THE HAYES LAW FIRM, www.dhayeslaw.com 1-866-332-3567(toll free)
The following is a transcript from an interview with Debra Hayes a securities arbitration lawyer who has been practicing for over 20 years as a litigator. Her firm is very unique in that all they do are securities arbitration cases, which means that they go before the NASD and the NYSE and handle cases before a private panel of arbitrators.
Interviewer: Could you tell us what NASD and NYSE stand for?
Debra Hayes: Yes. The NASD is the National Association of Securities Dealers. Any brokerage firm or any broker must be a member of the NASD in order to sell securities that are tracked on the NASD. There's also the NYSE, the New York Stock Exchange. Again, if you are going to be a broker or a brokerage firm, you must be a member of the NYSE in order to sell securities that are carried on the NYSE.
Interviewer: How would a consumer end up in your office? Why would they need securities arbitration?
Debra Hayes: First of all, the consumer will be someone who has lost money investing in the stock market.
The reason a consumer would need securities arbitration is that whenever you decide to invest in any manner and you go to a typical firm, such as Merrill Lynch or Salomon Smith Barney or Citigroup or Edward Jones or Raymond James, these would be the biggest names, you're going to sign an account agreement with this company in order for them to be your broker and help you with your investments. So, when you sign that agreement, there will always be an arbitration clause in it.
Your right to go to your state court or your federal court and present your case to a jury is waived when you sign this arbitration agreement. So your only way to have a grievance against the firm or against the broker is to file a claim with the NASD or the NYSE who then sets up the arbitration of the matter.
If you went out to invest and you have lost a fair amount of money in that investment process, then you should seek an attorney and see if you have the right to obtain a recovery for the monies that you've lost.
Interviewer: When would you know that you have a claim versus just a typical loss that may happen with any investment?
Debra Hayes: First you want to look at how much money you lost and what type of market did you lose it in. For instance, in 2001, when the market crashed, if you lost more than 20% of the principal amount of your investment, you had a good claim. So, if you took $100,000 in to an investment firm and all of a sudden you're sitting here with only $80,000 left, you haven't made any money on you investment, in fact, you lost money and should seek out an attorney.
In today's market, a strong upward market, if you have suffered any loss of money, you probably have a case against the broker and you should seek advise on the matter from an attorney.
There are also products that are purchased that raise a red flag for consumers. For instance, one of the hottest products of late has been something called a variable annuity. You may be in a variable annuity and not even understand that you're in it. Variable annuities are virtually unacceptable and what we call "unsuitable" products for the majority of people; there are very few people they are suitable for. So, if you're in a variable annuity, then you should be contacting an attorney as to whether or not that's a good product for you to be in.
Other things that have happened of late that are very popular are what we call a 72(t) plan. The average consumer isn't going to understand what that means. Say for instance you've got a 401(k), you're retiring and decide to roll over your 401(k) or you've got a lump sum retirement because your company was encouraging early retirement. These accounts were then taken by the brokerage firms and a hypothetical illustration was run showing you that you could take "x" number of dollars out per month and your money was going to last you as long as your life expectancy.
Unfortunately, those hypothetical illustrations have not proven to be true. You're probably not going to discover for seven to ten years down the road when all of a sudden you don't have any money left. So, I would encourage anyone that has any questions about what's going on in their accounts, and they may not even understand how much they've lost, to contact us so we can look at your documents. It's a simple process and we don't charge for it. We can either affirm that we think you don't have a claim or, if we do see some problems with your investments, then we can take the case further at that point.
Interviewer: What is broker misconduct?
Debra Hayes: Broker misconduct can range from someone, a broker, stealing your money -- which, frankly, there is so much regulation that this really doesn't happen very often these days -- to a broker making an unsuitable recommendation to you. For instances, a broker recommends that a person over the age of 55 buy a variable annuity. That's an unsuitable product; there are huge surrender charges if you ever try to get out of it. You're paying for the most expensive life insurance product that's wrapped into this variable annuity that you could ever pay. That's an unsuitable recommendation; that's broker misconduct.
