All investors know that there are considerable risks associated with buying and selling securities. The market can go up, and the market can go down. No matter how skilled of an investor you are, there are always risks. The market cannot be perfectly predicted, by any investor, brokerage firm or formula. Market risk simply must be accepted as a reality of investing. That being said, investors face other, more distressing risks as well.
Far too many investors lose a substantial portion of their hard earned money because of misconduct committed by their stockbroker. Stockbroker fraud victims deserve full and fair compensation for their losses. Here, our investor protection team highlights ten of the most common examples of stockbroker fraud that you should be aware of.
Outright Theft (Conversion of Funds)
One of the worst and most blatant types of stockbroker fraud is outright theft. In these cases, a stockbroker will use their privileged position to steal or intentionally misappropriate the funds directly from a victim’s trading account. Theft can happen in many different ways, and often stockbrokers use sophisticated tactics to cover up their fraud.
It is also notable that elderly and disabled investors are at a heightened risk of becoming victims of broker theft. These types of victims may not be able to fully understand their account statements, and sadly, an unscrupulous broker may take advantage of the situation to line their own pockets. Intentional misappropriation of funds, or unlawful conversion, as it is also known, is a direct violation of FINRA Rule 2150.
Stockbrokers need your authorization before they can conduct a transaction on your behalf. As a general rule, this authorization can come in one of two different forms. First, you may have opened a discretionary trading investment account.
With this type of account, you sign an agreement that gives your stockbroker authority to conduct certain types of trades on your behalf, without requiring them to get your authorization for each unique transaction. Still, your broker must follow your preselected trading guidelines.
Alternatively, you may have a non-discretionary brokerage account. With this type of trading account, your broker is legally forbidden from making any transaction without first getting your express approval for the particular trade.
If you or a loved one has been the victim of unauthorized trading, please contact an experienced unauthorized stock trading lawyer for immediate legal assistance.
Misrepresentation or Omission of Material Facts
Your stockbroker has a legal duty to always give you an honest assessment of any prospective transactions. Beyond a prohibition on outright lying, other forms of deception are also considered to be fraud. If your stockbroker misrepresented any investment opportunity, or omitted any key facts, you have been a victim of fraud. You have a right to make an informed decision.
When a broker leaves out important information, you are damaged as a result. Material misrepresentations hinder your decision making, potentially costing you a tremendous amount of money in the process.
Excessive Trading (Churning)
Often, stockbrokers are paid on commission. With this type of fee structure, a broker is able to make more money in fees by making more overall trades. While frequent trading could line the pockets of a stockbroker, it is a terrible strategy for any investor.
In fact, excessive trading is one of the worst things that any retail investor can do with their account. If you trade too frequently, you could win on every single transaction, and still lose a huge amount of money overall. Stockbrokers know this fact.
As such, they have a legal duty to ensure that they are only recommending sensible transactions that fit a broader trading strategy. If your broker is trading in your account just to increase their own fees, they are committing fraud and you should take legal action to recover for your losses.
Lack of Diversification
It is one of the oldest axioms in investing: You should never put all of your eggs in one basket. When it comes to investing in securities, you will want a large number of different, distinct baskets. A proper portfolio structure is one that allows you to get the best possible chance for a decent return, while keeping your risk down at an acceptable level.
As licensed professionals, stockbrokers have a duty to help their clients maintain a well-diversified portfolio that minimizes their exposure and risk. If you lost money because your stockbroker over-concentrated your investments, you need to contact a legal professional. Your claim should be reviewed by a qualified securities fraud lawyer.
Unsuitable Investment Recommendations
Not all investment opportunities are appropriate for all types of investors. Your stockbroker has a professional responsibility to conduct a careful assessment of your individual circumstances. Then, with that information in mind, your broker should build you a comprehensive risk profile, and should then ensure that any securities trades or recommendations they make fit that profile.
If a broker pushes you into an unsuitable investment, whether it is because the trade is too risky or because it is too complex, you have a right to seek fair compensation for any resulting losses.
Failure to Disclose a Personal Conflict of Interest
Imagine that your stockbroker called you up with a hot stock tip. Allegedly, it is a great investment opportunity. You trust your broker, so you agree to put a considerable amount of money into the stock. How would you feel if you suddenly found out that your broker had a major ownership stake in the company that you are investing in, but they decided not to tell you about it?
Obviously, you would be upset; and you would have every right to be. What your broker did in this hypothetical scenario is illegal. Stockbrokers owe a fiduciary duty to their customers. As part of this duty, brokers are legally required to disclose any personal conflicts of interests that they might have so that their investors can make an informed decision. Failure to disclose a relevant conflict of interest is fraud.
Front Running of Transactions
When you put in an order for a trade, your stockbroker has a professional duty to get you the available price for that transaction. The last thing your broker should be doing is taking a better price for themselves, leaving you to pay the increased costs.
Unfortunately, this type of broker fraud, the front running of block transactions, does sometimes take place. Front running occurs when a broker, after learning of your order request, puts in their own personal order first in order to get the best price for themselves, then, after the price has increased, they put in your order, leaving you with the higher overall price. Front running is a direct violation of securities industry rules, specifically FINRA rule 5270.
Breakpoint Sale Violations
Similar to big wholesalers, mutual funds frequently offer discounts on fees to customers who buy a large amount of their products. For example, a mutual fund may offer a significant discount on commissions to customers who invest at least $10,000 in their fund. This is known as a ‘breakpoint’.
In this case, buying $9,990 of that specific mutual fund would be completely senseless. You would be missing out a discount, and spending more money than is required for fewer overall shares of the funds. Similarly, making two separate $6,000 investments into the mutual fund would be a mistake. You would be missing out a discount, despite putting in enough total money to get it.
Sadly, unscrupulous stockbrokers sometimes look out for their own commissions, over the interests of their clients encouraging investors to break up transactions, resulting in their clients missing out on discounts at key breakpoints.
Negligent Portfolio Management
Finally, there are cases in which stockbrokers commit fraud through negligence, costing their customers a huge amount of money in the process. Brokers and brokerage firms sell their services to customers, usually by promoting their professional abilities and competence. As registered professionals, stockbrokers are required to execute their duties with a certain minimum level of skill.
Yet, sadly, in some cases, brokers simply do not give adequate attention to the needs of their clients. They negligently mismanage a customer’s portfolio, leading to that person sustaining serious losses and being put at avoidable risk. Brokers should deliver on what they are advertising. If you lost money because of your stockbroker’s negligence, you have been a victim of fraud and you have a legal right to seek compensation.
Contact Our Stockbroker Fraud Lawyers Today
If you have suffered investment losses because of stockbroker fraud, we can help. At Sonn Law Group, our team has extensive experience handling a wide range of broker fraud and broker negligence claims.
To learn more about what we can do for you, please call us today at 844-689-5754 to request a free review of your case. From our main office in Aventura, Florida, we represent fraud victims throughout the U.S. and Puerto Rico as well as in Mexico and South America.