The primary practice area of Charles C. Mihalek, PSC is alternative dispute resolution, with particular emphasis on the arbitration of securities disputes on behalf of investors before the Financial Industry Regulatory Authority (FINRA).  We also represent registered representatives in disputes with broker dealers.

Charles C. Mihalek, PSC regularly represents individual investors whose claims arise out of broker and brokerage firm misconduct -- claims often based upon misrepresentations and omissions of material facts, negligent retirement advice, unsuitable recommendations, excessive trading, unauthorized transactions, theft or conversion of client funds, and breach of fiduciary duty.

Attorneys

Charles C. Mihalek, Esq.

Steven M. McCauley, Esq.

Call us for a free consultation and case evaluation at (800) 294-9198, or contact us online.


Practice Areas

Negligent Retirement Advice

In many instances, the most important economic decision a person makes is when to retire. That decision is subject to a determination of "Do I have enough money to retire?" The securities industry, through its account executives, are reaching out to American workers with advertisements, seminars, and direct mail solicitations, touting their retirement and financial management services. The performance of the stock market has encouraged stock brokers to promise more than the market is capable of delivering.

Just when you need a conservative, safe, long-lasting investment in high-quality, low-cost investments, some stock brokers are recommending high-cost variable annuities in tax-deferred IRA accounts, Class B mutual fund shares, high-commission mutual fund shares when low-cost mutual funds and index funds are available, and a long list of unremarkable proprietary mutual funds and other financial products.

Part of the problem is that some stock brokers are changing from being “customer men” to “product salesmen.” In other words, stock brokers used to pick stocks and bonds that fit the customer’s investment objective and risk tolerance, but now some stock brokers sell whatever their employer urges them to sell.

Investors do not know that the stock broker's recommendation is tainted by some form of pressure or bias to recommend one investment over another. Investors often do not know that a particular recommendation was made because of an undisclosed sales contest, an undisclosed fee by a particular mutual fund family to promote its family of funds, etc. Investors have no way of finding out even after the event.

Some investors are convinced by their stockbroker that they have enough money with which to retire.  Essentially all of their assets are placed in some or all of the unsuitable financial products mentioned above, often to their financial detriment.  Such investors and retirees may have causes of action to recover their losses because of this negligent advice to retire.

Early Retirement Offers

These cases are very similar to negligent retirement advice cases except that they involve an additional economic enhancement. These early retirement offers are made to employees as young as 50 years of age as of the date of the offer.

The employees who are being offered these early retirement offers or enhanced early retirement packages typically have no prior experience with stock brokers, the stock market or picking suitable securities. They are unable to tell the difference between a “suitable” security and an “unsuitable” security. They lack comprehension of the vocabulary of Wall Street. They do not read The Wall Street Journal, Barrons, Investors Business Daily, Fortune, or any other financial publication. Their highest education level is often high school. “Risk” and “Reward” are two terms often used in tandem in the securities industry, namely, as your risk increases so too does the possibility of reward. This is an oversimplification that does more to mislead than to properly educate a thoroughly novice investor.

Most retirement investors’ cases that we handle involve investors who have wanted the stock broker to make appropriate, suitable and prudent investments for them that would produce and support a sustainable withdrawal rate of an amount they could live on for the remainder of their lives.

The truth is that these investors blindly put their full faith and trust in their financial professionals. They have no idea whether their interests have been properly served except through the performance of their portfolios. For example, if a retirement portfolio with an initial investment of $325,000 in 1999 is worth only $121,000 in 2004 with a 9% withdrawal rate, the investor can correctly conclude that HIS INVESTMENT OBJECTIVES HAVE NOT BEEN MET - - AND HIS LEVEL OF RISK TOLERANCE HAS BEEN EXCEEDED. 

These investors and retirees may have causes of action to recover the losses they suffered due to advice from their financial advisor or stockbroker to accept an early retirement offer when they should have continued working.

Securities Fraud

Securities investing and trading is carefully regulated by rules and laws for the protection of public investors. The violation of these rules, particularly through various deceptive acts and schemes to take advantage of investors, is commonly known as securities fraud. Securities fraud can take a number of different forms.

