For the past few years, stocks have been going up and stock market indices have continued to reach new highs. The stock market crash of 2020 erased years of gains and caused billions of dollars of equity to be lost.
While millions of investors have lost billions of dollars, not everyone who has lost money due to the coronavirus market crash has a claim against their broker. In fact, many losses occurred simply as a result of a market decline. However, some investors may have claims against their brokers or their brokerage firm if they lost money due to the broker’s negligence or a brokerage firm’s misconduct. Our experienced Former Wall Street Attorneys can evaluate your case and let you know if you are entitled to file a claim seeking to recover your market crash loss recovery. Please call us today or use our online contact form, for a free consultation.
Are You Retired or Saving For College or Retirement & Lost Money in the 2020 Market Crash?
If you are a retiree, who is living on a fixed income or who has only one source of income such as social security or a pension, you often cannot return to work to earn the money to replace your investment losses. Even if you are not a retiree, certain investors, especially those with limited assets or who need their funds to pay for their kid’s college, their parents, or who are saving for retirement themselves may also be conservative investors who do not want their money or a particular account exposed to stock market risk. If you are one of these types of conservative investors and lost money, it may have been invested in unsuitable investments and thus you could have a valid claim to recover your stock market losses.
The most common type of claim for such investors is that their money was invested in a way that did not meet their objectives. This type of claim is called “unsuitability.” Unsuitable investing is often raised as a claim for retirees living on a fixed income or other conservative investors who did not want to be, and should not have been, exposed to stock market risk.
Even Experienced Investors Can Have Stock Market Loss Claims.
Even experienced or so-called sophisticated investors can have claims when the risks of investing were too extreme or were not adequately disclosed or understood by the broker. A broker has a “reasonable basis” suitability obligation to every client. According to the Financial Industry Regulatory Authority, the reasonable-basis obligation is critically important because, in recent years, securities and investment strategies that brokers recommend to customers, including retail investors, have become increasingly complex and, in some cases, risky. Brokers are required to understand the securities and investment strategies they recommend.
A broker has an obligation to (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding. A broker must adhere to both components of reasonable-basis suitability. A broker could violate the obligation if he or she did not understand the recommended security or investment strategy, even if the security or investment strategy is suitable for at least some investors. A broker must understand the securities and investment strategies involving a security or securities that he or she recommends to customers.
There Are Also Customer-Specific Suitability Rules Protecting All Investors
Pursuant to FINRA Rule 2111, to be suitable, an investment recommendation must take into account the customer’s investment profile including, but not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. Both the customer-specific suitability and reasonable basis suitability requirements must be met when making any recommendation.
Risky Strategies Which Must Meet these Suitability Standards Include :
Concentration in One Sector or Investment
Investors may have claims when their account is concentrated in a particular sector or type of stock exposing them to unwanted risk. In this scenario, the risk of loss is increased by having a large portion of your holdings in a particular investment, asset class, or market segment relative to your overall portfolio.
Leveraged investments can perform more poorly when there is a stock market crash. Investments such as exchange-traded funds (“EFTs”) are one such example. ETFs have typically registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Unlike traditional mutual funds, shares of ETFs typically trade throughout the day on a securities exchange at prices established by the market.
ETFs have evolved over the years, becoming more complex. According to FINRA in the last few years, a number of leveraged and inverse ETFs have been introduced to the market that is very different from the traditional variety of ETFs. Leveraged and inverse EFTs carry more risk than garden variety EFTs if held for a period of time by the investor.
Alt Mutual Funds
Alternative Mutual Funds are another example of a risky investment. Alternative or “alt” mutual funds are publicly offered, SEC-registered funds that use investment strategies that differ from the buy-and-hold strategy typical in the mutual fund industry. Compared to a traditional mutual fund, an alternative fund typically holds more non-traditional investments and employs more complex trading strategies. They have unique characteristics and risks.
Funds of Hedge Funds
Another sophisticated and risky investment is a “funds of hedge funds.” Funds of hedge funds are pooled investments in several unregistered hedge funds. Unlike the underlying private hedge funds, the fund of funds itself can register with the SEC under the Investment Company Act of 1940. In addition, the fund of fund’s securities also can be registered for sale to the public under the Securities Act of 1933. Registered funds of funds can have lower minimum investments than private hedge funds (some as low as $25,000). A registered fund of hedge funds can be offered to an unlimited number of investors. However, unlike an open-ended mutual fund, there is no investor right of redemption – shares cannot be redeemed directly with the fund unless the fund offers to redeem them. Nor are the shares usually listed on a securities exchange like exchange-traded funds (ETFs).
Many investors had margin loans or other types of loans secured by their investments who were subject to large margin calls during the COVID-19 market crash. There are several ways investors can recover on claims relating to improper margin or margin calls. Depending on your contract and other circumstances, if losses were incurred as a result of securities being sold on a margin call, it may be possible to make a claim asserting that the broker or firm should have first asked you to repay the loan through another source or allow you to choose what investments to sell to pay the margin call. It is also possible to bring a claim for losses if the margin loan given to the customer was an unsuitable investment strategy or too risky for the investor’s objectives. Finally, if a brokerage firm has sued you for to the client to collect on an unpaid margin loan, there are a number of defenses to this claim which can be raised.
If you believe that you or a loved one has been harmed by any type of investment negligence, fraud, or investment scam, we are here to help you evaluate your potential market crash loss recovery. Contact our offices today for a free consultation. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers will evaluate your claim at no cost to you. Contact us by filling out our online contact form, or calling 888-768-2499.