If stockbroker steers you wrong, recovering lost funds may be possible

STAYING AHEAD

September 11, 1995|By JANE BRYANT QUINN

NEW YORK -- If you've taken a big investment loss, maybe it wasn't just bad luck. Sometimes your broker sells you risky investments you never should have had. In that case, you might be able to get some money back.

* A man with no investment experience went to a broker who

advised him to trade options. The broker said option trading was safe, because he'd make money whether the market went up or down. Based on that lie, the client put up about $85,000 and lost it all in about six months. The arbitration panel hasn't yet delivered its decision.

* A young widow with muscular dystrophy, and three children to put through college, met a broker

who put over half of her liquid net worth into limited partnerships. She lost $150,000. The case settled before going to arbitration for $250,000. She's lucky to have had such a large award. After paying their lawyer (who usually charges one-third of the recovery) and expenses, investors rarely are made whole.

2. Churning: Here, the broker buys and sells so often that you have small chance of making any money, after paying all the commissions. For example, take another Shellenberger case. A broker set up a margin account for a widow in her 70s (with a margin account, you can borrow money to buy shares). He made so many trades that she would have had to earn 44 percent annually on her investments just to cover the commissions and interest on the margin loan. Over 18 months, she lost about $120,000 of the

$211,000 average value of her account. The arbitrators returned her money.

Brokers usually argue that the loss was the client's fault because the client approved the trades. But that doesn't wash if an innocent client trusts the broker and effectively lets him control the decisions, says New York securities attorney David Robbins.

The brokerage industry generally concedes that you were churned if the broker turned over your capital six times or more during a given period. But you might win on a lower turnover than that. The arbitrators apply a smell test, Robbins says. "They look at the account and say, 'Boy, that sure is a lot of trading.' "

3. Misrepresentation: A broker can get away with puffery, like saying that the market is great and a stock should do well. But he's probably culpable if he guarantees a 20 percent no-risk return.

Unsuitability and misrepresentation go hand in hand, as does failure to disclose an investment's risks.

What's the best way to protect yourself? Get a copy of the form that your broker filled in when he opened your account (he may have exaggerated your wealth or misstated your investment objectives to justify selling you risky things). Send your broker a letter (and keep a copy), confirming how you want your account handled -- how much safety and how much risk. "If the broker ignores the letter, the only question is where the firm should send the check," Robbins says.

Check every statement, and insist that your broker teach you how to read it. Object immediately and in writing if something looks wrong.

Many people don't want to offend their broker by complaining too much or closing their account. That's how the broker gets to abuse you some more.

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