Stockbroker Fraud and Securities Fraud FAQs There are irrefutable "red flags" that investors need to be aware of to determine if their broker has committed securities fraud. Securities Fraud can be defined as the broker putting his or her own interests ahead of the client. This is known as a Breach of Fiduciary Duty. Here are the questions to ask to determine if securities fraud has happened to you: 1. Is your new account information incorrect? Whenever you open a brokerage account, a form (new account profile) is filled out with your personal information, including your income, net worth, prior investment experience, your investment objectives and risk tolerance. You may never have seen your form because firms are not required to send them to you, although some best practice firms do. Brokers have an incentive to inflate the figures on the form, because by doing so, they are able to signal supervisors that you are able to tolerate more risky investments. If you have not seen your form, ask the operations department at the brokerage firm to send it to you so you can determine if the information about you is correct. If its inaccurate, that could permit the broker to fraudulently implement your account with aggressive or speculative investments. That is brokerage fraud. 2. Is your account being excessively traded or "churned"? If you could wallpaper a room in your house with the purchase and sale confirmations you received, then the broker may have churned your account. Another place to look is on Schedule D of your tax return to see if it is more than one page. If it is more than that and you were relying 100% on your brokers advice and recommendations, as opposed to trades which were solely your own idea, your broker might again be committing securities fraud. 3. Has your broker been "negligent" with the handling of your account? Conduct that is unreasonable is all you need to observe. Every broker has a duty to observe high standards of conduct or "fair dealing", which means that he or she must disclose all material facts to you (omit nothing) and do what is right (fair) given your particular circumstances. In other words your broker owed you the obligation to make sure that you understood all the risks associated with your investments. If you didn't understand fully that your investments could substantially decline, your financial advisor's conduct was probably negligent. 4. Did your broker mention or provide you with research reports or analyst ratings in order to convince you to buy a security or prevent you from selling it? Many brokers justified their recommendations to customers by reference to the firm's analyst - both to get customers to buy particular stocks and to prevent customers from selling those stocks. This is known as "lulling" and is a fraudulent act. This is because that we now know that many firms had incredible conflicts of interest and a financial motive to make those recommendations. 5. Did your broker fail to fully disclose the risks of margin trading? Margin abuses have increased dramatically in recent years. If your broker used margin (leverage) in your account but did not explain the risks to you i.e. the downside of margin use, then you may have a claim against your broker and his or her firm. This is especially true when in your prior investment experience, you never used margin before. 6. Did your broker place you in only suitable investments? Suitable investments are those which take into consideration your age, income, net worth, tax status, health, investment objectives and risk tolerance. If you told your broker that you did not want to take much risk with your money or if you simply couldn’t afford to lose the money you have lost (because, for example you are retired or have limited irreplaceable assets) and you incurred significantly losses, then your broker violated the suitability rule. Further, if you have limited brokerage experience, part of the suitability obligation is to protect your account with "risk management" tools such as stop losses or protective puts to stop the bleeding. 7. Did your broker ever mark your confirmations "unsolicited"? Sometimes, brokers will mismark the confirmations for trades to show "unsolicited", which means that the trade was solely your idea, without a favorable opinion of the broker. Brokers do this so that supervisors will not look so closely at the trades that are going into your account. This is a very serious violation because management would not be so concerned about your account from a risk standpoint if the trades were your, as opposed to the broker's, idea. This practice is a violation of securities rules and another example of brokerage fraud. 8. Is your broker making trades in your account without your "written authorization"? Unless you give your broker written discretion to trade in your account, each and every single transaction must be approved by you. This means that it must be preceded by a conversation with you and for you to say "ok" to the trade. If this did not take place, than the trade is unauthorized and you may be entitled to undo the trade. However, you must complain in a reasonable amount of time or you will have "ratified" the trades. All of the acts described above could be fraudulent acts by a broker and are possible breaches of fiduciary duty. If you detect them, get a securities expert or securities attorney to review the activity to determine if you have a legitimate cause of action to take your broker and the securities firm to arbitration. Courtesy of Mason Alan Dinehart III of Financial Education Network Development and InfoFAQ Compass Law Group, PLLC © 2007 | All Rights Reserved