The Growing Problem With Sales of Unregistered Securities

Recently I have been busy working to recover losses for a large number of investors who lost money in unregistered investments offered by Woodbridge and Future Income Payments or FIP. In many cases these investments were recommended by insurance agents who were not licensed to sell securities, and did not perform adequate due-diligence on these companies before they made the recommendation.

FIP offered pensioners upfront, lump-sum payments in return for a portion of their monthly pension payments over a specific term, often three to five years. FIP then used these pension payments to fund a monthly income stream back to the investors who put up the money for the lump-sum payments. In July of 2018 Scott Kohn, the 64-year-old felon who started the company, closed the doors and disappeared leaving investors with more than $100 million in losses.

Subsequently the SEC filed charges against thirteen individuals and ten companies who recommended and sold Woodbridge, including Utah-based Aaron Andrew and Live Abundant. Live Abundant and its agents were not licensed to sell securities, and yet they recommended both FIP and Woodbridge to hundreds of people here in Utah and throughout the western United States. Our lawsuits against Live Abundant and the individuals and entities who perpetrated this scheme are ongoing.

The common link between these two fraud schemes is that investments in FIP and Woodbridge were not registered with the SEC. These are sometimes referred to as private placements or unregistered offerings.  Generally, a company may not offer or sell securities in the United States unless the offering has been registered with the SEC or an exemption from registration is available. For more information about exempt offerings I recommend you look at this article on the SEC’s website.

Below is a repost of an article from Investment News that highlights some of the challenges for individual investors from these investments, and for the firms that offer them.


Sales of Unregistered Securities are a Growing Problem That’s Harming Investors — and the Industry

By Bruce Kelly

To an investor, Castleberry Financial Services Group’s promise of up to a 12.2% annual yield on the alternative investment fund it was selling might have seemed awfully tempting. So might the assurance that your principal would be insured and bonded by well-known insurance companies CNA Financial Corp. and Chubb Group.

In promotional materials, Castleberry claimed to have invested almost $800 million in local South Florida companies and to have a portfolio of real estate holdings that was generating $2.8 million in rental income annually.

But in late February, the Securities and Exchange Commission went into court to shut the company down, claiming it was all a fraud, including the involvement of CNA and Chubb.

Before the SEC acted, though, it said that Castleberry had managed to raise $3.6 million from investors, some of which was used to pay the personal expenses of its principals. Other funds were transferred to family members or other businesses the principals controlled, according to the SEC.

By all indications, the marketplace for all types of private, unregistered securities, including private placements sold to wealthy investors and institutions, is thriving. But what’s growing alongside this legitimate, if risky, market is a seedy side of the financial advice industry. Investment funds promising above-market returns that employ networks of brokers, former brokers, insurance agents or others lurking on the fringes of the industry to sell their investments are taking advantage of unsuspecting investors.

Add in the ability to offer private securities over the internet and solicit clients via social media, and unregistered, private securities being sold to less-than-wealthy investors, many of them senior citizens, are becoming increasingly dangerous. Fraudulent securities are damaging the reputation of the legitimate financial advice industry,​ and the industry itself might serve as the best solution to safeguarding the investing public.

“I’m seeing more of it:​ the spike in the sale of nontraditional investments,” said David Chase, a former SEC staff attorney who’s now in private practice and based in South Florida.

Sales soar

The proliferation of potentially fraudulent schemes comes at a time when the sale of legitimate private securities, which are exempt from having to be registered if they meet certain SEC guidelines, has taken off. While the annual amount of public stock offerings has remained relatively steady over the past decade, the sale of new private stock offerings has soared.

The most popular of these, known as Regulation D offerings, have more than doubled, from 18,295 in 2009 to 37,785 in 2017. Those deals, along with other types of private offerings, raised a total of $3 trillion in 2017.

Brokers and advisers can sell private, unregistered shares to only the wealthiest clients; investors need a net worth of $1 million or an annual individual income of $200,000 to buy in. But the public disclosure is negligible, making the securities opaque, some sources said, and that is hazardous.

The game plan of the fraudulent unregistered securities schemes currently roiling the investment advice market is simple. An investment manager claims to have an alternative investment to the stock market that beats the return on bonds or bank deposits. The investments are heavily marketed with investment seminars, dinners, and ads on radio and in local newspapers.

James Park, securities professor at UCLA, said the internet is giving the promoters one more outlet to sell their fraudulent investments.

“It’s now possible to get investors from everywhere,” he said. “In the old days, brokers would have to call up people to convince them to invest or put on a road show. Now it’s normalized with online platforms.”

