Burned by Bad Brokers

An Illinois investor named Sergio Alvarado was recently awarded nearly $750,000 in damages following a dispute with his brokerage firm. According to an article in the Chicago Tribune, he had invested about 90% of his retirement savings on the advice of his broker.

Even though Alvarado won his arbitration claim, he’s still waiting to collect his award. His experience is not an isolated one. The percentage of awards going unpaid after going through the Financial Industry Regulatory Authority process has more than doubled in recent years. In 2011, aggrieved investors were unable to collect on $51 million of the $481 million that FINRA awarded, according to the Chicago Tribune story.

That translates into 11% of the claims that FINRA deemed legitimate remaining unpaid.

Many of the unpaid awards are owed by firms that go out of business. For example, almost three dozen broker/dealers that sold private placements in Medical Capital Holdings and Provident Royalties shuttered over the past three years following a rash of investor lawsuits.

As for Alvarado, he worked for 35 years for a local gas company before retiring in 2009. That same year, he learned about an Atlanta brokerage firm selling promissory notes in a company that supposedly helped consumers with poor credit buy used cars. The notes offered 12% annual interest.

Alvarado’s broker recommended that he invest $540,000 into the private-placement deal. At the time, that money was more than 90% of Alvarado’s retirement savings. All too soon, however, the investment soured. In January 2012, Alvarado received a letter stating that the car-financing company had been placed in receivership, rendering his investment essentially worthless.

A month later, Alvarado filed a grievance with FINRA against the brokerage firm that first led him to the investment.

In October 2012, a FINRA arbitrator ordered the brokerage and the broker to pay $540,000 in compensatory damages to Alvarado; $280,000 in interest; and nearly $250,000 for Alvarado’s legal fees.  In March 2011, the brokerage’s membership in FINRA had been suspended.

Alvarado nearly lost his home after getting three months behind on his mortgage payments. A local church stepped in to help Alvarado and his family when their utilities were shut off. Alvarado now has a part-time job at a convenience store to make ends meet.

Alvarado says his biggest regret is rushing into the investment without first getting legal advice. He also regrets not investing through a major brokerage firm or bank.