Stockbrokers, commodities brokers and other financial advisors have been known to engage in many types of fraud and other practices in violation of United States Securities and Exchange Commission (SEC), United States Commodities Futures Trading Commission (CFTC), Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers Regulation, Inc. (NASD), and other industry rules, practices and procedures.
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Affinity fraud refers to investment scams that prey upon members of certain identifiable groups, such as religious or ethnic communities, the elderly or professional groups. The "scammers" pitch is oftentimes "only available" to the particular group members because the scammer has infiltrated the group and gained members' trust and confidence.
Best Execution Abuse
Failing to use reasonable diligence to see that a customer's order is executed at the best possible price, given prevailing market conditions.
Breach of Fiduciary Duty
A broker is supposed to act like a trained professional, a person with superior knowledge and skills compared to the ordinary investor. He is often entrusted with investors' life savings. A stockbroker must always act with the utmost loyalty, care and candor in dealing with an investor and his assets. There are varying degrees of other fiduciary duties depending on the relationship.
Most mutual funds offer commission discounts that depend on the amount of the investment. The investment amounts are called the breakpoints. For instance, a purchase of $24,999 would require a commission of 5 percent. However, if the purchase were $1 more or $25,000, the commission would be lowered to 4.5 percent.
Fund families also do not require that the investment be in the same fund. For example if a fund family offers a large-cap fund and a small-cap fund you would be entitled to the discounted commission if you invested $12,500 in both funds of the fund family.
Some funds families will also give you the benefit of the breakpoint discount if you agree to invest the entire $25,000 over a period of time, usually 13 months.
Mutual fund fraud arises when brokers, in order to maximize their commissions, recommend fund purchases at just below the breakpoint or fail to recommend a suitable share class given the length of time a client anticipates holding the fund or sells a share class that is inconsistent with the client's objectives. Unscrupulous brokers maximize their commissions by failing to inform the client of the various methods commissions and expenses that can be reduced.
Churning refers to the excessive buying and selling of securities by a broker for the purpose of generating commissions and/or fees and without regard to your investment objectives.
Failure to Disclose
The broker failed to inform you of facts concerning an investment. If you had known these facts you would not have agreed to purchase the investment.
Failure to Diversify. Overconcentration of Individual Securities or Asset Classes
It is almost universally accepted that a portfolio's performance is dependent on diversification. Overconcentration occurs when the portfolio is invested in too few securities or asset classes such as bonds, stocks, real estate, cash, etc.
Failure to Execute
At times, a broker does not want to place an order that a client desires. Perhaps he thinks he is smarter or maybe his firm is engaged in stock market manipulation. Regardless, the broker has a duty to execute your orders promptly. The broker rarely is justified in refusing to accept your order.
Failure to Follow Instructions
The broker is instructed to buy or sell a security or follow a particular investment strategy. The broker ignores the instructions and does nothing or buys something else entirely.
Failure to Protect Profits
The account has appreciated significantly. The broker fails to recommend or implement a strategy to protect the account profits.
Failure to Supervise
Stockbroker supervisors have the responsibility of monitoring stockbrokers to ensure they comply with federal and state securities laws, securities industry rules and regulations as well as the brokerage firm's own policies and procedures. Stockbroker supervisors oftentimes let down their guard when stockbrokers under their watch generate greater commissions in which the supervisors obtain and override commission.
Forex Trading Fraud
Forex trading refers to trading in foreign currencies. Investing in foreign currencies is extremely risky. The vast majority of individual investors do not understand it or the risk involved. Further, forex trading is unregulated. Most "Brokers" who engage in foreign exchange trading are unregistered by any agency. The CFTC warns that anyone making the following statements are trying to defraud you:
- Guarantees of profits or claims of high performance
- These claims and claims like these can be false:
- Whether the market moves up or down, in the currency market you will make a profit.
- Make $1,000 per week, every week.
- We are outperforming 90 percent of domestic investments.
- The main advantage of the forex markets is that there is no bear market. We guarantee you will make at least a 30-40 percent rate of return within two months.