Securities fraud can take the form of white collar crime characterized by the theft of capital from investors by a publicly traded company that “cooks its books,” resulting in overstated profits. Recent examples of this form of securities fraud include the Enron and WorldCom scandals. Both companies are guilty of theft of investors’ capital and defrauding the federal government with fraudulent tax reports.

But securities fraud manifests itself most commonly through broker misconduct. Broker misconduct claims arise when an investor suffers losses as a direct result of unsuitable recommendations, misrepresentations and omissions of material facts, excessive trading in a customer’s accounts, failure to follow a customer’s instructions, and even outright fraud such as theft or conversion of customer funds or Ponzi schemes.

Federal and state laws provide legal remedies for defrauded investors to recover their losses. Investors may also be entitled to compensation for the loss of income that their investments should have been generating, interest on the losses, and legal fees.

To learn more about your rights as an investor, you should contact an experienced securities attorney who can objectively evaluate the facts of your individual case.

Broker Misconduct Claims

The relationship between a broker and an investor is defined by the duties which are owed by the broker to the investor. When a broker deviates from these defined duties, the investor or customer may have grounds to recover for any losses directly attributable to the broker’s misconduct. Broker misconduct claims can arise when an investor suffers losses as a direct result of unsuitable recommendations, misrepresentations and omissions of material facts, excessive trading in a customer’s account, predatory sales practices by the broker, the failure to follow a customer’s instructions, and even outright fraud such as theft or conversion of customer funds. These claims all involve conduct which is either negligent or fraudulent.

The best way for an investor to determine if they have a claim for broker misconduct is to contact an experienced securities attorney who can objectively evaluate the facts of his or her case.

Failure to Follow Customer Instructions

Whether an investor has an account in which the broker is permitted to actively trade without the investor’s prior authorization – commonly known as a discretionary account – or an account where all activity requires the investor’s approval before any trades may be made – known as a non-discretionary account – a broker has a duty to follow the investor’s instructions. A common example of the failure to follow a customer’s instructions includes the resistance to sell securities promoted by the broker.

Often the case is that a broker will not necessarily ignore the customer’s instructions, but for his own benefit may pressure the customer to hold a stock that the customer originally wanted to sell. This pressure by the broker to deviate from the customer’s explicit instructions can constitute grounds for recovery if losses in the account can be directly attributed to that deviation.

Misrepresentations and Omissions of Material Fact

Stockbrokers must truthfully disclose all material information, including the risks associated with the investments he or she is recommending. A fact is deemed material if it is one which a reasonable investor would want to consider when making an investment decision. Concealing the true risk or failing to disclose important information (i.e., the company has not earned a profit in the past three quarters) are examples of misrepresentation and/or omission. Often misrepresentations involve unrealistic rates of return, and omissions fail to disclose the risks associated with a particular investment.

A broker’s failure to disclose all material information can constitute grounds for recovery of losses suffered as a direct result of the broker’s misrepresentations and/or omissions.

Mutual Fund B Shares

When buying mutual funds, investors have a number of classes from which to choose. The primary differences among these share classes include how much the investor will pay in expenses and when. Investors who purchase mutual fund Class B shares may discover that it would have been more cost effective for them to purchase a different class of shares. Class B shares do not impose a front-end sales charge, but they may charge higher expenses that investors are assessed over the life of their investment in a particular fund compared to Class A shares. Class B shares also normally impose a contingent deferred sales charge (CDSC) which an investor pays if they sell their shares within a certain number of years. In addition, investors who purchase Class B shares cannot take advantage of breakpoint discounts available on large purchases of Class A shares.

A broker’s recommendation to invest in Class B shares when it would have been more cost effective for the investor to purchase a different class of shares can constitute grounds for recovery if losses in the account can be directly attributed to that recommendation.

Unsuitable Recommendations

When your broker recommends that you buy, sell or hold a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your risk tolerance, other security holdings, financial situation (income and net worth), financial needs and investment objectives. Your stockbroker has a responsibility to recommend investments based on your stated needs and goals, and to follow your instructions. If you don’t want to make risky investments, they should not be recommended to you. For example, elderly people living on fixed incomes shouldn’t have a lot of their money put into risky stocks, limited partnerships, or investments that don’t provide ready access to funds in case of an emergency.