A broker who runs a hypothetical illustration, and makes assumptions in that hypothetical illustration that are not reasonable, showing that your retirement monies are going to last you throughout your life, that's broker misconduct. Putting an IRA account inside a variable annuity, that's broker misconduct. In addition, broker misconduct would be filing out forms in a fraudulent manner or saying that a retiree who's most concerned about income is an aggressive growth investor.
Broker misconduct comes in many, many forms. Unfortunately, clients don't know about it until they lose money as a result.
Interviewer: Is this true for individual brokers or just for brokerage houses?
Debra Hayes: It varies. Many times the individual broker is the one making decisions. However, what he does, the action he takes, is supposedly and allegedly supervised by the branch manager in those offices. Many times our claims involve failure of the branch managers to supervise what's going on.
Sometimes, these branch managers and compliance managers get reports on their desk that -- they call them exception reports -- that are telling them, "Mr. Smith is over here losing 50% and 60% of his money and no action is taken." So, obviously there's supervisory and compliance issues that are not being followed by these firms.
Also, there is misconduct by the actual brokerage firm -- something that we call "making a market" in a stock. In other words, the financing part of Merrill Lynch is financing this stock and earning money. So, they're promoting this stock, they're encouraging their brokers to sell this stock to their clients so that they make money on it in every way that we can. Not because it's necessarily a good stock, not because it's a suitable security or stock for that client, but because they can make money on every side of the deal. So sometimes the misconduct is at a higher level.
There are other instances. Edward Jones is in the middle of a class action settlement for taking kickbacks from the mutual funds. When you walked into Edward Jones, there were eight mutual funds and every single client I've ever had has had one of those same eight mutual funds. Well, that's because Edward Jones was getting kickbacks on those mutual funds.
So sometimes it's at the high level where the brokerage firm is putting a "daily special list" out there to the brokers and saying, "Here's what's on the daily special, sell it to your clients." Sometimes it's at the mid-level management where the supervisor isn't doing his or her job. Other times it's at the individual broker level where they're not acting in the best interest of the client, which is what they are ordered to do by the securities regulations.
Interviewer: How can an investor recognize if they've been a victim of this type of misconduct?
Debra Hayes: Again, the misconduct is typically going to show up in the losses; the clients are going to lose money because this broker has not acted in their best interest and has taken action that's actually harmful to them. So, it could be that they're not getting a proper return. For instance, in this very high stock market, if you're sitting there and you're not making a 10% to 12% return, there could be broker misconduct. Many times when the market falls, like it did in 2001, that's when so many people get hurt because they weren't adequately protected; the market crashes, the brokers sit there and let the accounts fall and people can't ever recover from those kinds of losses.
Again, it may be the type of product that they have and many times people don't even know what they have. So, people need to inquire with their current broker, "What exactly do I have?" They need to understand what they have and then they need to seek out, either do some of their own research or seek out competent counsel to determine that and the manner in which they're invested is suitable for their situation.
Interviewer: Is there a more typical type of victim of this type of misconduct?
Debra Hayes: It's typically the elderly, those that are retiring or are retired. In this day and time, many, many people are retiring at the age of 55 and that's not what we would normally think of as elderly. However, I would say that the victims tend to be from age 55 and up. It's across the board. We see very educated people taken advantage of because they rely on the broker's recommendations. Of course, those that are not highly educated are victims of these types of conduct as well. The common sentiment is that people hire a broker that they trust and then they rely on them and accept their recommendations.
Many employees that are retiring meet with a broker that their company chooses. They're very trusting in that type of a situation and think, "Oh well, my company let this person speak to us, they must know that they're a good person. They must know what they're talking about."
These brokers are extremely good salesmen, which is what they are, salesmen. They really are not financial analyst, in my opinion, but they claim they are. So again, those that fall victim to that the most often are 55 and over, retirees and elderly people.
