Meyer Wilson

Recovering Losses Caused By Investment Misconduct

Warning to Investors: SIPC Provides Limited Protection

By David Meyer

Many investors mistakenly assume that stock or bond losses due to unsuitable investments or negligent account management are covered by the Securities Investor Protection Corporation (SIPC). This is incorrect. The SIPC provides limited coverage for an investor's brokerage accounts when the firm has failed or is in danger of failing, or when there are losses from unauthorized trading or theft. When a brokerage fails, in most cases clients' securities are held by clearing firms and are perfectly safe.

Membership in SIPC, a nonprofit entity created in 1970, is mandatory for brokerage firms (also known as introducing firms) and clearing firms (which clear trades for brokers and broker-dealers).

Since the financial crisis of 2008, SIPC has been involved in the Lehman Brothers bankruptcy, the Bernard Madoff Ponzi scheme debacle, and MF Global's liquidation. According to SIPC's website, "From its creation by Congress in 1970 through December 2013, SIPC advanced $2.1 billion in order to make possible the recovery of $133 billion in assets for an estimated 772,000 investors."

However, there are monetary limitations on damages that clients of SIPC members can collect. SIPC protection limits are capped at $500,000 for missing stocks and other securities, including $250,000 for cash held in certificates of deposit, money market mutual funds, and the like. Clients of SIPC members are covered for losses up to those limits.

What SIPC Does Not Cover

Yet while SIPC provides protection in certain situations, it does not provide protection for:

  • Any decline in value of securities between the time a firm goes out of business and the time claims are processed and approved (SIPC returns the securities themselves)
  • Clients who are sold worthless stocks and other securities
  • Bad investment advice or unsuitable investments

While SIPC does protect investors whose brokerages have failed, the process can be slow, especially if the firm's customer accounts records are in disarray. SIPC will initiate a liquidation process when it receives a referral from a regulating agency such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). With small brokerage firms, SIPC may conduct an out-of-court claims process where customers submit claims to SIPC. Approved customer claims would then be satisfied from SIPC advances only.

In most cases, however, a federal bankruptcy court appoints a trustee for the firm. The trustee gathers the names and addresses of all customers who had an account with the brokerage firm within the previous 12 months. The court publishes notice of the case and mails the claim forms to clients who had an account with the brokerage firm within the previous 12 months. Clients have a specified time period in which to file claims. Failing to file within the allotted time may result in the loss of all or a portion of the claim. Under SIPC's oversight, the trustee begins to restore securities and cash to customers as soon as possible.

So as you can see, SIPC offers protection to investors when their broker's business fails or is in financial trouble, but that protection has limitations and does not cover all circumstances. If you have losses that result from other situations—poor account management, unsuitable investments, or outright fraud—you may need to seek other avenues of potential recourse through an experienced investment attorney.

The team of investment fraud attorneys at Meyer Wilson has successfully represented nearly 1,000 individual investors from across the country who have suffered financial harm at the hands of stockbrokers. If you believe you have a case involving investment misconduct, our firm can help. Meyer Wilson represents clients nationwide from offices in Ohio and California.

Categories: Investment Fraud

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