If an investor suffers losses as a direct result of a broker’s unsuitable recommendation, an investor may have grounds for recovery of those losses, plus costs, reasonable attorneys’ fees and interest.

Variable Annuities

While variable annuities can be appropriate investments under the right circumstances, they nonetheless contain a number of features that make them inappropriate for certain investors. Investing in a variable annuity within a tax-deferred account (such as an IRA) may not be appropriate. Since IRAs already receive a tax advantage, a variable annuity will provide no additional tax advantages. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker. Brokers recommending variable annuities must disclose the potential surrender charges, expense charges, administrative and investment advisory fees, and market risk.

A broker’s failure to disclose this information, or the recommendation to invest in a variable annuity when it is clearly not a suitable investment, may constitute grounds for recovery of any losses attributable to that variable annuity.

Theft or Conversion of Customer Funds

Theft, or conversion, of investor funds is more common than one would think. Dishonest brokers sometimes devise elaborate schemes to steal customer funds. A broker may set up third party accounts at the brokerage firm under his name and make unauthorized transfers of customer funds into that account. Brokers may even ask an investor to write a check payable to the broker personally or to a company other than the brokerage firm, and the money never reaches the investor’s account. Investors should take all possible precautions when seeking the services of a broker, including checking the broker’s and the brokerage firm’s credentials.

Options Trading

The trading of options is generally viewed as an investment strategy characteristic of more sophisticated and experienced investors. Most investors do not understand the way options trading works. As such, the trading of options is suitable only for investors with greater investment sophistication, speculative investment objectives and a higher risk tolerance. For example, options trading would not be suitable for a retiree seeking conservative, income-producing investments. A broker has a duty to make sure that an investor understands all the risks associated with options trading. Failure to disclose these risks, as well as the active trading of options in an account with investment objectives and risk tolerance to which such an investment strategy is clearly unsuited, may constitute grounds for recovery of losses suffered as a direct result.

Margin Problems

With a margin account, an investor can borrow money from the brokerage firm to purchase additional securities in their account. The loan from the firm is secured by the securities the investor purchases. Investors need to be aware that when they buy on margin, they must repay both the amount borrowed and interest, even if money is lost on the investment. Many investors underestimate the risks of trading on margin and misunderstand the operation and reason for margin calls. If the market experiences a significant downturn, investors who cannot satisfy margin calls may have large portions of their accounts liquidated. Furthermore, the brokerage firm can sell securities in investors’ accounts without contacting them, can choose which securities or other assets in the accounts are sold regardless of the investors’ desires, and the brokerage firm can increase its maintenance requirements at any time and without advance notice. Stockbrokers have a duty to explain the risks associated with margin accounts and trading on margin.

A broker’s failure to properly disclose the risks associated with a margin account, and/or failure to follow a customer’s instructions not to trade on margin, may constitute grounds for recovery of losses.

Boiler Room and Ponzi Schemes

Sometimes brokers and even brokerage firms engage in outright criminal activity such as theft, fraud and forgery. In some cases, this criminal activity manifests itself as a scheme or operation intended to defraud numerous investors.

Dishonest brokers sometimes set up "boiler rooms" where a small army of high-pressure salespeople [use banks of telephones to] make cold calls to as many potential investors as possible. These strangers hound investors to buy "house stocks"—stocks that the firm buys or sells as a market maker or has in its inventory. These stocks are generally thinly traded stocks. The boiler room usually holds a large position in the stock and plans to dump it on brokerage clients at high price. This is sometimes referred to as “pump and dump.” By artificially inflating the price of the stock through their hyped promotion, thus creating artificial demand, the boiler room then sells the stock at the inflated price and leaves their customer’s holding the bag.

Unlike boiler rooms, Ponzi schemes – named after Charles Ponzi who duped thousands of New England residents into investing in a postage stamp speculation pyramid scheme in the 1920s – generally work on the “rob-Peter-to-pay-Paul” principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

Both boiler rooms and Ponzi schemes are illegal. Investors should be cautious regarding “cold calls” and should always be wary of any broker promising an investment that seems too good to be true.




Call us for a free consultation and case evaluation at (800) 294-9198, or contact us online.