifth, losses may also be recoverable due to brokers recommending unsuitable investments. Unsuitable investments include those not appropriate for a client’s stated risk tolerance and/or investment objective. Just as with churning, brokers have a duty to act within granted trading authority when selecting or recommending investments.

This also creates an incentive to choose investments that pay the best commissions and/or those that will maximize profits when the broker/advisor takes a percentage of assets as a fee each quarter or year. One problem is that the investment that pays the best commission may be too risky/too conservative. Another problem is when a client with low risk tolerance is convinced to purchase high risk investments. That client may be fine with the gains but may not able to afford the losses if the investment declines. For those reasons, when the client suffers losses related to investments unsuitable for their needs, the broker/advisor may be responsible.

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