Legal: How to Scare Away Plaintiffs' Lawyers

The vast majority of claims by investors against their stockbrokers are brought with the help of lawyers working for contingent fees. And since lawyers do not like to work for free, they usually will not take a case that appears unwinnable. How do you make the impression that a client has no claim? With the right documents. Certain types of written warnings and disclosures can make a case undesirable

The vast majority of claims by investors against their stockbrokers are brought with the help of lawyers working for contingent fees. And since lawyers do not like to work for free, they usually will not take a case that appears unwinnable.

How do you make the impression that a client has no claim? With the right documents. Certain types of written warnings and disclosures can make a case undesirable to a plaintiff's lawyer, so you should distribute them to clients readily and sprinkle them liberally in your files.

Some forms of paperwork, such as telephone notes, can cause a claim to be abandoned, settled favorably or defended successfully, but generally they will not be seen by lawyers until after a case has been filed against you.

The better way to go is to prevent a case from even being filed. To do that, you need documentation that will be seen by the lawyer while he is deciding whether to take the claim. So what does the lawyer usually request? Typical items include monthly statements and confirmation slips, as well as four other kinds of documents. These papers can make the lawyer run the other way.

Documents That Lawyers Most Often Request

Account opening documents--If your customer plans to engage in market timing, stock picking, margin purchases, options trading, bottom-fishing or high-yield bond buying, you need to explain in writing that what he plans to do is speculating, not investing. Also explain that such activities involve a risk of losing all his money. These actions are not consistent with "moderate" risk.

If the customer wants to speculate or engage in risky transactions, the application must say so. Of course, if you recommend such a transaction, it must be suitable for the customer. However, regardless of whether you recommend the transaction, if it is consistent with the application, your chances of being the target of a suitability claim will diminish dramatically.

Correspondence--A letter should be written (and properly approved before sending) when the customer makes an unusually large or risky investment that represents a change in his or her stated goals or when a customer does something against your advice.

Disclosure and acknowledgment forms--Compliance departments at most firms provide reps with forms for disclosing or acknowledging costs and risks connected with certain kinds of transactions. Many brokers view these forms as a nuisance or as an impediment to their relationships with their clients. Be wise. Use them when appropriate.

Financial plans--If you do a financial plan for your client, it is a perfect place to put confirmations, disclaimers and warnings. If the customer has elected to take risks to attempt getting a higher return, say so in the plan. If you presented alternative, lower-yield investments that would have avoided risk, indicate so in the plan. Further, if the customer has other funds invested conservatively and other income on which to depend, and wants to speculate with the funds in your account, say so in the plan.

It is not enough to do your conscientious best for your clients, to inform them fully and to recommend only suitable investments consistent with their circumstances and goals. You must also create documents that demonstrate your actions to potentially hostile lawyers before they file claims.

Sacramento, Calif.-based Vincent DiCarlo is a former SEC staff attorney. Now in private practice, he represents both investors and brokers. He can be reached through his Web site www.dicarlolaw.com.
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