Investors are the clients of the brokers with whom they entrust their financial investments. As such, those investors expect that their stockbrokers are competent and capable of properly managing and investing their funds.
However, this is not always the case.
In fact, in some cases, stockbrokers intentionally mismanage funds for their own benefit, causing financial strife for the trusting investor.
Stockbroker fraud is a serious problem, one that can result in significant investment losses for the individual investor.
Note: If you are an investor who has suffered an investment loss due to the wrongful actions of a stockbroker, don’t give up hope. Contact a stockbroker fraud attorney today.
Stockbroker fraud lawyer Robert Wayne Pearce has decades of experience helping defrauded investors in need. Contact The Law Offices of Robert Wayne Pearce, P.A., today. We will discuss your case with you and see how we can help you recoup your investment losses.
An Overview of Stockbroker Fraud in America
It is a generally understood principle that when you choose to invest, there will always be risks and the possibility that you could ultimately lose money.
The stock market is notoriously unpredictable and can go up or down at a moment’s notice. Thus, no matter how experienced you are at investing, there is always a chance you could suffer losses.
Nevertheless, investors expect their stockbrokers to act transparently and invest funds in a manner that is in the best interest of their clients.
This is a more than reasonable expectation. If you are paying a stockbroker to manage your investments, you should be able to trust them fully. As your advisor, it is a stockbroker’s duty to treat you fairly and recommend investments that are suitable for you.
Unfortunately, however, stockbrokers do not always live up to these duties and expectations. When a broker fails to do so, the result can often be significant financial loss to the investor. Even with extensive regulations and securities laws prohibiting stockbroker misconduct, such activities still occur.
When a stockbroker intentionally mismanages an investor’s funds for the broker’s own benefit, that broker may be liable under a civil claim for stockbroker fraud.
Common Types of Stockbroker Fraud
Just because your investment was not profitable does not mean that you have a case for stockbroker fraud. Likewise, just because your investment did not do as well as anticipated, that does not necessarily mean that your stockbroker engaged in fraudulent activity.
So what does constitute stockbroker fraud?
Essentially, stockbroker fraud arises in situations where your stockbroker places his or her own financial interests before the investor’s. Knowing what types of stockbroker fraud exist can help you determine whether you may be a victim of stockbroker fraud.
Recommending Unsuitable Investments
Stockbrokers have a duty to recommend suitable investments for their investor clients. Thus, they are required to take into consideration your financial status, risk tolerance, investment experience, and investment goals before recommending an investment.
Based on all the information provided to the stockbroker, he or she can only recommend that you purchase investments that are suitable for your particular situation. A failure to do so can constitute stockbroker fraud.
If you were sold high-risk stocks or were pushed into purchasing an investment that you did not understand or that was unsuitable for you and your circumstances, you may be the victim of stockbroker fraud.
While there is no precise formula for what might be considered an “unsuitable” investment, an experienced stockbroker fraud lawyer can help you assess the various factors and reach a determination.
If you have ever heard the phrase “don’t put all your eggs in one basket,” you understand the basic premise behind an “over-concentrated” portfolio.
When investing, you do not want your entire investment centered in one single area. This subjects investors to significantly more risk.
Rather, you want a portfolio that is well-diversified. That way, if one of your investments is performing poorly, you still have a chance for a return on your other investments.
Stockbrokers are required by law to help clients maintain a well-diversified portfolio that limits the client’s exposure to risk. If you suffer investment loss due to over-concentration of your investment portfolio, you may have a stockbroker fraud claim against your broker.
Stockbrokers must get authorization before conducting a transaction in an investor’s account. There are two ways stockbrokers usually obtain this authorization.
The first way is by having the investor open a discretionary trading account. With a discretionary trading account, you give your stockbroker authority to conduct certain transactions on your behalf without the need to provide authorization for each individual transaction. An investor can pre-select trading guidelines that the stockbroker must follow when making trades in the discretionary account.
The second way to authorize your stockbroker to make trades is to give your stockbroker express authorization for each individual transaction.
