Stock Broker Fraud: FAQ

What Is Securities Fraud?

Generally, when a financial professional encourages a client to invest in unnecessarily risky ventures that devalue the client's assets or when the financial professional acts without the client’s knowledge, it is referred to as securities fraud. In some cases, securities fraud victims may be able to recover some or all of their losses.

How can I tell if I`ve been a victim of a stock fraud?

Every case is different but when a stock has dropped, your loss may be due to fraud when Company executives misrepresented facts relating to important aspects of the business, or held off revealing bad news that should have been disclosed earlier. The company or its accountants restate financial results to reflect the true state of the company`s financial affairs. The stock drops rapidly on a disclosure of wrongdoing by the company or its executives or employees. Before bad news is revealed, insiders engage in insider trading by selling their shares at inflated prices. Many other scenarios may be reflective of fraud. If you are unsure of your rights, you may wish to consult an attorney.

What is securities arbitration?

In 1987, the U.S. Supreme Court held that brokerage firms could enforce pre­dispute arbitration clauses contained in their standard form customer agreements. Virtually all brokerage firms' customer agreement forms now contain arbitration clauses. As a result, most disputes between brokerage firms and customers are arbitrated. Arbitration is a private dispute resolution process in which three arbitrators are appointed to decide the merits of a case. One of the arbitrators is required to be associated, presently or formerly, with an NASD member. The purpose of having an "industry representative" on the panel is to assure that the panel will have the expertise and experience necessary to understand the transactions and practices involved in the case. The other two panel members are typically businesspersons, such as lawyers, accountants, investors or retired judges, who have an interest in securities or dispute resolution. In arbitration, the parties are typically represented by counsel and present evidence through testimony and documents like in a court proceeding. A significant except to mandatory arbitration exists for class action claims.

What is an unsuitable recommendation?

When you ask your stock broker for advice, you trust that they are giving you the best information for your specific situation. However, sometimes a broker will "hard sell" you a risky investment even though you didn’t want it. Many times a broker will state that although the investment has some risk (usually a very little amount), the amount of profit to be made is incredibly high. These stocks are usually very risky and the amount of profits to be made are minimal.

What Is Overconcentration?

Ever heard of the phrase "don't put all of your eggs in one basket?" Your advisor should also follow this advice, but when your financial advisor invests most or all of your money in a single type of asset or a few high risk stocks without your approval, then your financial advisor may be "overconcentrating." If you've lost most or all of your investment because of this investment strategy, you may be able to sue your financial advisor for overconcentration.

What Is Churning?

Some stock brokers collect fees on every trade they make on your account. Generally, a stock broker only makes the trades they think are necessary to meet your investment goals. However, when a stock broker makes excessive trades within your account with the goal to generate commissions, regardless of your investment goals, they are guilty of "churning."

What Is A Misrepresentation or Omission?

When you deal with a broker you expect them to tell you the honest truth about what you might be investing in. When a broker misrepresents or omits a material fact (an important fact) they could be held liable for misrepresentation or omission. The reason for this is because a broker has a duty to fairly disclose all of the risks associated with an investment.

What is a failure to execute trades?

Usually a broker and a client will talk about the different types of investment strategies that are available to the client. Based on the clients goals, a broker will usually make a recommendation as to what type of investments are appropriate. Most of the time, a broker and a client will agree on what investments will be made. However, sometimes, a broker will refuse to plan an order that the client demands. When the client still expects the broker to place an order, and the broker does not place an order (so long as the order is liquidating a position), then the client may be able to sue for failure to execute a trade.

What Is A Breach Of Fiduciary Duty?

A fiduciary duty is a requirement that your stock broker place your interests over their own. This doesn't mean a stock broker should fling themselves in front of a car for you, rather it means that the stock broker should make the best orders for your particular needs, not the firm's best interest. Many times a breach of fiduciary duty is tied to churning.

Do I Need to Hire an Attorney to Sue my Stock Broker?

You do not have to hire an attorney to sue a stock broker, you can file a complaint yourself. However, an attorney will know what the laws and regulations of your state are and be able to help you file a lawsuit. Additionally, an attorney can help you file the correct paperwork, figure out exactly how much you lost (by helping to calculate interest, how much your stocks would have made, etc), and provide counsel on what to expect in the future.

What Government Agencies Can I File A Complaint With?

Most states have an agency that regulates stock brokers within the state. Additionally, most stock brokers and stock purchases are governed by the SEC (the Securities and Exchange Commission) and FINRA (the Financial Industry Regulatory Authority). Each complaint received is reviewed and some are investigated. The goal of the SEC and FINRA are to protect the integrity of the markets and make sure investors feel safe investing in the markets.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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