Mr. Dunbar has been a licensed registered representative (Series 7, ROP) for over 25 years. His expertise and experience in this area has allowed him to successfully represent investors who have lost money due to the negligence of their stockbroker or investment advisor.
Investing in the stock market carries with it some risk. The fact that an investor loses money in the stock market, or with one of his/her investments, does not necessarily mean that he/she has an actionable claim. The stockbroker or investment advisor, acting in his role as a fiduciary, needs to have failed to act properly for the claim to be actionable.
An actionable claim arises if the investments in an investor's account are unsuitable. Unsuitability can result from poor asset allocation, investments that are contrary to an individual's investment objectives and risk profile, and from poor decision making once an asset is purchased.
In determining whether or not an investment is suitable, the stockbroker/investment advisor needs to allocate an investor's assets properly, identify and follow an investor's investment objectives and risk profile, and needs to insure that adequate protections are built into the account, if the investments decrease in value in an inordinate amount.
The stockbroker/investment advisor cannot simply state "don't worry", "we are in this for the long term", "these stocks will rebound, you just need to give them time", or similar Wall Street mantras. Listed below is an excerpt contained in a recent arbitration brief filed by Mr. Dunbar wherein the investor prevailed in his case against a major Wall Street brokerage firm. The names of the parties have been removed.
BASIS OF LIABILITY - RESPONDENTS' BREACH OF FIDUCIARY DUTY
A. Unsuitability/Failure to Diversify. Brokerage firms and stockbrokers owe a fiduciary duty to always act in the best interest of the customer. Respondents occupy a position of trust and confidence, owing the highest degree of loyalty, good faith and fidelity to Claimant. Where the broker's recommendations are invariably followed, such as the case here, the broker must determine the customer's actual financial situation and needs, in determining which investments are suitable. Duffy v. Cavalier (1989) 215 Cal.App.3d 1517 at p. 1533, 264 Cal.Rptr. 740, 751; Hobbs v. Bateman Eichler, Hill Richards, Inc. (1985) 164 Cal.App.3d 174, 201-202, 210 Cal.Rptr. 387, 403-404; Twomey v. Mitchum, Jones & Tempelton, Inc. (1968) 262 Cal.App.2d 690, 706-709, 715; 69 Cal. Rptr. 222.
NASD Rule 2310 provides in pertinent part, "2310. Recommendations to Customers (Suitability) (a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs."
A broker has a fiduciary duty to diversify his customer's assets and avoid over concentration in a limited number of stocks or asset classes. In the Matter of Jack H. Stein, before the National Adjudicatory Council, NASD Regulation, Inc., December 2, 2001. In the Matter of Jack H. Stein, the Council stated the rule in determining what is suitable for a particular customer will necessarily take into consideration both the quality of the recommended transactions, as well as the quantity of those transactions. In the Matter of Jack H. Stein, the Council found that the investments recommended to the customer were unsuitable, in part, due to their speculative nature, as well as the high concentration of those speculative securities.
In the Matter of Jack H. Stein, Stein argued that the customer understood the risks associated with speculative investments and actively sought to change her investment strategy to one that involved growth and speculation. The Council stated that even if the customer understood Stein's recommendations and decided to follow them, "that (would) not relieve (Stein) of his obligation to make reasonable recommendations." The Council then cited Clinton Hugh Holland, Jr. 52 S.E.C. 562 @566 (1995) aff'd, 105 F.3d 665 (9th Cir. 1997).
Investments made in Claimant's Investment Account at Respondent Brokerage firm were unsuitable. The investments made and the asset allocation in Claimant's account were contrary to his stated investment objectives and risk profile. In Claimant's account application, he ranked in order of priority, his investment objectives as 1) growth and 2) investment grade. Claimant did not identify income or speculation as an investment objective. Respondent Broker was aware that the funds in Claimant's Investment Account represented essentially all of his liquid assets/net worth.
There was no asset allocation in Claimant's account. The majority of the assets in Claimant's account were committed to equities. The majority of the equities in Claimant's account were high risk technology securities. The percentage of high risk technology securities appears to have increased as the account value decreased.
NYSE Rule 405, the Know Your Customer Rule, requires a broker to "Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization."
Respondent Broker either failed to know his customer or knew his customer, but failed to recommend transactions that were suitable. In addition to evaluating Claimant's stated investment objectives, Respondent Broker had an obligation to ascertain Claimant's financial situation and needs. With the aforestated information, suitable transactions should have been recommended.