If a stockbroker conducts a transaction in your account without authorization, he or she has committed stockbroker fraud.
Misrepresentation or Omission of Material Facts
If your stockbroker misrepresents information about an investment or withholds material facts about the investment, you may be a victim of stockbroker fraud.
Stockbrokers must give you an honest assessment of any possible investment transaction. Even if the stockbroker isn’t blatantly lying, he or she may still be committing fraud if their assessment was not a true and accurate assessment of the facts and information related to the investment.
Getting false information about an investment destroys your ability to make an educated decision about that investment. This can increase the likelihood that an investor will suffer significant losses.
Conversion of Funds
One of the most obvious forms of stockbroker fraud occurs when a stockbroker intentionally misappropriates a client’s funds. This can occur in many ways.
In some cases, a stockbroker may ask the client to provide their investment funds directly to the broker dealer. Then, instead of using those funds to make further investments, the stockbroker uses the funds for his or her own expenses or personal gain.
Another way a stockbroker can convert funds is by taking the funds directly from the investor’s account. In certain situations, investors may not completely understand their account statements and do not notice the fraudulent conversions of funds. Elderly and disabled investors are especially susceptible to this kind of broker fraud.
Excessive Trading (Also Known as “Churning”)
In most cases, stockbrokers are paid on commission. This means that the more transactions the stockbroker effectuates in the investors account, the more money the stockbroker is ultimately paid.
While frequent trading can be fruitful for a stockbroker, this is not the case for the investor. In fact, frequent trading can be devastating for an investor.
When a broker excessively purchases and sells securities, this is referred to as “churning” or excessive trading. Stockbrokers have a legal obligation to only recommend transactions that are suitable in the scheme of a broad trading strategy, rather than making numerous trades simply because it earns the broker more money.
If your stockbroker is conducting several trades in your account just to drive up their commission fees, you may have a case for stockbroker fraud.
Is it Possible to Prove Stockbroker Fraud?
There are many steps that go into bringing a successful legal claim for stockbroker fraud. However, just because you lost money investing does not necessarily mean you can recover from your stockbroker.
To prevail, you must show that your stockbroker committed fraud or acted negligently. This may be relatively simple to prove in some cases, like when a stockbroker blatantly misappropriates a client’s funds. In other cases, however, it can be much more difficult.
For example, when a stockbroker employs misleading tactics to cover up his or her fraud, proving the fraudulent act can feel like an uphill battle.
Additionally, you must be able to prove that there is a connection between your stockbroker’s misconduct and the losses you suffered. This is often the most difficult part to prove in bringing a successful claim for stockbroker fraud.
Essentially, you must show that your losses were a result of your stockbroker’s fraud or negligence and not just a coincidence that may have been due to some other factor or factors.
Can I Always Sue a Stockbroker for Fraud in Court?
Unfortunately, investors can’t always sue a stockbroker in a court of law. In fact, many stockbroker fraud cases must be resolved though an out-of-court process called arbitration.
The primary roadblock to suing your broker in court might be your investment agreement with your broker.
In many cases, an investment agreement will contain a mandatory arbitration clause, which prevents the investor from filing a lawsuit against the stockbroker in a typical court of law.
If your investment agreement does have an arbitration clause, you must seek compensation through the Financial Industry Regulatory Authority’s (FINRA) arbitration process instead of in court.
What Is FINRA Arbitration?
Arbitration is a form of alternative dispute resolution that allows the parties to avoid the time and expense of going to a full trial. In a stockbroker fraud dispute, the parties must submit the matter to arbitration through FINRA if arbitration is required per the investment agreement.
There are a few steps to pursuing a FINRA arbitration. The primary steps include:
- Filing a Statement of Claim with FINRA to begin the process;
- Waiting for the opposing party to file an answer to your claim;
- Selecting an arbitrator to preside over the case;
- Attending a pre-hearing conference with both parties and the arbitrator;
- Exchanging relevant documents and information related to the case through the discovery process;
- Attending the arbitration hearing where both parties present their arguments; and
- Receiving the final decision from the arbitrator.
