Exotic Derivatives and Investment Fraud
After a five year wait and grueling 95 day trial, James and Margaret Eringer can finally sleep a bit easier; their long investment fraud case against BNP Paribas Securities is over. The couple won an award of $16.6 million dollars.
Most investment fraud cases against stockbrokers are handled by binding arbitration before the Financial Industry Regulatory Authority – FINRA for short. We like the arbitration procedure because it’s usually quite quick. On average most cases are resolved in just 14 months or less.
That wasn’t the case with the Eringers, however. Their case lasted 5 years making it the longest running arbitration in FINRA’s history. The 3 person arbitration panel also required 95 days to hear the case, surely another record.
The Eringers’ investment fraud case began years ago in 2007 when a BNP Paribas Securities advisor recommended the couple place a sizeable portion of their assets into a “leveraged derivative call option.”
After losing millions of dollars and much of heir total investable assets on the risky strategy, James and Margaret filed their arbitration case.
At the time of their investment, James and Margaret were approximately 60 years old. Stockbrokers have a legal duty to understand their client’s age, needs, risk tolerance and financial situation. This duty is called “know your customer.”
Financial advisors also have a duty to only make financial recommendations that are suitable to their client’s needs. As clients such as the Eringers near retirement age, brokers have a heightened duty to also insure that clients have ready access to their funds or at minimum fully understand any liquidity issues associates with their investments.
James and Margaret claim their broker missed the mark and made an unsuitable recommendation. Ultimately, the three person FINRA arbitration panel agreed.
Critical to the panel’s ruling was the fact that BNP Paribas wouldn’t allow its brokers to sell retail customers such as the Eringers these leveraged derivative call options. These risky investments were better suited for sophisticated institutional investors.
If the Eringers couldn’t be sold the leveraged derivatives, what did the stockbroker do? He had them create a corporate entity so that they could invest. In our opinion, this was a giant red flag.
Derivatives are often quite complex, risky and often illiquid. We believe that often these exotic investments are not suited for individual investors, especially those nearing retirement. Regulators have issued similar warnings to brokers.
In our experience, many brokers can’t even fully explain how they work! Why do they sell them then? Commissions!
If you are asked to create an entity solely so you can invest in an exotic derivative or if your broker can’t explain precisely how these derivatives work, don’t invest. These two red flags are sure signs of investment fraud.
It is virtually impossible to appeal an arbitration decision meaning the Eringers will get back their hard earned money. They were also awarded attorneys fees.
As this case illustrates, investment fraud cases can be won. It is critical to have a good fraud recovery lawyer, however.
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Please contact us if you are a victim of investment or stockbroker fraud. We have helped our clients recover millions of dollars of their hard earned money. Even if the stockbroker has moved or filed for bankruptcy, it is still possible to collect from the brokerage firm that employed him or her.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). Minimum loss size is $200,000 for stockbroker cases and $1 million for other fraud recovery matters.
MahanyLaw – America’s Fraud Recovery Lawyers