Forged Account Statements and Documents
With the advent of desktop computers and color printers, it has become relatively easy for Stockbrokers to reproduce account statements. These Brokers send forged account statements, confirms and other official-looking documents to their clients that reflect fictitious positions and money balances. By engaging in this fraud, brokers make the client believe that his/her investment strategy is working and that he or she has nothing to be concerned about or to hide the fact that the broker has withdrawn all of the client's funds from the account.
Using any manipulative, deceptive, or other fraudulent device or contrivance to effect any transaction in, or induce the purchase or sale of, any security.
Fraudulent Asset Transfers
A brokerage firm operates under one name and incurs significant debts, liabilities and lawsuits. When the firm reaches a point it has to liquidate assets to pay its liabilities it closes its doors and transfer the assets to a newly created firm with a different name. Both firms will have the same employees and principals.
A stockbroker buys or sells securities for his or her own account before executing orders previously submitted by his or her customers. After the broker has filled his or her client's orders, the broker closes out his or her position at a profit based on the new price level created the buying or selling of the clients orders.
Guaranteeing customers that they will not lose money on a particular securities transaction, making specific price predictions, or agreeing to share in any losses in the customer's account.
High-Yield Junk Bonds and High-Yield Junk Bond Mutual Funds
High-Yield Bonds bond funds are rated below investment grade and are more susceptible to default. Clients are typically not informed that these investments are known in the industry as "Junk Bonds." Given that most people would not put their life savings into anything called "Junk," brokers rename these securities by calling them high yield and fail to inform the client of the significant risk they pose. High Yield is attractive sounding but high yield means high risk.
Purchasing or selling a security while in possession of material, nonpublic information regarding an issuer.
Limit Order Abuse
Failure by a market maker to display a customer limit order in its published quotes, absent a valid exception.
Margin accounts are a significant source of profits for a brokerage firm. The client borrows money from the brokerage house using the equity in his/her account as collateral. The broker then uses the money to purchase additional securities for the client. The client pays commissions on the additional stock purchased in the account as well as interest on borrowed money.
Margin also doubles the risk on investments. Accounts can be liquidated if stocks drop in value, even if the drop is temporary.
Charging a customer excessive markups, markdowns, or commissions on the purchase or sale of securities.
Misrepresenting or failing to disclose material facts concerning an investment. Examples of information that may be considered material and that should be accurately presented to customers include: the risks of investing in a particular security; the charges or fees involved; company financial information; and technical or analytical information, such as bond ratings.
Multiclass Mutual Fund Abuses
Mutual funds typically have different share classes typically called A, B and C. Class A shares are front-end loaded, meaning you pay commissions upon purchase. However class A shares have lower ongoing annual fees. Class B shares are back-end loaded meaning that you pay a commission if you sell the fund within a certain number of years. The longer you hold the fund the lower the back-end commission. Class C shares have a fixed annual commission that is typically 1 percent of the amount invested. Class B and C shares' annual fees can be more than double that of class A shares. Therefore, depending on how long you hold a fund it may be less expensive to pay the upfront commission. Regardless of the share class, the broker gets paid a commission when the fund is purchased.
Mutual Fund Abuse
Mutual fund abuses include mutual fund churning, mutual fund switching, mutual fund class B shares and breakpoint selling. Mutual fund commissions can be as high as 5 percent of the amount invested. These commissions give unscrupulous brokers significant incentive to sell you a fund regardless of whether it is suitable for you.
Mutual Fund Churning/Switching
Mutual funds are considered long-term investments. Mutual fund churning is the practice and buying and selling mutual funds for the purpose of generating a commission.
Mutual fund switching involves the replacement of a mutual fund with the same type of fund in another mutual fund family for no purpose other than generating commissions.
Any number of behaviors can constitute negligence. Most cases involve brokers who fail to tell their clients about all of the risks inherent in their investments. If a broker knew about the risk and forgot to tell, or was ignorant of the risks, such behavior is negligence.
Brokers have a duty of care to be reasonably diligent and prudent in the handling of client accounts. Negligence occurs when the broker failed in his duty to be reasonably diligent or prudent and did not act as a reasonable and prudent broker would have acted in the same situation.