In one of the largest recent cases,​ the SEC said the owners of Woodbridge Securities raised $1.2 billion over a five-year period by claiming they were selling loans to real estate developers.Source: North American Securities Administrators Association

Promising returns of 10%, the scheme reeled in 8,400 investors, many of them senior citizens, with the help of a network made up mostly of insurance agents and former stock brokers, according to the regulator. Woodbridge’s owners kept the scam going, the SEC said, by using money from new investors to pay off old investors — a classic Ponzi scheme.

Without admitting or denying the allegations, Woodbridge and its former CEO Robert Shapiro settled with the SEC for $1 billion in disgorgement and fines. Ryan O’Quinn, a lawyer for Mr. Shapiro, did not return a call seeking comment.

Beyond FINRA’s reach

One of the reasons these cons take time to detect is because the agents selling them mostly work outside the supervision of licensed broker-dealers, who are under the purview of the Financial Industry Regulatory Authority Inc. This gives the fraud ample time to flower before the SEC or a state regulator gets a complaint from an investor, investigates and shuts it down.

The largest Ponzi schemes in general are those that have tapped into a very successful and productive line of independent sales agents who typically have long-standing relationships with clients,” Mr. Chase said. “They sell the deal, and clients get defrauded.”

The SEC did a better job of shutting down what it said was a fraud in the case of Castleberry Financial Services Group after only a year in business. In February, the SEC was granted a temporary restraining order and temporary asset freeze against Castleberry and its principals.

​ Among other allegations, the SEC said the firm’s president, T. Jonathon Turner, formerly known as Jon Barri Brothers, had falsely claimed to have had extensive finance industry experience, an MBA degree and a law degree, while concealing that he had served 18 years in prison for multiple fraud, theft and forgery felonies.

Attorneys for Castleberry Financial and its executives did not return calls seeking comment.

State enforcement

In 2017, state regulators reported that enforcement actions against unregistered brokers and salespeople increased at a faster pace than actions taken against registered individuals. That means the risk from salespeople on the fringes of the financial advice industry is growing. And they are the type of people who often sell scams that are being marketed as unregistered securities.

“[The] enforcement survey reflects a large increase in enforcement actions against unregistered individuals and firms,” according to an October 2018 report from the North American Securities Administrators Association. Members of the group reported actions in 2017 against 675 unregistered individuals and firms — an increase of 24% over the prior year — and 647 registered individuals and firms — a 9% increase.

“The surge in cases against unregistered actors reversed a two-year trend in which registered individuals and firms in the securities industry, broker-dealers and investment advisers, had constituted the majority of respondents in state enforcement actions,” according to NASAA.

Perhaps the poster boy for selling phony unregistered securities is Barry Kornfeld, a leading seller of the Woodbridge Ponzi scheme.

The SEC barred Mr. Kornfeld from working as a broker in 2009. Regardless, he continued to sell private securities; he and his wife allegedly solicited investors at seminars and a “conservative retirement and income planning class” they taught at a Florida university, according to an SEC complaint.

From 2014 to 2017, he and his wife received $3.7 million in commissions after selling more than $60 million of the Woodbridge private securities, according to the commission. Mr. Kornfeld reached a settlement in January with the SEC, agreeing to be barred for a second time from the securities industry. Robert Harris, a lawyer for Mr. Kornfeld, did not return a call seeking comment.

Registered reps involved

Unregistered reps aren’t the only ones selling fraudulent securities. Registered reps working at broker-dealers also are involved.

“We’re starting to see more sophisticated means for registered reps within the broker-dealer space to get investors to invest in private securities,” Thomas Drogan, senior vice president at Finra, said in testimony last year about investor fraud before the SEC’s Investor Advisory Committee. “The challenge in that space has been reps encouraging their customers, for example, to send money from their brokerage account to their bank account. And once the money gets to the bank account, instructing the customer to then send the money to the individual reps’ outside business activity. This creates a problem. This creates a very big challenge for broker-dealers to conduct surveillance on.”

The practice, known as “selling away,” can be grounds for disciplinary action if the broker-dealer employing the broker has not approved the broker’s actions. Unregistered firms and individual topped the list of disciplinary actions by state securities regulators in 2017.

Advisers at independent broker-dealers are commonly paid 7% commissions when selling private placements, clearly on the high end of a broker’s pay scale.

“What’s driving this?” asked Adam Gana, a plaintiff’s attorney. “It’s commissions, commissions, commissions. Brokers think they can get away with selling whatever they want on the side.”

