Stockbroker Arbitration: Don't Get Burned. Get Even

Cleveland, OHInvesting is sometimes a risky business, and can result in stockbroker fraud. Investment risk is normally mitigated with the help of a stockbroker who understands your particular risk tolerance, and manages your portfolio with prudence and pride.

However, if that stockbroker gets greedy with your money and pulls some financial fast ones that could result in substantial losses to your portfolio, you can at least look forward to some assistance through the process of stockbroker arbitration.

Investors and clients of William Salem, 48, of Ohio would have been glad to have some recourse after the Willoughby stockbroker pleaded guilty in mid-January to securities fraud and making false statements.

Salem was in cahoots with David Dadante over the manipulation of the stock price of Innotrac Corporation, a logistics provider based in Duluth, GA.

A third broker, Stephen Glantz of Chagrin Falls, is already serving 33 months in prison for stock price inflation.

There are many ways in which a less-than scrupulous stockbroker can get the better of your money, for his own benefit. One such strategy is 'churning,' which is the excessive trading of stocks within a client's portfolio, whether it makes sense financially or not, all in an effort to generate more commissions and fees for the broker.

Negligence is also something that the savvy investor has to watch out for. The stockbroker is required to conduct investments, and manage a client's portfolio with reasonable care, and prudence. After all, in most instances he isn't representing a faceless corporation worth millions of dollars. Rather, she is representing you, an average Joe, just trying to make a few bucks for your twilight years.

In so doing, you trust this individual with your future—a future that will likely see you well beyond your peak earning years, perhaps well beyond the ability to earn any income at all.

So you only have one shot to get this right, one earning lifetime to ensure that you have enough money in the kitty to fund your retirement.

In that context, your stockbroker can be your best friend, or your worst enemy—and there isn't much to separate the two distinctions.

For example, imagine the panic, and the losses of the more than 100 investors who lost $46.71 million of hard-earned money after Dadante, who is currently serving a 13-year prison sentence, bilked them through an elaborate pyramid scheme. One of his victims handed Dadante $6.1 million to invest in blue-chip stocks, with a promise of 10 to 20 per cent returns.

Of course, the old adage of 'if it's too good to be true...' may apply. Buyer beware, caveat emptor.

However, the stockbroker and financial advisor need to take some form of responsibility, and exercise sensitivity for things such as your individual risk tolerance.
Recommending strategies such as investing ALL of a client's money in stocks (thumbing the nose at prudent diversification), borrowing money from the brokerage on margin, or to invest heavily in a single stock, a small group of stocks or single mutual fund (again, diversification) that ultimately defy suitability or your risk tolerance is not only unwise, imprudent and improper, it could also be grounds for a claim—and especially so if you have incurred losses.

Such claims can be realized through what is called stockbroker arbitration, a process that can take up to a year, but is a process that could potentially recover an investor's losses at the hands of an unscrupulous broker or adviser.

Rather than litigating in court, arbitrations are conducted before the National Association of Securities Dealers, or the New York Stock Exchange. Arbitrations are heard in front of either one arbitrator, or a team of three, and are held throughout the country.

The responsible broker and financial advisor will defer to a client's risk tolerance and other mitigating factors that present, such as age. If you are a young buck, starting a career balls-to-the-wall and the world is your oyster you have a lifetime of investing ahead of you. You can afford to take some pretty intense risks (should you have the emotional tolerance), from a time factor.

However, if you are older, with your peak earning years behind you and understandably cautious, you should not be advised to roll the dice with your entire portfolio in an imprudent fashion. In fact, conservative investing for older Americans, in an effort to grow the portfolio while protecting its original value and avoiding unnecessary exposure to risk, is the prudent strategy for most.

If you haven't the fortitude for high-risk investments, or haven't the time (in years) to recover from a potential investment gone wrong, be wary of any broker or advisor recommending such activity that seems to disagree with who you are, and where you are, in your life.

And if you have been burned by stockbroker fraud, there are options open to you.

Take them. He sure would...