Stockbroker fraud is, unfortunately, all too common.
Investors typically understand that there is always some risk when investing in the stock market.
However, what they don’t expect is for their broker to intentionally deceive them and engage in illegal activities to make a profit. Brokers are strictly regulated by the Financial Industry Regulatory Authority (FINRA) and must adhere to a fiduciary standard when providing advice to their clients.
When a stockbroker fails to act in the most beneficial manner for their client, they may be participating in unlawful activity known as stockbroker fraud.
What is Stockbroker Fraud?
Stockbroker fraud is any act committed by a broker or financial advisor that violates the securities laws or their fiduciary duty to their client, generally in an effort to gain profits for themselves or their firm.
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There are many different ways a stockbroker may violate their legal and ethical obligations towards their clients. If a broker commits securities fraud, their employer – which is often a large brokerage firm – will be held accountable for any losses the client suffers.
12 Common Types of Stockbroker Fraud
Below are the most common examples of stockbroker fraud and other stockbroker misconduct:
Recommending Unsuitable Investments
Brokers have an obligation to make sure that any investments they recommend are suitable for the investor’s individual needs and objectives. If a broker recommends a high-risk investment to someone who is looking for conservative, low-risk options, this could be seen as unsuitable advice.
Unsuitable investments can lead to serious losses for the investor, so it is important that brokers provide advice tailored to their clients’ individual needs and goals.
Outright Theft or Misappropriation of Funds
This is one of the most serious forms of stockbroker fraud. It involves a broker taking money from their client’s account without authorization and using it for their own personal gain. This could include transferring funds to accounts they control or even selling securities in the client’s account and pocketing the proceeds.
There are many different ways brokers can steal from their clients, so it’s important for investors to closely monitor their accounts.
If you find unusually large transactions or other suspicious activity, you should contact a stockbroker fraud attorney.
Churning (Excessive Trading)
Churning occurs when a broker engages in excessive buying and selling of securities in a client’s account, often for the purpose of generating commissions. While some trading activity is expected with any investment strategy, churning can be seen as irresponsible behavior that only benefits the broker while putting the investor at risk.
You can often spot churning by looking for unusually high commission charges or a large number of transactions with short holding periods.
Similar to churning, unauthorized trading occurs when a broker executes trades in a client’s account without their knowledge or authorization. This is an illegal activity that can be seen as a form of theft if the broker does not have the client’s permission to act on their behalf.
Unauthorized trading can also be seen as a breach of fiduciary duty, since the broker should have obtained their client’s consent before entering into any transactions.
Lack of Diversification
Another form of stock broker fraud is a lack of diversification. This occurs when a broker invests all or most of the client’s money in one type of security, such as stocks, bonds, or mutual funds.
Diversifying an investment portfolio can help reduce risk and maximize returns, so failing to diversify a client’s investments could be seen as a breach of fiduciary duty.
Misrepresenting or Omitting Information
It is the responsibility of a stockbroker to provide accurate and complete information about any investment they recommend. If they fail to do so, or intentionally misrepresent the facts, this could be seen as a form of stock broker fraud.
Not only that, but they must also disclose any risks associated with the investments they recommend. Failing to do so could lead to serious losses for their clients.
Failing to Follow Instructions
In most cases, your broker is ethically and contractually compelled to follow your directions when you’re buying or selling stock. If you instruct your broker to make a certain trade, and they fail to do so, this could be seen as a breach of their duties.
In some situations, the broker won’t flat-out ignore your instructions but might attempt to persuade you into keeping a stock that you wanted to sell, for their benefit rather than yours.
Failure of a broker to follow your instructions, and even improper pressure to change your instructions, can be grounds for recovering your loss.
Over-Concentration of Assets
Over-concentration occurs when a broker invests too much of a client’s money in one particular security or sector. This is risky, as it could cause the investor to suffer significant losses if that security or sector declines in value.
Imagine if your broker recommended investing all of your money in a structured product, and then the structured product suddenly declined. You could find yourself with a margin call or a forced liquidation of your portfolio.
Failure to Disclose a Personal Interest in a Security
Brokers owe their clients a duty of disclosure, meaning they must disclose any personal interest they have in security before recommending it. Imagine if your broker recommended that you invested in a certain stock only for you to later find out they had a majority ownership stake in the company.
Of course, you would be upset. You have a legal right to expect your broker to put your interests first. Failing to disclose their personal stake in the security could be seen as a breach of fiduciary duty and constitute stock broker fraud.
Negligent Portfolio Management
A big reason you hired a broker in the first place was to get professional advice on how to manage your investments. If the broker fails to follow through on their duties and takes actions that are deemed negligent, this could be seen as a form of stockbroker fraud.
When it comes to investments, timing is everything. If your broker fails to execute trades in a timely manner, it could mean the difference between making and losing money on an investment. This is why it’s important for brokers to act swiftly when executing trades.
Front Running of Transactions
Your stockbroker has a professional duty to get you the best available price for your trade transaction–not take a better price for themselves at your expense.
Front running is a form of stockbroker fraud wherein the broker buys or sells securities for their own account ahead of a client order, taking advantage of the expected price movement.
This tactic is especially unethical as some brokers make money at their client’s expense, essentially taking advantage of inside information to make a profit. Front running of transactions is illegal and can result in serious penalties and sanctions.
Breakpoint Sale Violations
Breakpoint sales are a type of discount that is typically offered on mutual funds when large investment amounts (often $25,000 or more) are involved.
When offering a breakpoint sale, brokers are ethically obliged to explain the details of the discount, and disclose any potential conflicts of interest.
If your broker fails to inform you about the existence of a breakpoint sale or tells you that it isn’t available when in fact it is, this could be seen as stockbroker fraud. Failing to disclose this information is a violation of their fiduciary duty and can be grounds for legal action.
Is It My Broker’s Fault that I Lost Money in My Investment Accounts?
The stock market is inherently risky, and it’s possible to have losses even with the best of advice. So, the answer to this question really depends on the circumstances.
If your losses are a direct result of your broker’s negligent or illegal activities, then yes, it is likely that they are to blame for your losses. In these cases, you may be able to recover some or all of your losses through legal action.
Related Read: Can You Sue a Financial Advisor or Stockbroker Over Losses?
Consider Speaking with a Legal Professional About Your Investment Losses
Not all investment losses are cause for legal action. It will take a thorough examination of your case to determine if you have a valid claim for stockbroker fraud. If you believe that your losses are due to broker negligence, it’s important to speak with an experienced stockbroker fraud attorney. They will help investigate your case, and determine if you have a valid claim.
Remember, all investments carry some level of risk, and no broker can guarantee you will make money on your investment.
However, you do have a legal right to expect your broker to put your interests first and act in good faith. If they fail to do so, it could constitute stockbroker fraud. Don’t hesitate to speak with an experienced attorney if you believe that you are the victim of such wrongdoing.
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