Evaluating Your Broker-Dealer Misconduct Case

The first, and in many respects the most important, question for any investor is: Do I have a case? Not only does this keep you from wasting your time and money on a meritless claim, it also helps avoid having costs awarded against you for frivolous prosecution. When you receive the Statement of Answer, typically it will include a plea for dismissal and costs. A good Statement of Claim, properly written, will normally breeze right by this test.

Although arbitration, in its correct form, is based more on equity than law, there are basic legal necessities that every claim must satisfy before it is considered valid. To present a claim, you must have "liability" and "damages." In other words, someone has to have done something wrong (intentionally, recklessly or negligently), and the complainant must have lost money as a result. As a general rule, if you did not lose money, you have no case.

Even before the above determination, you need someone viable to go after, you need to make sure the case is not too old and you need to be able to establish the arbitration's jurisdiction over such persons or entities. The simplest way to determine the latter is to ascertain if the broker and/or firm is a member of one of the securities exchanges or the NASD (often, you can check such a status by searching NASD's website). Each of these regulatory bodies requires arbitration by its members upon the demand of a public customer.

Is the case too old? There are two hurdles to cover on this question. The first, and easiest, is the NASD's six-year eligibility requirement. This is not a statute of limitations, but simply a test to determine whether or not the NASD will allow you to arbitrate this case (similar to the jurisdictional question discussed above). NASD arbitration Rules state that you may only bring an action if it is within "six (6) years of the act or dispute" about which the customer is complaining. Some recent rulings indicate the interpretation may mean six (6) years from the purchase of the disputed securities.

If the case is less than six years old, NASD will allow it to commence, but the arbitrator may dismiss it based on the relevant statute of limitations. These vary from state to state, and for different causes of action. The may be as short as a year, or as long as ten years. As a general rule of thumb, any cause of action over four years old may well have problems unless "discovery" of the dispute is a triggering event.

An exception may be carved out of this body of law in the case of "fraudulent concealment." If you can show that the Respondent deliberately withheld or concealed vital information from you, which prevented you from finding out what was going on, then you may be able to have the statute of limitations tolled for some length of time.

Assuming NASD can assert jurisdiction, that your Respondent is still a viable entity, and you have not waited too long, you can turn your attention to the strength claim itself. First, ask yourself what happened. Then ask yourself why it was wrong. Remember that liability is the first requirement for a claim -- just because you lost money in the stock market is not necessarily a reason for you to recover damages.

The most common causes of action involve unsuitable recommendations, unsuitable transactions, misrepresentations, omissions or fraud (the broker did not tell you something or outright lied), excessive trading, unauthorized transactions or breach of fiduciary duties. If you are unable to articulate a complaint other than "He gave me bad advice," do not waste your time and risk exposure to costs and fees by filing a potentially frivolous claim.