What is Investment Fraud or Malpractice?
The investment industry is regulated by the Financial Industry Regulatory Authority. FINRA provides guidelines for appropriate investment conduct. The following are some examples of prohibited conduct for any stock broker or investment professional:
Unsuitable Investments. Recommending to a customer the purchase or sale of a security that is unsuitable given the customer's age, financial situation, investment objective, and investment experience. A broker has a duty to recommend investment and trading strategies that are suitable for an individual investor. In making this determination, the broker must consider several factors including the investor’s risk aversion, time horizon, investment goals, tax consequences, and present financial situation. If a broker fails to adequately assess an investor’s individual circumstances and goals and makes unsuitable investment recommendations, the broker may be liable.
Excessive Trading (Churning). Engaging in transactions which are excessive in volume and frequency in order to generate commissions paid on each trade. There is no special rule for number of turnovers that constitutes churning. In evaluating claims of excessive trading, courts will consider whether trading was excessive in light of the customer's investment objectives, and if trades were made in reckless disregard of the customer's best interests for the purpose of generating excessive commissions. Unauthorized Trading. Purchasing or selling securities in a customer's account without first contacting the customer. The customer must specifically authorize a 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.
Misrepresentation and Omissions. Misrepresenting or failing to disclose material facts concerning an investment. Examples of information 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.
Failure to Execute an Order. Failure to use reasonable diligence to see that a customer's order is executed at the best possible price, given prevailing market conditions. Brokers are responsible for executing orders in a timely fashion. If a dishonest broker refuses a client's request to sell a stock, the broker may have a conflict of interest and may be involved with a high-pressure sales scheme. If a broker is trying to manipulate the price of a stock, allowing an investor to sell the stock is counterproductive to the scheme, which is to drive up sales of a stock and prevent any selling to boost the price.
Overconcentration. Concentrating the client's portfolio into a single investment or type of investment, thereby creating an unacceptable degree of risk within the portfolio. A broker who fails to diversify an investor’s portfolio is potentially liable for a decline in value.
Other Prohibited Conduct May Include:
- Switching a customer from one mutual fund to another when there is no legitimate investment purpose underlying the change.
- Removing funds or securities from a customer's account without the customer's prior authorization.
- Charging a customer excessive markups, markdowns, or commissions on the purchase or sale of securities.
- 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.
- Private securities transactions between a broker and a customer that may violate FINRA rules, particularly where such transactions are done without the knowledge and permission of the sales representative's firm.
- Trading for a firm's account in preference to a customer by trading ahead of a customer limit order, absent a valid exception.
- Failure by a market maker to display a customer limit order in its published quotes, absent a valid exception.
- Purchasing or selling a security while in possession of material, non-public information regarding an issuer.
- Using any manipulative, deceptive, or other fraudulent device or contrivance to effect any transaction in, or induce the purchase or sale of, any security
If you believe you are the victim of stock broker fraud or malpractice, contact us today.