Increases Expected in Pandemic-Related Securities Litigation
Recent webinars and articles have centered around the issues the securities industry will confront as a result of the pandemic and market turmoil. We have compiled relevant information from those sources and added our own observations based on our previous experience.
Based on past market downturns, firms can expect a wave of litigation stemming from the pandemic and the attendant volatility and market losses. In March 2020, securities litigation in Federal Courts increased by 20% year-over-year. They expect FINRA and the SEC to report new cases in the coming weeks and expect they will report a significant increase in complaints. After the 2008/2009 recession, FINRA arbitrations were up 53% and 43% the following year. We expect the same or larger increases in litigation stemming from the pandemic. A significant amount of litigation may come from elderly clients so their account reviews should be prioritized.
Clients have complained that there was inadequate disclosure regarding risks of losses and the impact of the pandemic. Others state they were misled in believing their income securities were “recession proof” and believe they were misled by their financial advisers.
In all previous market downturns, including the 1987 crash, the 2000 and 2001 tech wreck, the flash crash and the 2008/2009 recession, the largest number of investor complaints resulted from lack of communication or the inability of clients to make trades, sell securities or talk to their registered representative. Client complaints alleged lack of timely response to their inquiries, poor disclosure of issues and significant increase in trade errors by advisors due to stress and lack of coordination.
We suggest and urge firms to conduct account reviews, particularly of elder clients, to ensure their investments are still suitable. Similarly, advisers and service providers should increase their communication with their clients and set up frequent calls to address issues they may confront: brokers and investment advisers should contact clients routinely, promptly return their calls, over-disclose issues to clients, show sympathy and document and confirm client discussions. Also, be sure to document all calls and follow-ups to establish the record of what was done to address the concerns.
Perhaps the biggest concerns facing advisors will be based on failing to monitor discretionary accounts and take appropriate action. Documentation of actions taken, hold recommendations, accounts reviewed and communication with clients will be key in defending such actions.
Oyster Consulting’s core team of former regulators, industry professionals and attorneys provide Expert Witness and Litigation Support Services. Because Oyster professionals come from a variety of backgrounds and are still involved as industry practitioners, their knowledge and expertise is valued by adjudicators, who rely on their experience and their ability to provide clarity on a range of complex matters. If we don’t have the right expert for your matter, we are happy to help you try to find the right person for your needs.
About the Authors:
Jeffrey Hiller is an industry professional with over 25 years of experience, specializing in Investment Advisor services. Prior to joining Oyster, Jeffrey was Chief Compliance Officer and Managing Director of Principal Global Investors, where he created and managed the firm’s global compliance program. In his capacity as CCO, he provided global leadership and direction on regulatory compliance and ethical business practices for all of the firm’s business domestically, internationally and its seven boutique investment advisors. Jeffrey began his compliance career as Senior Counsel in the Securities and Exchange Commission’s Division of Enforcement in Washington, D.C. Following his government service, he held CCO roles with several leading Wall Street financial firms.
Patrick M. Dennis has been involved in the securities industry for over 30 years, most recently as one of the Founding Principals of Oyster Consulting, LLC, a compliance, regulatory, operations, clearing advisory, software and technology consulting firm for broker-dealers and investment advisers. Previously, Patrick was a Senior Vice President and Assistant General Counsel to Wells Fargo Advisors, or its predecessors. Patrick moved to Wells Fargo in 1998, where he managed significant litigation and regulatory matters affecting the firm. He was Senior Regulatory Counsel and Senior Counsel to the firm’s Investment Advisory business. Patrick also worked for the SEC in the Division of Corporation Finance from 1986 to 1989, and the Division of Enforcement from 1991 through 1996.