SEC Whistleblower Lawyer Blog
In a previous post, we began to address some general ways in which a financial advisor can overcharge investment clients. But it’s worth a bit more focus on one specific type of investment: margin accounts. Some advisors contractually steer customers into margin accounts as the default investment. But margin accounts are inherently riskier investments, and investors with these accounts are more vulnerable to being overcharged by their advisors.
The Basics of Margin Accounts
As the Securities and Exchange Commission (SEC) explains, in a margin account, clients pay part of the price for stock while a broker loans you the rest of the money to purchase securities. If the stock goes up, then clients can make a large return, but if the stock drops, they can lose a larger percentage of their investment than if they’d paid cash—even losing their entire investment. On top of that loss, they have to pay the relevant fees and the interest on the margin loan—even though the clients have lost all of the money the advisor has loaned them.
Why Margin Accounts Can Lead To Large Losses
By the very nature of the margin account, trades are made quickly and frequently—and advisors can make big changes to the client’s investments entirely on their own. For example, if the advisor makes a “margin call,” an advisor can sell a client’s securities to pay for the loan without giving the client any notice of the sale or allowing any input on which securities the advisor will sell.
While these moves are technically legal, this type of account enables advisors to make changes that are inconsistent with the client’s goals—therefore (illegally) breaching their fiduciary duty to their clients.
Additionally, a broker can change the margin requirements at any time—meaning the broker can sell the client’s securities to make up for the new amount that they suddenly require. Again, this could be legal—but it could also be a breach—if doing so was at the expense of the client’s financial well being.
The style of the transaction also may facilitate hidden fees: In a recent case, the SEC fined an investment advisor who encouraged its clients to sign with a margin broker, while the advisor set the interest rates higher than the broker’s actual rates—and then the advisor kept the difference between the advisor’s disclosed rates and the broker’s actual interest charges.
Reporting And Recovering Losses Because Of Margin Losses
Margin abuse takes many forms and serves as a major profit center for Wall Street firms. Our attorneys have recovered millions of dollars for investors by reporting misconduct to the SEC Whistleblower Office and seeking individual damages through FINRA arbitration or federal court litigation.
If you are considering becoming a whistleblower because you believe that your advisory firm is using margin accounts to overcharge clients, or are using other methods to defraud them, the experienced attorneys at Silver Law Group and the Law Firm of David R. Chase are here to help. They can explain possible legal avenues available to you to get the compensation that you deserve. For a free, confidential consultation, email us or call us today at (800)975-4345.