Stockbrokers often do not understand and oftentimes misrepresent the nature, mechanics and risks of options. Options are complicated and extremely risky investments suitable for individuals who understand the enormous risk of options and can afford to lose a significant part of their investment.
One of the most important rules of investing is diversification. If a broker concentrates your portfolio in any individual investment or type of investment, then the risk of loss in that portfolio is dramatically increased. It's the old adage that "it is unwise to place all of your eggs in one basket." Overconcentration is another form of stockbroker abuse.
The lure of greater returns than generally available by brokers may be a Ponzi scheme, that is, the stockbroker is borrowing from Peter to pay Paul. These schemes are also known as pyramid schemes and oftentimes a form of affinity fraud.
Private securities transactions between a broker and a customer that may violate NASD rules, particularly where such transactions are done without the knowledge and permission of the sales representative's firm.
A broker will sell an investment that is not sold or authorized by his/her firm. The broker almost always receives a special commission or finders' fee for selling an investment outside of his/her firm.
Stock Market Manipulation
There are many forms of stock market manipulation such as wash sales (transactions between different accounts controlled by the same person); domination and control or "pump and dump" (hording shares, making them scarce to increase price and then selling all of them into the market); and marking the close (entering orders late in the day to increase the closing price).
Theft of Funds or Securities
Removing funds or securities from a customer's account without the customer's prior authorization. Some examples:
- The broker borrows money from you and never pays it back.
- The broker recommends a nonexistent security and keeps the purchase price.
- The broker transfers the money out of an account without permission (see forged statements below).
- A check is sent to the client from a brokerage account. The client did not ask for the check. The client calls the broker to inquire why the check was sent and the broker claims it was a mistake and asks the client to send the check back to him/her directly. The broker endorses the check upon receipt and deposits it into another account.
Purchasing or selling securities in a customer's account without first contacting the customer and the customer did not specifically authorize the sale or purchase, unless the broker has received from the customer written discretionary authority to effect transactions in the account or the broker was given discretion as to price and time.
Brokers have an obligation to learn their client's financial needs, objectives and circumstances before recommending an investment. Unsuitable recommendations occur when the broker recommends an investment inconsistent with the client's age, financial situation, needs, circumstances or objectives. Investment in a particular type of security may be unsuitable or the amount or frequency of transactions may be excessive and therefore unsuitable for a given customer. For example, it would be unsuitable if the client wanted safety of principal and the broker recommends a risky stock or option strategy.
Variable Annuity Abuse
Annuities command some of the highest commissions and fees available for a broker annuities are also expensive to hold or redeem early. Early redemption penalties can be as high as 20 percent or more of the amount invested. The amount of the withdrawal could also have significant tax penalties for early withdrawals. As such these investments are ripe for abuse.
The high commissions and fees provide significant incentive for brokers to misrepresent their benefits when recommending annuities to their clients. One example is when brokers claim that a variable annuity is guaranteed and that the client cannot lose money. However, the broker fails to inform the client that the underlying securities in the annuity are subject to market risk. The guarantee will not pay off during the holder's lifetime unless the underlying securities appreciate in value. The death benefit is the only guarantee in an annuity where the client's heirs will receive the amount originally invested.
Schedule Your Free Initial Consultation With a Securities Law Attorney Experienced in All Kinds of Stockbroker Misconduct Claims Nationally and Internationally
The Law Offices of Robert Wayne Pearce, P.A., understands what is at stake in securities, commodities and investment law matters and constantly strives to secure the most favorable possible result for all of its clients. Mr. Pearce provides a complete review of your case and fully explains your legal options. The firm works to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case.
For dedicated representation by a law firm with substantial experience in all kinds of securities, and commodities and investment law, contact the firm by phone at 561-338-0037, toll free at 800-732-2889 or via e-mail. We can also arrange a meeting with you at offices located in Boca Raton, Fort Lauderdale, Miami and West Palm Beach, Florida and elsewhere if we believe you have a viable case.