Interview: You've recommended seeking counsel if you think there is a problem with an investment you've made and this type of misconduct as something a victim should do. Is there anything else they should do and things they shouldn't do?
Debra Hayes: Number one, they need to absolutely understand what the product is they're in and what the fees and expenses are that are going into that product. For instance, you might be getting a lovely 8% or 9% return, but if you're in a product that's costing you 3%, you're only earning 5% or 6% and so you really aren't earning what other people in the market are. You've got to ask very detailed questions and understand what you're getting into and hold your broker accountable.
You can also always go and visit with a competitor, go to another broker at another firm and have them give you an opinion. Although, quite frankly, you're just probably going to get an opinion about them wanting to put you into whatever their hot product is.
There are insurance agencies and securities agencies in every state. Your could contact for instance, the Texas Securities Board or the Alabama Securities Board. Those entities differ by each state as to how aggressive they are. For instance, Joe Borg in Alabama is very aggressive and he will investigate any claims of abuse that anyone would bring to his attention. I'm not as familiar with every other state, but some states are very good about investigating, so that is another route that people could take.
Interview: Are there things they shouldn't do?
Debra Hayes: They should not accept these recommendations carte blanche. They should discuss it with other family members, other brokers, perhaps an attorney, perhaps their accountant -- that's another source of information that they can go to.
They should not believe that they will get something for nothing. In other words, if you are told that you are going to get the highest return, then you need to understand that you're taking the highest risk. Nothing comes for free, even in the stock market. If you are getting the highest return, you're taking a tremendous amount of risk and you need to be honest with yourself about that.
You should be very wary, in my opinion, of any portfolio that involves being invested 100% in the stock market. I think that every person, especially this group we're talking about which are retiring or retirees, need to have well-balanced portfolios and that means a mix of bonds and stocks, as well.
Interview: You mentioned state agencies to contact. Does broker misconduct fall under state and federal law? What rules do apply here?
Debra Hayes: It would probably have to rise to the level of criminal for the state to be involved. Again, someone stealing money. I believe that a state would certainly have jurisdiction over that and can take action in that sense. Most of the time it's what we call common law, which is that the broker has been negligent or the broker has been fraudulent. Those are just state laws that apply, as well as the NYSE, NASD and SEC, which is the Securities Exchange Commission. They have their own set of rules that lay on top of the law of each state. So for instance, if my client is in Texas, then I'm applying Texas law as well as the overlying SEC, NASD, NYSE rules. If the client is from Alabama, we're applying Alabama law.
Interviewer: What is the statute of limitations on these misconduct cases? How does that work?
Debra Hayes: There is a six-year eligibility rule. In other words, the damage that was caused must have occurred within the last six years. For instance, you may have bought the stock seven years ago, but if it wasn't sold until two years ago, because there is a transaction, you still come within that statute of limitations or statute of eligibility.
There's not an easy answer to those questions because there are many factors to consider in the statute of limitations, but six years is a good rule of thumb. In other words, if the broker that caused you harm, you closed that account with him seven years ago, you don't have a case.
Interviewer: You mentioned that often people don't realize this until they're into their retirement and realize they have no money or less money than they should. How would statutes apply in those types of cases?
Debra Hayes: There is always what we call the discovery rule, which is that you realize that you've been harmed when you discover the harm. In these retirement cases where there's a lump sum distribution, you're not going to discovery that you've run out of money until six or seven years later. So the statute is tolled based on when you discover that. Those people are protected under the 72(t) cases.
Interviewer: How does the arbitration process work?
Debra Hayes: The first thing that happens is if you contact our office, we're going to ask to see your account statements. We want to see the monthly statements that you get from Merrill Lynch, Edward Jones or Raymond James every month or every quarter. We take a look at those and we can tell whether there's been wrongdoing.
