Investment Losses – When to Call a Securities Attorney

by Neal Frankle, CFP ®

When do investment losses justify calling a securities attorney? I know that you are a reasonable person. You know that even the best investments lose money at times. But there are times when broker fraud, scams and/or incompetence result in major hits to your financial position. That should not happen. Here’s an overview of those situations and what you can do about it.

Mistakes, Errors and Omissions

Your broker is not responsible for mutual fund performance. But she is responsible for selling your funds or stocks when you ask her to do so.

When you signed your contract with your broker or financial advisor, you probably agreed to accept communications through verbal, written or electronic means. At the same time, your broker agreed to the same thing. And that means if you call your broker and request that she execute a trade, she has to do so.

If he or she forgets to execute your instructions and you lose money as a result, she’s liable. If she refuses to make good on your losses, it could be time to call in the big guns – and that means a securities attorney.

But how do you prove you made a request that wasn’t executed? If you deal mainly on the phone you might get into a “he said, she said” situation, and there is no telling who will come out winners.

That’s why I suggest you keep records of all your conversations with your broker. Better yet, whenever you want your broker to make a trade for you, send an e-mail and request confirmation. Think of your investments as your business, and when you e-mail your requests, it’s just cheap business insurance.


Most financial advisors I know are honest folks. (Financial advisor training always includes how to avoid getting into trouble!) But there are obviously a few bad apples in the bunch. I’ve spent a lot of time trying to explain how financial advisors work and how to make sure you’re working with the right one. You might take all the right steps and still get stuck with a jerk.

It’s tough for a broker to abscond with clients’ money, but it happens. You can eliminate 99% of the risk of this happening by simply never ever making a check payable to the broker herself and reporting any advisor who asks you to do so (unless they are asking for advisory or consultant fees).

But one way an advisor could steal from you would be if he signs your name. That’s fraud, forgery and theft, and it’s illegal. Your broker will go to jail for these offenses. While this is an extremely rare occurrence, even if it does happen, your custodian firm is insured and your broker is typically bonded, so you’ll be made whole. (Ask your broker if she is bonded and if she has errors and omissions insurance.) Nevertheless, if this happens, get on the horn with a securities attorney.


If your custodian goes bankrupt, you are probably going to be fine – unless you own stock in the company itself. I say you will be OK for a few reasons.

First, when you buy and sell securities through a custodian they don’t usually have custody of your money. A third party financial institution typically holds on to all the cash and securities to safeguard investors like you against problems like these. That’s why Lehman Brother’s clients didn’t lose money when the firm went under – other than, as explained above – those who owned shares in the brokerage itself.

If your brokerage firm goes under, the company is typically taken over by a larger firm. Once a suitable partner steps up, your accounts get transferred intact and all your money will be safe as a bug in a rug. No worries. The bottom line is you probably don’t need a securities attorney when your brokerage firm goes bye-bye. All you’ll need is patience and steady nerves.

Very few investors lose money as a result of broker mistakes or misdeeds or custodian bankruptcy. You incur the biggest risk by writing a check to a broker, and I’ve already explained how dangerous this is.

How Broker Fraud Can Cost You

As I said above, if your money is in a legitimate brokerage account, you’re covered by SIPC – Securities Investor Protection Corporation. This will cover y0u as long as the fraudster or firm is a member of FINRA, which most brokers are. But Ponzi schemes aren’t covered. That’s because in these situations, you money never gets into a legit account. This is a terrible fate to suffer after you spent all your life working and saving trying to get enough money to retire.

The best way to make sure this never happens is to confirm your account balances directly with the brokerage firm. Look up the firm’s contact information on the internet and call to confirm everything. Don’t use the phone number on the statement — that number might be as bogus as the account information itself.

Bottom line: If you deposit your money directly into your brokerage account, you really have very little to worry about.



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{ 2 comments… read them below or add one }

Billie 2 Willies May 8, 2011 at 5:10 AM

There is no recourse out there when a fund company decides to delist a product and roll it over into a mutual fund as NexGen did with their Macquire Global Infrastructure. No notice to holders. It was combined with a Canadian Balanced Income Fund,with twice the mer. Delisted and unable to deal with it for a month. Likely will be charged a redemption fee to sell this mutual fund. Their excuse was the fund was too small at 24 million bucks. Stay away from these small mutual fund companies they
are only interested in filling their own pockets.


Jessica07 May 4, 2011 at 10:11 AM

Not sure what else to say except that I loved, loved, LOVED this post. So true! I think it’s frightening how many people don’t even realize that security attorneys exist.

Thanks for posting!


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