Category Archives: Articles

Hypothetical 1

You have just referred one of your elderly clients to a local accountant.  The accountant is in his 40’s.  You have seen him around town for years.  He regularly eats breakfast at an expensive local restaurant.  He appears to be popular at the restaurant.  His office is located in a good part of town.  He is a nice guy.  You have heard that in addition to being an accountant, he also advises his clients about investments.  So, what can possibly go wrong with referring one of your elderly clients, for accounting purposes, to this gentleman?  Well, lots can go wrong.

As it turns out, for years this accountant, while being registered as a stockbroker/financial advisor, was alleged to have been soliciting his clients to co-invest in various internet businesses operated by another accountant’s son.  The accountant was further alleged to have signed promissory notes in favor of his customers, for an aggregate amount in excess of $1 million.  When his former broker-dealer employer learned of his conduct, he was fired.  His former employer, the broker-dealer, has paid settlements in excess of $500,000 to several investors.  As the results of an investigation initiated by FINRA, the Financial Industry Regulatory Authority, the accountant was suspended for two years from acting in any capacity with a FINRA member firm.  That suspension ends in December 2013.  The accountant’s Florida accounting license remains in good standing.

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My Corporations professor in law school once said, “Financial advisors are nothing more than used car salesmen with more expensive suits.”  Although her words may have been somewhat harsh, her comment was prescient in one particular regard — the subject of education.

Whether one sells used cars or investments, the educational prerequisites for those who sell used cars and investments are identical – there are none.  Perhaps there is good reason in the case of the car salesperson, but is the same true with respect to one’s advisor?  Do investors really care whether the person with whom they are entrusting their life savings ever graduated from high school or college?  Of course they care.

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Can an attorney be liable for the negligent referral of a client to a “rogue stockbroker”, or in the Thanksgiving spirit, a turkey broker?[1]  If an attorney chooses to refer a client to a stockbroker[2], what are the best practices prior to making the referral?[3]  Given the absence of New York case law addressing an attorney’s liability for the negligent referral to a “rogue stockbroker”[4], best practices dictate that at a minimum, an attorney should exercise reasonable care in investigating the stockbroker’s background.  The attorney must also be extraordinarily careful regarding the nature of the referral to the stockbroker.  Initially, it may be best to determine if the person one is referring to is a stockbroker and/or an investment advisor.  Generally, stockbrokers charge commissions per transaction, whereas investment advisors charge fees based on percentages of assets under management.  Some individuals are both stockbrokers and investment advisors.

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Securities Arbitration – once a concept foreign to most attorneys, is now a reality for many individuals whose retirement nest eggs have been decimated within the past year. For better or worse, most individual and institutional investors who do business with firms that are members of the Financial Industry Regulatory Authority (hereafter “FINRA”), are required to resolve disputes through a FINRA administered arbitration process. For most Nebraska residents, this means that their dispute will be resolved through an arbitration proceeding that will occur in Omaha. Residents of western Nebraska may be required to travel to Cheyenne,Wyoming for their hearings.

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How Well Do You Know Your Financial Advisor?

Sad, but true: many of us spend more time researching the latest digital device than a potential financial advisor. That camera may cost you $200. Turning your hard-earned money over to an advisor who doesn’t meet your needs could cost you your life savings.

How well do you know your financial advisor?

• Has your Financial Advisor ever filed for bankruptcy?
• Does your Financial Advisor have a criminal record?
• How many clients have filed complaints against your Financial Advisor?
• How many clients have successfully sued your Financial Advisor?
• How much money has been paid in settlements as a result of claims filed against your Financial Advisor?
• Has your Financial Advisor been reprimanded or sanctioned by the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the National Association of Securities Dealers, the New York Stock Exchange or any state regulator?
• Have punitive damages ever been assessed against your Financial Advisor?
• Has your Financial Advisor ever been fired by a former employer?
• If a former employer fired your Financial Advisor, would you like to know the reason(s) they were fired?
• Did your Financial Advisor graduate from college?
• Did your Financial Advisor attend college?
• Are your aware that Financial Advisors are not required to have attended college?
• Do you know how many times your Financial Advisor took their licensing examinations before passing?
• Are you certain that your Financial Advisor is licensed in the state in which you reside?

Would you like the answers to these questions?

If your financial advisor hasn’t provided them, it’s not too difficult to find the information on your own. You just have to do a little legwork.

Most of this information is contained on your financial advisor’s Central Registration Depository (CRD) Report.  To get the report:

• First, get your financial advisor’s CRD number. Go to: http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/  Follow the instructions and you will have the CRD number in moments. Or you can call the financial Industry Regulatory Authority (FINRA) at 1.800.289.9999.  Provide your advisor’s name and current employer, and you will be given the CRD number.
• Next, contact your state securities regulator and request a copy of the financial advisor’s CRD Report.  To find your state’s regulator, visit http://www.nasaa.org/about-us/contact-us/contact-your-regulator/. Florida residents can request the CRD Report by sending an e-mail to: [email protected].  Remember to include the financial advisor’s      name and CRD number.

How can you use the information contained in the CRD Report?

• If you have researched your current financial advisor’s background and are satisfied with the results, you don’t have to do anything with the information.
• However, if you’re unhappy with the results, you can use the same tools to research the background of other potential financial advisors. In addition to researching the backgrounds of employees of full-service FINRA member firms, you might also look into other types of investment advisors, including bank trust departments, independent certified financial planners, online brokerage firms and discount brokerage firms.  You have to decide for yourself how to manage your savings. There is no one best answer. However, information is power.  The more you know, the more intelligent a decision you can make!

Construction contracts, attorney-client fee agreements, employment agreements, and stock brokerage agreements are examples of contracts that frequently contain arbitration clauses. Some of these contracts are negotiated at arm’s length. Others are not. Typically, the arbitration clauses within the contracts identify the forum in which future disputes will be resolved.

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Does an attorney have liability for the negligent referral of a client to a “rogue stockbroker”? If an attorney chooses to refer a client to a stockbroker, what are the best practices prior to making the referral?

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