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Stockbroker Arbitration: Recovering Losses for Investors

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Pittsburgh, PAWhen investors agree to invest with a stockbroker, they are often required to agree to stockbroker arbitration to settle any disputes that arise over the broker's conduct. Although investors may be leery of arbitration panels, they can be a way for investors to recover money that is lost due to the unethical practices of their stockbrokers.

There are also ways for investors to protect themselves from high losses. These include watching for signs that a stockbroker is behaving unethically. One such indicator is too many transactions on an account. Transactions on an account result in commissions for the broker. Too many transactions on an account, a practice known as churning, can result in high commissions for the broker.

Stockbroker investorOne stockbroker, Brian J. Kelly, reportedly used the account of an unsophisticated investor to make over 540 in a year. To put it in perspective, that is almost 1.5 transactions per day for a year. Doing so generated tens of thousands of dollars in commissions for the stockbroker. The investor reported that months would pass without him hearing from his stockbroker. When the investor complained about stocks, Kelly told him that they would bounce back and everything would be okay.

According to an article in the Baltimore Sun, Kelly obtained loans using the investor's account as collateral. Despite Kelly making tens of thousands of dollars in commissions, the investor's account actually lost $90,000 between May 2001 and July 2002.

The investor went to stockbroker arbitration with his complaint and was awarded $95,000. The National Association of Securities Dealers (NASD) then brought its own case against the broker. As a result of complaints against Kelly, the NASD barred him from the profession for life.

Meanwhile, a stockbroker who had investors in Nebraska and Iowa faces both lawsuits and arbitration from her former investors. The investors claimed that the broker sold them risky investments that were unsuitable based on the investors' characteristics. The complainants say they were near or at retirement age and wanted stable, low-risk investments, but the broker put their money in high-risk investments without fully explaining the risks. One investor told the Sioux City Journal that her financial loss of around $55,000 meant she had to change her lifestyle.

An NASD arbitration panel has the authority to not only award restitution to complainants, but also to award lawyers' fees and interest. An arbitration panel awarded $299,000 plus interest to six investors who filed a complaint against their broker's firm, FSC. The panel also awarded lawyers' fees and $104,000 in undisclosed costs to the investors. The panel found that the firm showed ineptness by hiring a broker who had been fired as CFO from a church organization for alleged embezzlement. He also had a record that included allegations of forgery at another company.

In a different decision, an NASD arbitration panel found A.G. Edwards & Sons liable for $258,300. The panel found that A.G. Edwards failed to properly supervise its broker who sold one investor's death benefit worth approximately $200,000 for less than $3,400. The investor had told his broker that he was uninsurable because of a serious heart condition.

If you are planning on investing with a new stockbroker, make sure you check the broker's credentials with state or federal regulators. This can tell you if someone is a licensed broker or simply pretending to be one. Sometimes unethical people will use false certifications to convince people that they are licensed financial advisors. Such certifications, according to an article at, include certified senior adviser (CSA) and senior tax adviser (STA).

Arbitration can be an effective way of dealing with complaints against unethical stockbrokers. If you have lost money because of illegal dealings on the part of your stockbroker, contact a lawyer to discuss your options.


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