Even though these dubious private securities are creating havoc for investors and the financial advice industry, regulators may soon change the rules about how private securities transactions are supervised.

Simplify supervision?

Last year, Finra proposed rule changes that are intended to simplify how broker-dealers supervise a hybrid rep’s outside business activity and sale of private securities. The new rule focuses on the rep’s RIA firm and decreases some of the responsibility the broker-dealer has to watch over that separate line of business. It would cut costs for the firm and the broker. But some think these changes could prove dangerous.

William Galvin, secretary of the Commonwealth of Massachusetts and the most feared regulator in the securities industry, does not care for the Finra rule proposal.

“Finra claims that the proposed rule will strengthen investor protections, but it is not at all clear how investors will be protected by the removal of supervisory oversight,” Mr. Galvin wrote in a comment letter last April about the proposed rule. “The absence of proper oversight of outside business activities will increase the risk of fraud and abuse.”

Can financial advisers and the financial advice industry do anything to contain this problem?

Local investment advisers are often the best cops on the beat for detecting such frauds. Their knowledge often comes from clients who are being pitched such deals at “free” steak dinners that are provided to get them in the door for a presentation.

Advisers have the responsibility to report a suspicious private securities deal to their firm, said Mr. Chase, the former SEC attorney.

“If brokers get wind of these types of deals, they’ve got to go to the broker-dealer’s compliance department and report to the SEC or Finra,” he said. “They have the ability and obligation to report. There’s nothing wrong with putting these suspicious deals in front of regulators.”

BREAKING: Vescor Ponzi Mastermind Val Southwick Has Been Paroled

Val Southwick, who was convicted of defrauding more than $140 million from hundreds of Utah residents, was quietly paroled last month after serving just ten years, according to KSL News. He pleaded guilty to nine counts of securities fraud, each second-degree felonies, and was sentenced to serve anywhere from 9 to 135 years in Utah State Prison.

Apparently he was a model prisoner.

Mr. Southwick’s case was somewhat infamous in this state because at the time it was the largest Ponzi scheme in Utah history, and because he was so blatant in his use of his LDS faith to convince others to invest.

In its summary of the case the Utah Division of Securities alleged that Southwick “emphasized his membership and ecclesiastical roles in The Church of Jesus Christ of Latter-day Saints during solicitation of meetings with investors.”

“Southwick showed his LDS temple recommend, or mentioned its existence, to several investors, and his office contains LDS ‘memorabilia,’ all of which appeared designed to breed a sense of trust between Southwick and investors.” Investigators said Southwick touted himself as a “respectable LDS gentleman, who was more concerned about the consequences of the after-life than those in this life if he lied to investors.”

The receivership case was finally closed in 2011.

Stay tuned for more information.

FIVE QUESTIONS TO ASK BEFORE YOU INVEST

Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.

Question 1: Is The Seller Licensed?

Research shows that con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Smart investors check the background of anyone promoting an investment opportunity, even before learning about opportunity itself.

  • Researching brokers: Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.
  • Researching investment advisers: The Investment Adviser Public Disclosure website provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms.
  • Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.

If you are not sure who to contact or have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 2: Is The Investment Registered?

Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 3: How Do The Risks Compare With The Potential Rewards?

The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.

Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds.

Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities or, better yet, report them to the SEC.

Question 4: Do You Understand The Investment?

Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.

Question 5: Where Can You Turn For Help?

Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ websites. If you have a question or concern about an investment, please contact the SECFINRA, or your state securities regulator for help.

Editor’s note: This is a repost of an article from the SEC’s
investor education website. I have a more extensive checklist of my top ten ways to avoid getting caught in a financial scam that is still highly relevant today. If you have questions about an investment or knowledge of ongoing fraud please contact me.

Broker Imposter Scams: Remember To Ask And Check

Editor’s note: This is re-post of an investor alert that recently appeared on FINRA’s website. This is a good reminder of the need to “trust but verify” the credentials of your investment professional.

FINRA recently issued an investor alert on fraudsters impersonating FINRA executives, offering bogus investment “guarantees” to investors as part of an advance-fee scam. But regulators are not the only ones who need to worry about someone trying to steal their good name.

We are aware of a recent scheme that involved an unregistered individual impersonating a registered investment professional to lure in potential investors. This scammer created a fake version of a public FINRA BrokerCheck® report of a legitimate broker—picking an experienced broker with a spotless regulatory record.

