InfoFAQ: How does someone commit Investment fraud?

Paul Thomas: Those that would commit investment fraud or securities fraud would be stock brokers or registered investment advisors, these are brokers that assist a customer in selecting the proper investments. When brokers buy improper investments for a customer they commit a violation and they are liable for it.

InfoFAQ: What types of companies commit investment fraud?

Paul Thomas: There are situations where there are class actions on the news that are launched against public companies withholding information before an earnings report comes out, those are very complicated cases. 

InfoFAQ: What does the term "securities" mean?

Paul Thomas: Securities generally refers to stock and bond investments that a customer would make through a brokerage firm like Merrill Lynch or Morgan Stanley with the assistance of a stock broker.

InfoFAQ: What exactly is securities fraud? How many varieties are out there?

Paul Thomas: Securities fraud can come in a number of different varieties. When a broker excessively buys and sells in a customers account, he's generating a commission whenever he buys or sells something. He may be churning the account to generate commissions. The customer has to be aware of the fact that there is a conflict of interest. Every time the broker recommends something he is making a commission. So is he really giving you the best advice? Every time he gives you advice, if you follow it he makes money. Excessive trading is one violation. Another main violation is where the broker buys investments that are not in accordance with the customers investment objectives. If the customer is an elderly widow she's going to need safety and income from her investments. If the broker negligently buys other types of securities like technology stocks which would not provide income and are certainly not safe then he has committed a suitability violation. The stocks that he is recommending and buying for the widow are not suitable for the widows investment needs. Misrepresentations occur, this is another main broker misconduct. A broker downplays the risk of an investment and overly touts the profit potential, he is committing misrepresentation, the firm and the broker are liable when that happens. One more area is unauthorized trading, where the broker has not really obtained the permission of the customer to buy something and he goes ahead and does it anyway. The he tells the customer after the fact, "Hey I just bought IBM in your account" that's called an unauthorized trade. This happens a lot too.

InfoFAQ: Is investment fraud a crime?

Paul Thomas: These types of misconducts are usually of a civil nature but the SEC and the New York Stock Exchange and the NASD also investigate these and they could take criminal actions. This happens but it is infrequent. Rather than the broker going to jail what typically happens is the exchanges will suspend a broker for a period of time, 6 months or a year, or hit him with a $10,000 fine. There are examples like the Martha Stewart case the broker went to jail and Martha Stewart went to jail, there was insider trading, but again, seldom do they wind up in jail.

InfoFAQ: What is a securities class action?

Paul Thomas: That's a large litigation that is filed on behalf of all shareholders of record of a particular stock. The Enron situation resulted in large settlements, the plaintiff lawyers were Milberg Weiss they filed a massive class action on behalf of all employees and investors, shareholders of Enron. For the fraud that resulted in the wiping out of trillions of dollars in assets. That case was launched against Enron and since Enron was bankrupt those that helped finance Enron like the banks involved all wound up making settlements. 

InfoFAQ: What are the benefits to filing a class action?

Paul Thomas: Well the benefits to the individual investor are usually not there, and these class actions although in the Enron case Milberg Weiss the law firm, settled against City Corp for 2 billion and CIBC for 2.5 billion and in the greater scheme that was just pennies on the dollar for the investor. Its a great deal for the lawyers cause they get a 25-40% cut of a huge fee but the hundreds and hundreds of thousands of investors wind up getting pennies on the dollars. So its never typically a good thing for the investor.

InfoFAQ: How does someone know if they actually have a securities claim?

Paul Thomas: That's a difficult thing to determine because most investors are going to a professional, someone with a license at Merrill Lynch. They don't know about investments, if they did they would be dealing with a small low commission discount firm like Charles Schwab, where the commissions are a fraction of what they would pay at Paine Webber, Morgan Stanley or Merrill Lynch. So its very difficult for the customer to know how the investments in his account are not suitable with his needs if he's never heard of these investments. What the customer really needs to do is watch the bottom line, if they need safety and income or a conservative growth profile and they notice their value plunging dramatically they can safely assume that the broker is putting them into a lot more risk than they've asked for. If they see a lot of transactions, if they see a lot of buying a selling going on in the account they'll go get confirmations in the mail and those confirmations will state right on them how much the customer was charged for a given trade. So if they see a blizzard of paperwork in their mailbox they know that the broker is generating a lot of commissions and they need to talk to the manager and put a hold to it 
immediately. 

InfoFAQ: If I think I have a Securities claim what should I do?

Paul Thomas: What they need to do is talk to a securities lawyer and get a consultation and bring their documents. The way they go about getting a securities lawyer is either online, they consult the yellow pages, or they call the local bar association and ask for a referral. 

InfoFAQ: How long do these types of litigations or class actions take?

Paul Thomas: Class actions can take years and they are very expensive. The average individual investors case will not go to court because the major firms all require you to go to arbitration when you have a dispute on your account. Those type of cases take on average a little over a year to a year and a half to complete. 

InfoFAQ: What exactly is securities arbitration?

Paul Thomas: Securities arbitration take place in a number of different self regulatory organizations. New York Stock Exchange, NASD, American Arbitration Association, those are the main ones. Those the lawyer will select, the customer doesn't need to have insight into those. Its a strategic decision that the attorney handling the case will make, where to go to litigate the matter. 

