Margin Account Abuse

Orange County Attorney Helping Victims of Securities Fraud

Margin investing is a great way to increase your gains on an investment. Due to the nature of these accounts, however, they also create a potential for risk and abuse. A margin account investment is a high-risk form of investing, and only sophisticated investors who are completely aware of the potential risks involved should explore this realm. Unfortunately, many investors’ funds are severely depleted through margin account abuse. With over 20 years of experience, securities law lawyer Steve A. Buchwalter represents victims of fraud throughout Orange County and the surrounding areas. If you have been burned by your broker, we can help.

The Many Risks of Margin Accounts

A margin account is a type of brokerage account that brokerage firms use to loan money to investors. The most attractive feature of a margin account is its ability to double an investor’s money. For example, if an investor deposits $50,000 into a regular bank account, that investor can purchase $50,000 worth of stock. If the investor deposits that $50,000 into a margin account, however, the money’s value is doubled in value and the investor can purchase $100,000 worth of stock. The brokerage firm will provide a loan matching the amount of money the investor deposits into the margin account. The investor must eventually repay the amount loaned to the brokerage firm.

One of the ways that brokerage firms make money is by immediately charging interest on a deposit. For many firms, the interest they earn on margin accounts exceeds the amount of money they receive through regular commissions. Brokerage companies soothe investors’ fears about the high interest rates by comparing the transaction to a mortgage in which the purchaser typically borrows 90 percent of the property’s value. In comparison, borrowing only 50 percent of the value of the stock seems like less of a risk. This is a misleading analogy, however, a margin account requires a minimum equity be maintained in the account at all times, regardless of changes in the stock price. If you are unable to make a cash deposit, a temporary drop in the value of the company’s stock can result in an account liquidation, without notice to you, almost immediately. Even if you lose the value of your stock, you are still responsible for repaying the brokerage firm the amount that you borrowed.

Establishing Liability Against a Negligent Broker

Brokers and brokerage firms owe their investor clients a duty to ensure that the investments they make are in their best interests. Margin accounts create a difficult situation because it is in the brokerage firm’s best interest to loan money on a high interest basis, even though it may not be in the client’s best interest. An unethical brokerage firm may encourage an investor to open a margin account, even though the investor would be making a poor investment by proceeding with the arrangement.

In most margin abuse account claims, the investor has suffered severe losses as a result of a brokerage firm’s deceptive assurances that the investment is a good deal. To recover compensation from a deceptive and unethical broker, the investor must show that the broker owed the investor a duty of care and failed to act according to that duty. Brokers owe their client a duty to provide financial investment advice that is in the best interest of the client. As financial advisors and trusted confidants, brokers have a heightened duty of care when it comes to managing investor’s accounts and counseling investors about financial decisions.

After establishing duty and breach, the investor must show the amount of damages that he or she suffered as a result. In investment cases, California courts use various methods to determine damages including the “well managed account” rule, which measures the actual value of the mismanaged account against the actual value of the account had the broker provided appropriate counsel and advice to the investor. Investors may also pursue reimbursement for any excessive commissions paid to the broker.

Contact a Broker Fraud Lawyer in Orange County

Steve A. Buchwalter knows how important your investments are to you and your family. With decades of experience as an attorney, licensed stockbroker and commodity trading advisor, he can help you build a claim to seek compensation from an unethical or negligent broker or brokerage firm. Attorney Steve A. Buchwalter has provided guidance to Orange County residents victimized by unsuitable investments and other forms of broker fraud. He also serves clients throughout Los Angeles and Ventura Counties, among other regions of California. Call us at 1-818-501-8987 or contact us online to set up a free consultation.