Investment Advisor Misconduct
Investment advisors have a fiduciary duty to act in the best interests of their clients. Breaching this duty violates both their legal and ethical responsibilities to clients and can carry serious penalties. Investment advisor misconduct includes acts such as stock manipulation, theft, forgery, embezzlement, and recommending investments that are not suitable for a particular client’s circumstances.
If an investment advisor learns that they are being investigated for misconduct, they should contact an attorney at once, especially if they are requested to appear before a FINRA Arbitration Panel. If the investigation could potentially result in criminal charges, such as forgery or embezzlement, a criminal defense attorney should be engaged.
In March 2014 the Securities and Exchange Commission filed charges against a group of brokers for running a scheme that persuaded investors to use variable annuities with death benefits to wager on the lives of the terminally ill. The plan, which ran from July 2007 to February 2008, involved the sale of over $80 million in variable annuities.
Michael A. Horowitz of Los Angeles and Moshe Marc Cohen of Brooklyn, New York, were both targeted with a cease-and-desist order and allegations of fraud. Horowitz allegedly acquired details about the dying patients through fraud and marked them as annuitants on variable annuity contracts that he proceeded to market to wealthy investors. He and Cohen both used false pretenses to obtain their broker-dealers’ permission to sell the annuities.
Horowitz allegedly told the investors funding the annuities to invest heavily in order to drive up the account’s value. At least 16 terminally ill patients, who were identified with the aid of alleged accomplices in Chicago and Los Angeles, were designated the annuitants in over fifty variable annuity contracts.
The various forms that Investment advisor misconduct may take includes the following:
● Criminal or fraudulent activity such as theft, forgery or embezzlement.
● Recommending investments that are not suitable for a particular client's circumstances.
● Manipulating stock prices for personal and/or corporate gain
● Pressuring a client to buy or sell a certain security
● Failing to diversify a client’s account to control risk and avoid heavy loss
● Variable annuities fraud: i.e. recommending unsuitable annuities to drive up the broker’s commission, failing to properly advise investors about the risks associated with particular annuities.
Grand Larceny, Forgery and Falsifying Business Records are all crimes that can be associated with investment advisor misconduct, depending on the circumstances.
Penalties imposed by FINRA include fines, restitution orders, suspension of one’s registration, and a permanent ban from holding a job in the industry. If investment advisor misconduct includes criminal offenses such as grand larceny, the punishment depends on the severity of the crime. In New York there are many degrees of grand larceny, determined primarily by the value of the theft. The penalties range from one to twelve years’ imprisonment.
A successful defense pivots on whether or not an investment advisor can prove that they did not commit the alleged offenses (or order them to be committed). Mental disease / defect and proven lack of intent to defraud are both viable defenses in investment advisor misconduct proceedings, although under New York’s state securities law intent does not need to be proven in order to be found guilty of a misdemeanor.