The doctored BrokerCheck report was emailed to potential “clients” using the name and CRD number of a registered investment professional, and a company that is not registered as a broker-dealer with FINRA. The solicitation included other documentation and a request for investors to respond with a photo of their driver’s license and other personal information. Here are some of the red flags we spotted on the doctored report:

Broker Imposter Scams: Red Flags of Doctored BrokerCheck Report

Here are six tips to keep your money and personal information safe from these types of scams.

1. Go to the source. FINRA encourages investors to “ask and check” by using BrokerCheck before investing with an investment professional. Don’t assume that the information you receive in an investment pitch is legitimate. Go directly to the sources that collect the regulatory information to produce these reports, including FINRA’s BrokerCheck, the SEC’s Investment Adviser Public Disclosure, and state registration databases. You can search both professionals and firms not only by name, but also by their registration number—known as a CRD number.

2. Look for things that appear out of place. Compare whatever BrokerCheck report or other documentation you receive from an individual or firm soliciting your business with the real reports you obtain yourself from BrokerCheck or the sources in Tip 1. Be wary of typos, and look for differences in the reports. For instance, in a recent scam, the doctored information was in fonts that were different from fonts used in other parts of the report, items appeared to be pasted into the document, and the state of the branch office address was not included in the list of states where the individual was licensed.

3. Verify information with an internet search. Take a few moments to use a common search engine to type in the name of the individual who is soliciting your business and the firm name, and see what comes up. Does it match the information provided to you, including the contact information? If something doesn’t look right, do a little more digging, including a map search on the address or a reverse lookup on the phone number. Be sure to check all this information against a reliable source such as BrokerCheck. When scanning LinkedIn profiles, be aware that scammers often copy select information from a registered person’s LinkedIn profile to create the appearance of legitimacy.

4. Do not send money or personal information without verifying the recipient. In the scam described above, investors were asked to send a driver’s license photo and other personal information in response to an email solicitation. Don’t ever send money or personal information, such as your driver’s license, passport, social security number, date of birth, or bank account information, until you verify who contacted you, as described in Tip 3.

5. Beware of the use of personal contact information. Sometimes a scammer will ask you to send money or personal information to a personal (not firm) email address or to respond to phone numbers that are not listed as official firm contacts. One general rule all investors should follow: if you invest through an account at a financial firm, use BrokerCheck to verify that the firm is registered and send all deposits directly to the financial firm. If an individual pitches an investment opportunity that requires you to write a check directly to him or to a third party, proceed with caution.

6. Be alert to the red flags of fraud. Be cautious of guarantees, unregistered products, overly consistent or high returns, complex strategies, missing documentation, account discrepancies and pushy salespeople. The vast majority of investment professionals are trustworthy individuals, but there are always exceptions who might look to take advantage of your trust. Practice spotting the persuasion tactics that con artists use, and always exercise healthy skepticism. For instance, be wary of sales pitches that make exaggerated claims about performance. This is a red flag of fraud.

If you are suspicious about information you receive from an individual or firm soliciting your business, contact FINRA or another regulator BEFORE you send any personal or financial information. If you are an investment professional and have concerns that someone is using your name or information as part of a potential scam, contact your firm’s compliance department, and alert FINRA by calling our BrokerCheck hotline at (800) 289-9999, or emailing BrokerCheck@finra.org.

Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.

More Legal Trouble for Zane Jeppeson

This is actually the third post I have written about a guy named Zane Jeppeson of Garland, Utah. My prior posts can be found here and here. Today’s update comes to us courtesy of The Leader out of Tremonton, Utah. Apparently Mr. Jeppeson is having a hard time getting his restitution paid and may go back to jail. Kudos to Judge Royal Hansen for keeping his feet to the fire.

Jeppesen granted more time to pay restitution

By Cari Doutre Leader County Editor Feb 13, 2019

Garland resident Zane Jeppesen has been given more time by a judge to pay restitution to victims in the amount of $488,830, extending his time to March 14, 2019. Jeppesen appeared before Third District Court Judge Royal Hansen on Thursday, Feb. 7, 2019, for an evidentiary hearing on one count of pattern of unlawful activity, a second degree felony.

On April 4, 2016, Jeppesen was charged with 11 counts of securities fraud, two counts of theft and one count of pattern of unlawful activity, all second-degree felonies. On July 7, 2017, Jeppesen entered into a plea deal with the state and plead guilty to one count of pattern of unlawful activity and the remaining charges were dismissed.