The FINRA arbitration process is much like a mini trial, and the process can seem complicated and overwhelming. Thus, it is imperative to have someone in your corner who is well-versed in the FINRA arbitration process. A stockbroker fraud lawyer can help you navigate the entire process and fight to get you the compensation you deserve.
Do I Need a Stockbroker Fraud Lawyer to Pursue My Legal Claim?
There is no legal requirement that you retain an attorney to represent you in a stockbroker fraud dispute. However, having one is definitely recommended.
Investment fraud disputes can be extremely complicated to navigate on your own if you have no prior experience doing so. Further, you can be almost certain that the stockbroker defendant will have legal counsel. Thus, going against the fraudulent stockbroker and their attorney on your own can be daunting.
Instead, consider hiring a stockbroker fraud lawyer who regularly handles these types of claims.
When you’ve suffered significant investment losses and your future financial security is at risk, you deserve competent legal representation to help you maximize your recovery and get the results you need and deserve.
Hear From Our Clients
At The Law Offices of Robert Wayne Pearce, P.A., we believe the ultimate barometer of our success is surpassing the expectation of our clients.
The following clients have direct knowledge of our firm's processes from the inside and experienced our fierce advocacy.
Hear From Our Clients
- “Robert Pearce is part of that unusual breed of lawyers that are able to create empathy with clients and thoroughly adopt their cause”
No half efforts here. He and his group of professionals are outstanding strategists that can execute with precise fervor and unyielding determination. Theirs is a huge wave of facts, research, precedents and preparation, that has impressed me in its thoroughness and creativity, and most importantly with the results. No stone goes unturned and no effort is ever spared. In my book, he and they are those of a very rare kind that one wants to keep for a very long time.- Ramon Flores-Esteves -
- “Just like the song from HAMILTON, it's so nice to have Bob Pearce on your side.”
Just like the song from HAMILTON, it's so nice to have Bob Pearce on your side. He is the consumate plaintiff's lawyer: smart. dedicated, fully able to try a case but a great negotiator in a mediation. He did a wonderful job for us, fully supporting us through the process and more than holding his own against a large national law firm.- Maurice Z. -
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Mr. Pearce and his staff exceeded all of our expectations. We were able to reach a settlement that was of our complete satisfaction, all within a very smooth, professional and efficient process. Mr. Pearce is now not only our lawyer but our family friend. We highly recommend him and his team!- Severiano L. -
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This law firm is the real deal. We were so lucky that they took our case as they have so much experience in securities and all the wrongdoing that happens in these investment companies where they mislead you and your money (as in our case) into schemes that are not what you think they are. Mr. Robert Pearce is one of the best lawyers around, a truly professional who will fight for you and will tell you as it is all the time. We could not have gone thru this experience if it was not for all the advice, guidance and support he and all of his staff and associates brought to the game. For the best fighting chance, Robert Pearce is the lawyer you want in your corner.- Astrid M. -
- "He never felt intimidated and his study of the case and perseverance prevailed at all times."
Attorney Robert Pearce was our lawyer in a case against a Brokerage Firm and I'm witness to his ability and intelligence to deal with lawyers from the most prominent law firm in New York which was the key to recovering much of our losses cheered by their negligence. He never felt intimidated and his study of the case and perseverance prevailed at all times.- Jose A. C. -
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No lawyer except Bob said I had a chance of winning. When UBS Lawyers laughingly offered me zero to settle the dispute, Bob became even more determined to prove everybody wrong. Bob was extremely prepared, and always a step ahead of the opposing attorneys throughout the arbitration. In the end, Bob and I had the last laugh when the arbitrators awarded me almost 6 million dollars.- J. Blanco -
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Robert's team is excellent. They are very competitive in what they do and they are very responsible. Every meeting and phone call was made with dedication and desire to help our family every step of the way. Their professionalism, responsibility and empathy assured us that we were in good hands. Recommend to everyone.- Mayra A. -