Losses on Securities Issued by Financial Firms Give Rise to Unsuitability and Misrepresntation Claims


Page Perry has noticed a significant increase in legal claims associated with investor losses in financial firm securities, including bonds, preferred stocks, and common stocks. These claims are generally based on unsuitability abuses and/or misrepresentations in connection with the sale of the securities. Some of the securities most at issue were those issued by Freddie Mac, Fannie Mae, Lehman Brothers, Washington Mutual and Wachovia.

Many of these losses were the result of unsuitable recommendations made to investors. The law imposes a duty upon securities brokers only to recommend securities that the broker reasonably believes are suitable for the customer. The broker’s belief must be based upon a reasonable inquiry concerning the customer’s investment objectives, financial situation and needs, tax status, other security holdings, and any other relevant information known by the broker. This suitability duty is based on a “homely truth about investing — that investment decisions can be made only in light of the goals and needs of the person for whom they are made.”

Despite this duty, unsuitable recommendations of securities are among the most common violations in the brokerage industry. Many of the cases referenced above involve overconcentrations of in one type of security exposing the accounts to undue risk. Overconcentration is among the most common violations of the suitability rule. The suitability rule is violated when a portfolio is overconcentrated in the securities of a single issuer or in the securities of multiple issuers in the same industry.

An unsuitable recommendation of securities constitutes a dishonest, unethical and fraudulent business practice. If such a recommendation results in financial loss, the customer has a right to recover that loss from the individual broker and his or her brokerage firm.

Many losses have also resulted because investors were not adequately advised of material risks or facts about these investments. Misrepresentation is another common abuse in the brokerage industry. It may seem self-evident that a broker has a duty not to misrepresent or omit to disclose a “material” fact to a customer, yet misrepresentation is an element in most if not all securities arbitration claims. A material fact is one that a reasonable person would consider important in deciding whether or not to invest. A material omission (or silence) regarding a material fact provides a ground for recovery of resulting financial losses. One of the most common material omissions is the failure to fully and precisely disclose all material risks associated with an investment before the investment decision is made.

Many of the financial firms identified in this article have been struggling for the better part of two years. Yet many brokerage firms continued to recommend and sell the securities of such firms to investors. The investors with whom Page Perry has spoken were not advised of the risks associated with an investment in the firms’ securities. Investors have a right to recover losses resulting from such misrepresentations and omissions.

Page Perry has represented investors in unsuitability and misrepresentation/omission cases against brokerage firms for many years. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors with investment problems. For further information, please contact us.