On Dec. 8, 2017, Jeppesen was sentenced to one to 15 years in the Utah State Prison but the term was suspended. Instead, he was sentenced to 30 days in jail, which he served. Jeppesen was also ordered by the judge to pay restitution to the investors in the previously mentioned cases in the amount of $488,830 within six months of his release, which would have been June 2018.

Jeppesen failed to make a court appearance on Sept. 28, 2018, an order to show cause. On Oct. 1, 2018, on an outstanding bench warrant issued by Third District Court in Salt Lake City. Jeppesen arrested and taken into custody in Box Elder County but was released later that day on a $25,000 cash only bail.

According to a probable cause document, from 2010 to 2014 Jeppesen raised approximately $555,000 from at least four investors and issued promissory notes to those investors. Jeppesen sold promissory notes on land in Saratoga Springs and Payson with the promise that the land was worth value and offered a promissory note and trust deed as security for the real estate development.

Court documents show that Jeppesen failed to tell these investors that he filed for bankruptcy in 2005 and was unable to pay back prior investors. The money from investors was spent on “Ponzi like payments to other investors” as well as transfers to family members, credit card payments, transfers to other bank accounts, electronic stores and bank fees.

The probable cause statement added that Jeppesen has never held a securities license and that Jeppesen’s company, Jeppesen Land and Property, has never been licensed or registered with the Utah Division of Securities.

Documents state that Jeppesen, in connection with the offer of sale of security, directly or indirectly, and made untrue statements or omitted facts in an act, practice or course of business which operated or would operate as fraud or deceit in violation of Utah state laws. The theft charges stem from Jeppesen’s allegedly obtaining or exercised unauthorized control over the property of another with a purpose to deprive them thereof.

This isn’t the first time Jeppesen has been charged with securities fraud. According to court documents Jeppesen was employed through Beverly Hills Development Corporation, a real estate development enterprise ran by Michael J. Fitzgerald of Utah County, from April 1998 to May 2004. In that time Jeppesen obtained a total of 134 Utah investors, many in Box Elder County, and raised approximately $8 million for Beverly Hills Development. During that time he was paid $986,563 in compensation from the company for his work raising investment funds.

There were at least 100 investors from Box Elder County, many of which from Tremonton and Garland that invested with Jeppesen before 2005. Investments ranged from as little as $380 to as much as $467,000.

In June 2018, the Utah Division of Securities of the Department of Commerce filed three different reports against Jeppesen, a Stipulation and Consent Order, an Order of Adjudication and a Findings of Fact, Conclusions of Law and Recommended Order, all highlighting Jeppesen’s pattern of securities fraud from six different investors starting in 2010 while adding two other incidents that left many Box Elder County residents out of millions of dollars.

According to these documents, the Division determined that Jeppesen, with Jeppesen Land and Properties, are subject to a $300,000 fine. In the stipulation and consent order, it states that JLP is a business entity that was incorporated in Feb. 2011, and is currently an active entity registered with the Utah Division of Corporations with LaDene M. Jeppesen, 92, (Jeppesen’s mother), listed as the registered agent and manager. Jeppesen Land and Properties has never been registered with the Division as an issuer of securities and found no records showing securities registration, exemption from registration or notice filing in any manner for JLP, according to these documents.

If he fails to make the payments to investors he may be sentenced to addition time in jail and/or prison. It has not been stated in court records if Jeppesen has made any restitution to victims.

Securities Arbitration—Should You Hire an Attorney?

Note: this is a re-post of an excellent article that was published on January 3, 2019 in FINRA’s Alert Investor newsletter. The article was co-authored by FINRA staff and The PIABA Foundation.

The vast majority of interactions between investors and investment professionals are positive. However, sometimes the relationship doesn’t go as planned, and the situation can’t be resolved by communicating directly with your firm or broker. In such a situation, you may find yourself considering arbitration or mediation.

There are many factors to consider as you proceed down these paths, one of which is whether to hire an attorney to help you out.

An attorney that represents you during arbitration or mediation proceedings can provide experience, direction and advice. Brokerage firms are generally represented by an attorney in an arbitration proceeding, so even if you choose not to hire an attorney, there might be one representing the firm or individual on the other side.

Securities Arbitration Basics

Arbitration is similar to going to court, but is usually faster, cheaper and less complex than litigation. It is a formal alternative to litigation: two or more parties select a neutral third party, called an arbitrator, to resolve a dispute.

