Category Archives: Resources

Hypothetical 1

You have just referred one of your elderly clients to a local accountant.  The accountant is in his 40’s.  You have seen him around town for years.  He regularly eats breakfast at an expensive local restaurant.  He appears to be popular at the restaurant.  His office is located in a good part of town.  He is a nice guy.  You have heard that in addition to being an accountant, he also advises his clients about investments.  So, what can possibly go wrong with referring one of your elderly clients, for accounting purposes, to this gentleman?  Well, lots can go wrong.

As it turns out, for years this accountant, while being registered as a stockbroker/financial advisor, was alleged to have been soliciting his clients to co-invest in various internet businesses operated by another accountant’s son.  The accountant was further alleged to have signed promissory notes in favor of his customers, for an aggregate amount in excess of $1 million.  When his former broker-dealer employer learned of his conduct, he was fired.  His former employer, the broker-dealer, has paid settlements in excess of $500,000 to several investors.  As the results of an investigation initiated by FINRA, the Financial Industry Regulatory Authority, the accountant was suspended for two years from acting in any capacity with a FINRA member firm.  That suspension ends in December 2013.  The accountant’s Florida accounting license remains in good standing.

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My Corporations professor in law school once said, “Financial advisors are nothing more than used car salesmen with more expensive suits.”  Although her words may have been somewhat harsh, her comment was prescient in one particular regard — the subject of education.

Whether one sells used cars or investments, the educational prerequisites for those who sell used cars and investments are identical – there are none.  Perhaps there is good reason in the case of the car salesperson, but is the same true with respect to one’s advisor?  Do investors really care whether the person with whom they are entrusting their life savings ever graduated from high school or college?  Of course they care.

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Can an attorney be liable for the negligent referral of a client to a “rogue stockbroker”, or in the Thanksgiving spirit, a turkey broker?[1]  If an attorney chooses to refer a client to a stockbroker[2], what are the best practices prior to making the referral?[3]  Given the absence of New York case law addressing an attorney’s liability for the negligent referral to a “rogue stockbroker”[4], best practices dictate that at a minimum, an attorney should exercise reasonable care in investigating the stockbroker’s background.  The attorney must also be extraordinarily careful regarding the nature of the referral to the stockbroker.  Initially, it may be best to determine if the person one is referring to is a stockbroker and/or an investment advisor.  Generally, stockbrokers charge commissions per transaction, whereas investment advisors charge fees based on percentages of assets under management.  Some individuals are both stockbrokers and investment advisors.

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Securities Arbitration – once a concept foreign to most attorneys, is now a reality for many individuals whose retirement nest eggs have been decimated within the past year. For better or worse, most individual and institutional investors who do business with firms that are members of the Financial Industry Regulatory Authority (hereafter “FINRA”), are required to resolve disputes through a FINRA administered arbitration process. For most Nebraska residents, this means that their dispute will be resolved through an arbitration proceeding that will occur in Omaha. Residents of western Nebraska may be required to travel to Cheyenne,Wyoming for their hearings.

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