In 2008, American and world financial markets experienced an almost unprecedented loss in value. One of the first signs of trouble came in March of that year, when JPMorgan Chase purchased Bear Stearns, to prevent it from going bankrupt, for $2 per share, down from its high of $171 per share a year earlier. Next came the failure of AIG, and then the major banks. Black Week (October 6-10, 2008) saw the Dow Jones Industrial Average drop from 10, 831 to 8,451, a loss of 22%.
Unlike earlier major market downturns, such as the Tech Wreck of 2000-2002, which affected technology stocks, or the Asian Flu of 1997, the 2008 Stock Market Crash was not strictly limited to a particular sector or market. Though precipitated by the real estate bubble, it dragged the entire market down. Between January 1, 2008 and March 9, 2009, the Dow Jones Industrial Average dropped from 13,000 to 6,500, a loss of roughly 55%.
Unfortunately for investors, the financial services industry has been attempting to use the broad and supposedly unexpected nature of this market crash as a defense to its own negligence and intentional wrongdoing. The argument is made that a “perfect storm” of economic factors, which no one could have foreseen and which no one could have prevented, was responsible for losses in investors’ portfolios. As such, so the industry argues, “we cannot be responsible for your losses.” This convenient strategy has some superficial appeal. However, it ignores longstanding legal rules. Notwithstanding the unusually severe nature of the recent crash, financial services firms may still be liable for improperly recommending securities, improperly managing investor accounts, and deliberately withholding relevant information.
For example, the Financial Industry Regulatory Authority—FINRA—the governing body which oversees the financial services sector, has requires brokers to 1) “know your customer”—meaning that broker has a duty to learn the essential facts about each customer and each order placed for a customer, to ensure that only appropriate investment recommendations are made; and 2) to have a“reasonable basis” for believing that all recommendations are suitable for the customer for whom they are made, based on the customer’s circumstances and financial objectives. Additionally, well-established federal and state securities laws prevent a seller of securities from intentionally making false statements, or intentionally omitting to state key facts, in order to induce a purchase or sale of securities.
Regardless of the larger economic backdrop, financial services professionals are governed by clear legal duties. These duties exist regardless of market trends. As between the average investor (typically not a financial professional) and large brokerage houses with their research departments and underwriting functions, the industry is in a better position to analyze and predict market conditions. Indeed, the Madoff bankruptcy trustee has just filed suit against JPMorgan Chase alleging that it had advance knowledge that Bernard Madoff was running a Ponzi scheme, and in fact sold its own position in a Madoff feeder fund before the scam was made known to the public. A market downturn does not absolve your broker if he violated his professional duties to you.
Practice Areas: Financial Fraud