We conduct an interview with the client and look at the documents. We accept the case. Then we prepare what's called a statement of claim; that's the document that starts the process. We file that with either the NASD or the NYSE. They send to the defendant (they're called respondents in these actions). They'll send it to Merrill Lynch and say, "Here, you've been sued by Mr. Smith and you need to file an answer in 20 days." So, they file their answer. Then you begin the discovery process. There are no depositions, there's simply an exchange of documents. Then, a three-day hearing is set in the city, in the major city closest to where the client lives.
You're dealing with our office throughout this. It takes about a year to 18 months to complete it, so it does go very quickly; unlike a court case, that's one of the positive things. We will be dealing with you throughout this time period, getting additional documents, talking to you about your case, getting feedback and getting you ready for the hearing.
We pick the panel. At some point, we'll be sent a list of perhaps 10 to 14 panel members and we choose our panel from that. We end up with a panel of three. We go to that city and put witnesses on the stand and go through an evidentiary hearing. Within 30 days, that arbitration panel must enter a ruling--another positive thing. If we win, that money must be paid by the respondent within 30 days. So, hopefully 18 months, worst-case scenario 24 months, you're done. It's over, complete, virtually cannot be appealed, so.
Interviewer: So this process replaces a trial in a state or federal court?
Debra Hayes: That's correct.
And there is, you said, no appeal.
Debra Hayes: That's right.
Interview: So it's a final decision.
Debra Hayes: Yes. You can appeal it, but in the four years I've practiced, I think I've seen only two of them appealed--which we won and then they end up owning more money because the interest statute continues to tick. Now the courts are threatening more and more to sanction people if they file appeals to these cases. So, it's very rate that a case is appealed.
Interviewer: What can a victim of this type of broker misconduct sue for?
Debra Hayes: Well, they sue for two things. One, the actual out-of-pocket losses that they have. If you turned $100,000 over to the broker and when you left you only had $50,000, you sue for $50,000, which is what we call the net out-of-pocket loss. You also sue for what we call the market-adjusted damages. In other words, if you had that $100,000 invested properly, it wouldn't have dropped. It would be worth more and we run charts that show exactly what it would be worth. So, if it was invested properly, we show the panel, "Not only would Mr. Smith not have lost $50,000, he would have had $125,000 because he would've earned a proper return on those monies." We sue not only for the net out-of-pocket loss, we sue for the monies that the person should have made if they'd been invested properly.
Interviewer: Is it more beneficial to go to arbitration rather than trial?
Debra Hayes: Well, there are arguments on both sides of that coin. There are advantages to arbitration; however, it is a process that is flawed and prejudiced, unfortunately, in favor of the brokerage firms. But does offer a quicker, less painful recovery.
Interviewer: Are there fees associated with the arbitration and who would pay for those fees?
Debra Hayes: There is a filing fee, which we ask the client to pay. That typically ranges from $700 to $1,500. We then pay all of the other expenses: all copying expenses, all expert expenses and all travel expenses. We take the risk on those fees. If we recover, either by settlement or award, then those expenses are paid out of that settlement or award.
Interviewer: As someone is preparing to come to your office, what type of documentation is required to evidence this type of broker misconduct if they believe they have a case?
Debra Hayes: They should gather any letters between themselves and the broker or the brokerage firm. Obviously, we have to have the account statements and those are monthly or quarterly statements that they get regarding the account. If they have any other document, for instance, when you get a variable annuity, you're typically sent a variable annuity policy and that would be important for us to see. Other than that, if the client filled out questionnaires, we would need to see those. However, there really isn't a whole lot of paperwork that the brokers provide the clients.
Interviewer: Is there ultimately a cap on the type of damages a client can receive from this type of a suit?
Debra Hayes: No. Its also possible to seek punitive damages. The amount of punitive damages would, frankly, be limited by whatever state law in which you were trying the case. It's extremely rare to be awarded punitive damages in arbitration, but it happens.
THE HAYES LAW FIRM, www.dhayeslaw.com 1-866-332-3567(toll free)