The arbitration process goes something like this. A FINRA arbitrator or panel (consisting of three arbitrators) will listen to the arguments set forth by the parties, study the testimonial or documentary evidence, and then render a decision. The arbitrator’s decision, called an award, is final and binding, and all parties must abide by the award. FINRA does not have an appeals process through which a party may challenge an award. However, under federal and state laws, there are limited grounds on which a court may hear a party’s motion to vacate an award.

The size of the claim will determine how the arbitration process works. Claims involving more than $100,000 require an in-person hearing decided by a panel of three arbitrators, with one chairing the hearing. Smaller claims up to $50,000 can be decided by a single arbitrator in one of three ways: a regular hearing where evidence is presented in person; a phone hearing that incorporates many aspects of a standard arbitration hearing; or a “paper” hearing where an arbitrator makes a decision based solely on the documents submitted.

To Hire or Not to Hire

FINRA’s Code of Arbitration Procedure states that parties are entitled to be represented by an attorney at any stage of the arbitration proceeding. Here are some things to consider when you are trying to decide whether to hire an attorney to represent you in securities arbitration or mediation.

  • The process governing arbitration proceedings will likely be unfamiliar to you. Hiring an attorney with experience in these matters might be a comfort to you and help you appropriately present your case to the arbitrators.
  • Arbitration can be faster, less expensive and more streamlined than litigation, but some arbitrations involve complex legal and regulatory issues or large claims for monetary damages. You might benefit from legal guidance if your case falls into these categories.
  • An attorney can provide guidance even before the arbitration process begins. An experienced attorney can assist aggrieved parties in determining whether they have a viable claim for arbitration. This can be critical so that parties do not waste money or time filing a case that does not have a good chance for success.
  • FINRA provides identical randomly-generated lists of proposed arbitrators to both parties, along with a detailed report on each arbitrator’s background. An attorney can help you evaluate which arbitrators might be a better fit for your case.
  • Parties to an arbitration can come to the forum with a lot of emotion about what has transpired to this point. An attorney can serve as a detached third-party representative and provide legal advice to help you meet your goals.
  • Speaking with an attorney is confidential and protected by attorney-client privilege. This means that your attorney is not allowed to discuss what you tell him or her with anyone else, and that statements you make will be kept between the two of you. Attorney-client privilege helps both parties better understand the strengths and weaknesses of the case and establishes a relationship of trust that can lead to better guidance and decision-making.
  • If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.

A word about non-attorney representatives or NARs. Although NAR firms are an alternative to representation by attorneys, NAR firms are not subject to the same professional rules or guidelines, nor are they subject to malpractice insurance requirements. Investors may also not be aware of the absence of these protections, and therefore may not properly evaluate the benefits and costs of representation by NAR firms.

Finding an Attorney

Whether you decide to engage an attorney or not, a good resource to consult is An Investor’s Guide to Securities Industry Disputes published by The PACE Law School Investor Rights Clinic.

If you decide hiring an attorney is the right choice for you, the first step to take is to locate qualified candidates. The Securities and Exchange Commission (SEC) offers these tips:

  • Consult with your own attorney, if you have one, about your situation and whether you would benefit by an attorney who specializes in securities arbitration or litigation.
  • Contact the American Bar Association and the Public Investors Arbitration Bar Association (PIABA). Both allow you to search their member attorney directories for someone to represent you in your area. PIABA members have specific experience representing investors in disputes with the securities industry.

You can also check with your state, county or city bar associations.

If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics. Under faculty supervision, law students provide legal services and guidance on the arbitration process in disputes between individual investors and their investment professionals.

Ask These Questions

Picking the right attorney is a personal decision that is often unique to your own needs and preferences. It’s a good idea to interview more than one attorney—and ask the following questions:

Do you have experience representing investors in securities arbitrations? Experience matters. Representation by someone with specialized legal knowledge of the investments sold to you and the procedures that apply to the arbitration process are important. Ask how long the attorney has been in business and how many securities arbitration cases he or she has handled.

How will you represent my interests? Aggrieved investors commonly do not understand, or cannot articulate, the extent of their harm. A critical component to effective representation is your attorney’s ability to communicate to you, the opposing counsel and, ultimately, the arbitration panel any underlying problems with the investments or actions at issue. Your attorney should also be expected to articulate the regulatory standards your investment professional is held to, and how those standards were breached.

How are you paid? Attorneys are paid under different arrangements. Many attorneys who specialize in representing investors in securities arbitrations do so on a contingent fee basis. This means the attorney is willing to advance their time with the hope and expectation of recovering money from the investment firm or professional. Read the fee agreement presented by the attorney to make sure that you understand the terms.

Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.