This is the ultimate guide to understanding broker-dealer fraud and misconduct for investors.
For more than 40 years, the Law Offices of Robert Wayne Pearce, P.A. has been helping investors understand brokers, broker-dealers and the rules governing their activities.
We understand that brokers and broker-dealers do not always act in the best interests of their customers. As a result, we have devoted our practice to helping investors who have been harmed by unscrupulous or negligent broker-dealers recover their losses through litigation or arbitration proceedings.
In this guide, we’ll cover:
- What broker-dealer fraud is
- The most common types of fraud broker-dealers engage in
- What you can do if you believe your broker-dealer has committed fraud or misconduct
- How to protect yourself from broker-dealer fraud and misconduct
- Actions you can take if you have suffered losses due to broker-dealer fraud or misconduct
What is Broker-Dealer Fraud?
Broker-dealer fraud occurs when stockbrokers put their own financial interests ahead of their customers, violating their fiduciary duty. This can take many forms, including churning accounts to generate more commissions, misappropriating funds from customer accounts, making unsuitable investment recommendations, or even outright theft.
Broker-dealers are held to a high standard of care in their dealings with customers. They must exercise care, skill and diligence when recommending investments, executing trades, and providing advice. When they fail to do so, they can be held liable for any losses suffered by their customers.
Sometimes fraud is easy to spot – if a broker-dealer is stealing funds directly from an account, for example. Other times it may be more subtle, such as recommending investments that are not suitable for the customer’s needs or risk tolerance.
When investors suffer significant losses due to broker-dealer fraud or misconduct, they may be able to recover damages through a process called FINRA arbitration. In these situations, it is best to consult with a securities attorney to determine the best course of action.
What’s the Difference Between Broker-Dealer Fraud and Misconduct?
Broker-dealer fraud is the intentional act of causing financial harm to customers by deliberately making false or misleading statements or omissions or engaging in dishonest or unethical practices.
On the other hand, broker-dealer misconduct refers to negligence by a stockbroker in failing to meet their responsibilities and obligations as outlined in FINRA rules and regulations.
For example, if a broker-dealer provides incorrect information to their customers or fails to take reasonable steps to ensure the accuracy of statements they make, this could be considered misconduct. Similarly, recommending investments that are not suitable for a customer’s needs or risk tolerance can also be considered misconduct.
Investment losses due to either fraud or misconduct can be recovered through a FINRA arbitration.
What are the Most Common Types of Broker-Dealer Fraud?
There is a wide variety of broker-dealer fraud schemes, but there tend to be a few that are more common than others.
When a broker-dealer fails to act in the best interest of their client, they may be engaging in one or more of the following practices:
High-Yield Investment Frauds
High-yield investment frauds are characterized by promises of high returns on investment with little to no risk. These types of fraud can involve several forms of investments, including securities, commodities, real estate, or other highly-valuable investments. You can identify these schemes by their “too good to be true” offers.
Perpetrators may elicit investments from investors by internet postings, emails, social media, job boards, or even personal contact.
They may also use mass marketing techniques to reach a large number of potential investors at once. Once the fraudster has received the investment money, they may simply disappear with it or use it to fund their own lifestyle. The investment itself may not even exist.
Ponzi & Pyramid Schemes
Ponzi and pyramid schemes use the money collected from new investors to pay the high rates of return that were promised to earlier investors in the scheme. Payouts over time give the early impression that the scheme is a legitimate investment.
However, eventually, there are not enough new investors to support the payouts, and the entire scheme collapses. When this happens, the people who invested at the beginning of the scheme often lose all of their money. In these schemes, the investors were the only source of funding.
Other Broker-Dealer Fraud
In addition to the above list, at The Law Offices of Robert Wayne Pearce, P.A., we have found that the following types of securities fraud are also common:
Misconduct by an Investment Advisor
By far the most common type of broker-dealer securities fraud that our firm sees is misconduct by brokers.
Brokers are supposed to act in their clients’ best interests (fiduciary duty), but some broker-dealers put their own interests ahead of their clients. For example, a broker-dealer might recommend that a client invests in a certain stock or mutual fund because it will generate a high commission for the broker, not because it is a good investment for the client.
Other examples of misconduct by an investment advisor or broker include:
- unsuitable investments for their investor clients;
- a lack of diversification or an “over-concentrated” portfolio;
- conducting transactions in your investment account without authorization;
- misrepresentation or omission of material facts;
- misappropriation of a client’s funds;
- malpractice by a financial advisor;
- excessive purchases and selling of securities, also known as “churning”;
- untimely and unexpected margin calls & forced liquidations;
- and even the theft of a client’s funds.
Structured Notes
Structured notes are investments that often combine securities of different asset classes as one investment for a desired risk and return over a period of time. They are complex investments that are often misunderstood by not only investors but the financial advisors who recommend them.
Due to their complexity, it is easy for the terms of the investment to be misrepresented. For example, an advisor might tell their client that a structured note is “risk-free” when, in reality, there is a significant risk of loss.
What Actions Can You Take if You Suspect Broker-Dealer Fraud?
Broker-dealers must register with FINRA to participate in the securities industry, and FINRA’s arbitration program typically handles disputes between investors and broker-dealers rather than court proceedings. Compared to court proceedings, FINRA arbitration is typically faster, less expensive, and more private.
To seek justice for losses due to broker-dealer fraud, filing a claim with FINRA’s arbitration program is recommended. Investors are advised to consult with an attorney to understand their rights and determine if they have a valid claim against the broker-dealer or associated financial professionals. An experienced investment fraud attorney can provide valuable guidance throughout the process.
If you’ve lost a significant amount of your investments due to fraudulent broker-dealer activities, don’t hesitate to reach out for help. The Law Offices of Robert Wayne Pearce, P.A., can assess your case and represent you in the FINRA arbitration process to help you seek justice and recover your losses.
Over the last 40 years, we’ve helped recover over $175 million for our clients in securities arbitration cases. We are one of the most experienced FINRA arbitration firms in the country and we have a proven track record of success.
Contact us today for a free case evaluation. We’ll review your case, explain your legal rights and options, and determine if you are eligible to file a claim against the responsible broker-dealer or associated financial professionals. Don’t wait—take action now to protect your rights and recover your losses. Call (800) 732-2889 or contact us online to get started.
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