Right after she retired a few years ago, my mom took a chunk of her savings (about $30,000) and gave it to her cousin to “invest” through his small brokerage firm. The cousin proceeded to make a bunch of terrible decisions, like invest in GameStop and crypto. He also seems to have invested the money in a friend’s business venture (?) that went nowhere. Now most of my mom’s money is gone. At first, he convinced her that he could get it back, but now it’s pretty clear that he won’t.
My mom was initially hopeful, but now she’s pissed. I’ve done some research and it seems like this might have been fraud. Can she take legal action? I’m worried that hiring a lawyer might be too expensive, and she’s already lost enough. She doesn’t have a ton of financial literacy, so I want to help her out. What should she do?
Your poor mom! This is a shitty situation, but the good news is that what her cousin did is definitely illegal, and she does have some recourse. I talked to several lawyers who specialize in fraudulent investments and they laid out her next steps. Obviously, this does not constitute actual legal advice, but it’ll help you weigh your mom’s options. She’s lucky to have you in her corner.
First, help your mom collect every record of her communications with her cousin involving this money. “This could include chats, texts, e-mails, account statements, transfer receipts, everything,” says Jenice Malecki, a securities-fraud lawyer based in New York. “All of this will be important for putting together a cohesive claim.”
Meanwhile, see if your mom’s cousin is (or was) registered with the Financial Industry Regulatory Authority (FINRA), which you can do by searching his name on FINRA’s website directory. “In order to sell securities and make recommendations to investors, one needs to be registered at a broker dealer through FINRA,” says Malecki. You should also see if he is registered as an investment adviser with the Securities and Exchange Commission (SEC). Both the SEC and FINRA have rules and protections against inappropriate investments like the ones you described.
(A side note: Running an investment adviser’s name through FINRA and the SEC before you work with them is a good idea, in general. “I would strongly urge any investor to periodically look up their adviser and make sure that they don’t have any red flags,” says Malecki. That’s not helpful to your mom at this point, of course, but good to know for the future.)
If the cousin is not registered with FINRA, then you’ve got a harder road ahead. “The distinction may seem small, but it will affect which laws he broke and which regulatory authority is in charge of enforcing them,” says Chase Carlson, a lawyer based in Florida who specializes in investment-fraud litigation. “FINRA has their own arbitration system where you can bring a complaint against a broker and try to get your money back. But if this falls outside of FINRA’s authority, you will probably have to file a claim in court.”
Worst-case scenario, this cousin wasn’t registered or licensed to deal with investments at all. But even if that’s the case, he still broke the law. “Every state has laws against fraud, negligence, and misrepresentation in the sale of securities,” said Carlson. “There are federal laws against this as well.” In other words, saying that you’re a qualified investment adviser or broker when you aren’t, in order to get other people to give you money, is considered fraud as well. Holding him accountable for it, however, is a little more complicated.
Next, it’s time to get legal help. “The good news is, most attorneys in this area of law work on contingency, meaning they’re only paid if they’re successful,” says Carlson. “That way, the investor doesn’t have to put more money into recovering what they’ve already lost.” A lot of defrauded investors can’t even afford to hire lawyers because they’ve had their savings wiped out, which could be your mom’s position.
That said, $30,000 — while a lot of money — would be small potatoes to many investment-fraud lawyers, so they may not take the case. That’s why you should also look into a securities-law clinic at a local law school, says Malecki. These clinics are run by professional securities lawyers (and law professors) and offer free legal services to the public in order to give students — who are not yet practicing attorneys — the opportunity to gain experience working on actual cases. “They often like to help investors with small claims, and would probably help you draft a demand letter to send to the cousin’s firm, stating that they must return her money,” says Malecki.
If that letter goes nowhere, your next step would be to file a simple arbitration claim. Again, this would be most successful with the assistance of a lawyer or a legal clinic, and you would do it either through FINRA or the court system, depending on the cousin’s license or lack thereof.
No matter what, you should file complaints about the cousin with both the SEC and FINRA. One may kick you over to the other one, says Malecki, but the important thing is alerting these authorities so that they (and you) can stop him from harming more people.
The best possible outcome is that this cousin is registered with a broker-dealer through FINRA, which would compel him to give the money back. Many brokerage firms have insurance for these kinds of cases, Malecki says, so even if he’s lost all her cash, insurance would cover some or all of it.
The worst possible outcome is that this cousin was simply a bad actor who scammed your mom into handing over her money and then gambled it away on dumb investments that he made personally. If that’s the case, even if you win a lawsuit against him, you may not be able to collect the money that he lost because he simply doesn’t have it.
Either way, there are legal services and laws in place to help and protect people like your mom, and she should make full use of them. She isn’t powerless in this situation, especially with your help.