InfoFAQ: What's corporate fraud?

Paul Thomas: Corporate fraud is for example committed when a bio technology company has a result on a test that they are running for a new drug and they suppress that negative result until after their earnings come out. They do this to liquidate their shares of the stock before the general public gets the news and the share price consequently tanks and they get out at the top and the shareholders get out at the bottom. Those are very complicated cases and won't go to arbitration, they are always court litigation battles and they take many years and millions and millions of dollars to process. 

InfoFAQ: When I go see an attorney what questions do I need to ask?

Paul Thomas: The first thing you should do as an investor, if you even suspect you have a problem with your stock brokerage firm you want to have the Bar Association refer you to an experienced securities lawyer to be sure that they specialize in this kind of dispute, and that they handle these types of cases on a routine and consistent basis because it is a specialized field. Once you've ascertained that you have a lawyer who is qualified and experienced in this field you may want to ask him for any referrals or references from his former clients and see how he handled their matters. If you are satisfied with your initial investigation and you decide to go with this lawyer then he will be the one asking the questions. If he is an experienced lawyer you can be sure that he will find out what the problem is. If the documents need to be reviewed, the monthly statement confirmations, the new account forms, all that is going to be by the lawyer because he's the one who is going to know where to look for the violations. So the customer needs to cooperate and be truthful and try to furnish all of his paperwork. Its up to the lawyer to put the case together and to ask the right questions. 

InfoFAQ: What if I disagree with my lawyer?

Paul Thomas: If you are in conflict or disagreement you have every right to terminate the attorney client relationship. You can go get another lawyer but before you do that you may want to get a second opinion. If you are a client you are entitled to get a second opinion from another lawyer. You can run it past him and he may concur that the lawyer is doing it wrong or maybe he thinks the lawyer is doing it right in which case you maintain the relationship. 

InfoFAQ: What are the fees?

Paul Thomas: The way it works is the customer lost money with his brokerage, he suspects there's a problem, he goes and gets a lawyer, he should always get it on a contingency basis if he's got a sizeable dispute at hand. That way the brokerage ends up paying the attorneys fees rather than the investor being charged on an hourly basis. Another thing that is good for the customer to know is that if the lawyer is willing to take the case on a contingency basis than he has confidence that the lawyer believes he has a good case, because if the lawyer doesn't win then the lawyer's not going to get paid. Any lawyer can take any case no matter how frivolous it might be and he will say, "Ok I'll take you case but it's gonna be 250 bucks an hour." You have no assurance that you have a strong case if you are paying you lawyer on an hourly basis. If you are paying him on a contingent basis, which means he must win to get paid you can feel a lot more relieved that you've got a good case. 

InfoFAQ: Are there any other fees?

Paul Thomas: the lawyers compensation could be on an hourly basis, for example $250-$350 per hour or it can be a percentage and the lawyer might charge a third of whatever he collects. In addition to those costs the investor is going to have filing fees. When the investor has a problem he goes to arbitration, the arbitration board charges anywhere from $1000-$5000 as a filing fee on average. This is an additional cost that the investor has to take into account. The if the case actually goes into arbitration, only about 15% of the cases go to arbitration, but if the investor is one of that 15% he will probably need an expert witness to testify as to the wrongdoing that was committed on the account. So the lawyer represents the investor and he can't also testify on behalf of the investor, so an expert witness will be needed to testify as to the wrongdoing and the violations so that the panel can render an award in favor of the investor and that's how the investor ultimately wins his case. 

InfoFAQ: Should I look for the lowest rate?

Paul Thomas: I you see a lawyer that is not experienced in this field, I don't care how low his fees are, you should steer clear. It is a very complicated specialized practice and within this field of securities attorneys, those attorneys representing investors, the vast majority of them work on a contingency basis and the standard on a settlement is a third percent. So if an investor sees an attorney who is working outside of those main boundaries, you should be alerted that there may be something wrong. By getting the lowest rate you may do yourself more harm than good if you get a lawyer that doesn't handle these types of cases.

InfoFAQ: Is there anything about other securities attorneys that bothers you?

Paul Thomas: I have a competitor who invariably charges his clients on an hourly basis representing investors, and he generates substantial fees in an hourly fashion and his cases typically don't have good results. On a certain case he bills a lot of hours and at the end of the day the customer or an arbitration award that's barely enough to cover his fees. If a lawyer won't take a case on a contingency basis, it should send a red flag, because he really doesn't believe in the case or the investor probably doesn't have a case. If the lawyer takes a case on a contingency basis you should feel very confident that you're going to get something out of it. 

InfoFAQ: How long does a securities lawyer have to be practicing to be a good attorney?

Paul Thomas: When you're shopping around for a securities lawyer you want to know how many years he's been doing it. This field has mushroomed in popularity in the last several years, which means there's a lot of guys doing it that have not been doing it for very long and really don't have the skill level requisite to get solid good results. So you want to do a background check on the lawyer, see how many years he's been doing securities work, how many cases has he handled? Maybe he can give you a referral from a client from 1995. Ask him for a referral from 5 or 10 years ago if he can produce one. If he can't then that means that he hasn't been doing it for very long. 

Question and Answers Session with Investment Lawyer Paul Thomas at Thomas & Associates Law Firm.

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