Stockbroker Misconduct

At some point, everyone experiences a stock market loss.  While some losses may be attributable to the volatility of the stock market, others may be caused by unscrupulous dealings by your broker.  If you suspect that your stockbroker deliberately mislead you or engaged in some of the more common forms of securities fraud, you may be able to recover monetary damages for your losses.

Some common forms of stockbroker fraud to watch for are:

Churning

"Churning" occurs when unscrupulous stock-brokers cause excessive activity in their customers' accounts for the sole purpose of generating a large volume of commissions.  In short, the more activity, the more commissions, and the more commissions, the more profit for the stockbroker. The result over time is the investor's account shrinks, sometimes significantly, by the cumulative effect of many small but regular charges. 

In order to establish the fraudulent practice of churning, two basic elements must be proved. First that the stockbroker actually exercised control over the customer's account.  Second that the trading activity was excessive.

Unsuitable Investments

Because the brokerage business is deemed to be fiduciary in nature - which means that the stockbroker must act in the best interests of his or her customers - brokerage firms are required by the rules of various self-regulatory organizations to restrict their purchase and sale recommendations to financial vehicles that are suitable for their customers' needs.

According to the rules of the New York Stock Exchange and the National Association of Securities Dealers, suitability is to be considered in the context of the customer's other security holdings and his or her financial situation and needs. In addition, a stockbroker must learn the essential facts relative to every customer and every order. 

If a stockbroker recommends an investment that is not suitable for the client the broker may be liable for your losses. For example, if a stockbroker recommends a variable annuity to a senior citizen investor, knowing full well that he or she has limited financial resources and is relying on an annuity to supplement their retirement income to meet monthly living expenses, this may be a classic unsuitable investment case.

Unauthorized Trading

By law, a stockbroker is required to consult with the customer before conducting any transaction on behalf of the customer, such the buying or selling of stocks. An unauthorized transaction is one that the stockbroker executed without the permission of the customer having been obtained beforehand.

Unauthorized transactions such as these can be the result of either mistake, in which case the stockbroker is simply negligent, or they can arise from a deliberate act, in which case the stockbroker has committed a fraud upon the customer. In either instance, the stockbroker will be compelled to put the customer back into the position in which the customer was before the unauthorized or improperly executed transaction took place.

To reverse an unauthorized or improperly executed transaction, the customer must be conscientious and act immediately upon discovering the impropriety or error. Otherwise, if the customer chooses to wait until future market direction can be ascertained in order to see if a profit can be obtained from the transaction, recovery for any loss that occurred between the time of discovery and the time of complaint will not be recoverable.

If you think your stockbroker has defrauded you, contact us at 800-647-7003 or gpritchard@clarkperdue.com.

What is written here is not legal advice.  You should consult your attorney before applying any of this information to a specific situation.