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by Lisa Fields
"There are securities salespeople out there who prey on clients by not telling them the whole truth. People can be bilked quite readily," says Pete Pfeffer, an expert witness for Round Table Group and a partner at the Chicago-based Walsh, Pfeffer & Co., which provides litigation support in securities-related disputes.
Growing a securities practice
Pfeffer advises attorneys who want to grow their securities practice to "talk to CPAs and accountants, because people who have substantial assets to invest usually don't do their own taxes."
A good working relationship with CPAs can mean greater access to a steady stream of securities cases. Pfeffer encourages attorneys to speak at local CPA associations' meetings to garner exposure. His advice: Let accountants know they can call with securities-related questions, especially if a client has had significant losses.
Common scenarios for securities-related disputes
Often, CPAs and accountants raise the red flag for clients who invest substantial amounts of money by recognizing the possibility of fraud with losses tied to securities, commodities and foreign exchange trading (FOREX), Pfeffer says.
According to Pfeffer, common scenarios for such disputes include:
- Billions of dollars of variable annuities get sold every year, many inappropriately. Variable annuities can be okay investments--but not when sold to people at or near retirement age, or into already tax-deferred IRA accounts.
- Recently, much arbitration followed the bear market that ran from 2000 through 2003, Pfeffer says. Many clients who lost money in the stock market claimed their brokers were to blame, particularly if the percentage of loss was significantly greater than the market drop.
- There's nothing wrong with investing money when you think the Euro, the British pound, the Japanese yen or other currencies will gain or lose on the U.S. dollar, but some salespeople don't disclose the very high degree of risk in FOREX.
- There's a possibility for fraud when a client trades on margin: A client purchases $20,000 worth of stock but only pays $10,000; the brokerage firm loans him the other $10,000. For every dollar the market may drop, the client loses two dollars, explains Pfeffer. This can be problematic if the client doesn't understand the risks of trading on borrowed money--because no one explained those risks to him.
After they've learned about a client's losses from his or her schedule of capital gains or losses, CPAs or accountants should recommend that an attorney review the case, says Pfeffer. "The CPA won't know if the loss was due to market investments or fraud, but it would be in his--and his client's--best interest to find out."
The attorney then needs to enlist the services of an expert specializing in securities matters, to determine whether fraud seems likely, says Pfeffer. The Round Table Group can provide expert witnesses who match the specific needs of varied cases.
Determining fraud"The questions to be asked are: 'What did the client know?' 'Could he make informed decisions?' 'Was he misled?' 'Was the risk fully and fairly disclosed?'" says Pfeffer.
If the expert finds that a case has merit and fraud seems likely, he'll recommend that the attorney file a claim.
About half of all cases settle before they're heard by a panel of arbitrators, says Pfeffer, adding: "Frequently, they settle because the attorney can demonstrate that he has amassed sufficient ammunition from a consulting expert witness, and is prepared to testify."
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