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The mere fact that you have lost money in the stock market does not mean that your broker is responsible for your losses.  Any type of investment has a risk involved, and that risk is that the securities will decline in value. You must have a legal claim against the broker - losses are not enough.>

Traditional claims against brokers fall into a few categories:

Churning - in a churning claim, the customer alleges that the broker purchased and sold securities solely to generate commissions, without regard to the customer's investment objectives or goals. In the typical churning case, the customer must prove: 1) that the broker controlled the account; 2) that the trading was excessive in light of investment objectives; and 3) that the broker intended to defraud the customer or acted willfully or recklessly. 

Unauthorized Trading - in a claim for unauthorized trading, a customer alleges that the broker entered transactions into the account without the customer's knowledge or approval. Unauthorized trading allegations are common in securities arbitrations, and usually turn on the timing of the customer's complaint to the brokerage firm. Customers who first raise an unauthorized trade allegation months, or years after the trade has occurred usually do not fair well in arbitrations, particularly where the customer has been receiving confirmation slips and monthly account statements.

Unsuitability - unsuitability is a common customer complaint. Here the customer alleges that the broker recommended investments that were not appropriate for his investment goals, or even his age and investment objectives. Unsuitability is another problem in securities arbitrations, since the claim is typically made after the entire account loses money, rather than at the close of a truly unsuitable investment. Arbitrators often struggle with unsuitability claims, as the inquiry requires a determination, often without expert witnesses, of just what is suitable for the customer. 

Failure to Diversify - this claim is in reality a subset of an Unsuitability claim, as discussed above. As Internet and Technology stocks roared upwards in the late 1990s, more and more investors invested in those securities. Not only did they invest in them, they left other sectors of the market, and placed an increasing percentage of their assets in Internet and Technology stocks. Now, after the bubble burst, investors are filing complaints against their brokers for the over concentration of their portfolios in these sectors.

The claim is a difficult claim to prove, for the issue is nearly always that the customer expressly desired the investment in these sectors, and that given the time, and the climate, the investments were in fact suitable for the investor, as they fit the investor's risk tolerance and investment objectives. Like most customer claims, the success of this type of claim depends heavily on the facts of the case, and the particular circumstances of the investor.

Material Misrepresentations or Omissions - here the customer alleges that the broker intentionally misled him or failed to disclose a material fact about an investment. While Courts require proof that the broker acted intentionally or recklessly, arbitration panels often use the level of sophistication of the customer in deciding whether he was mislead. Here, as in most of these claims, the credibility of the customer, and the broker are crucial to the arbitration process, and, as discussed in Avoiding Customer Disputes, the documentation maintained by the parties may be determinative of the outcome.

 If proven, an intentional misrepresentation claim can have serious consequences for the broker, as it is a violation of Rule 10b-5, and a matter taken very seriously by the regulators. A serious enough violation could lead to criminal charges.

Breach of Fiduciary Duty - this is what is known as a common law claim. Brokers are fiduciaries in relation to their customers, that is, they occupy a position of trust and confidence, owing the highest degree of loyalty and fidelity to his customer. In this claim, the customer alleges that the broker breached his duty to a client.

While breach of fiduciary duty overlaps some of the other claims, negligence may suffice to find the breach, and since the claim is not premised on fraud, the customer's burden of proof (discussed below) is lower, and the claim is therefore easier to prove. Further state laws differ as to when a broker is a fiduciary and the level of conduct necessary to constitute a breach of the fiduciary duty.

Negligence - another common law claim, a claim for negligence is best described as a claim for broker malpractice, although that term is not used in the securities industry. Essentially, a claim for negligence is that the broker failed to use reasonable diligence in handling the affairs of the customer, and did not act as a reasonable and prudent broker would have acted. 

Like breach of fiduciary duty, negligence claims do not require any proof that the broker acted maliciously, or intentionally. However, claims for negligence alone are not particularly strong claims, and it is the rare case where a customer prevails on such a claim without prevailing on one of the other claims discussed here.


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