Types of Stock Broker Misconduct

Churning. Churning refers to the excessive buying and selling of securities by a broker for the purpose of generating commissions. .

Fraud. Here, the broker falsified fact(s) or concealed material information about an investment. If you had known the truth you would not have agreed to purchase the investment.

Unsuitable Investments. Brokers have an obligation to learn their client’s financial needs, objectives and circumstances before recommending an investment.  Unsuitable recommendations occur when the broker recommends an investment inconsistent with the client’s financial needs, circumstances and objectives.  Experience has shown that the following situations can make strong cases for successful arbitration or litigation involving investment suitability:

Lack of Customer Knowledge – Has the broker sought adequate information about the investor’s fiscal means, financial goals and life circumstances? Do records exist to show that this knowledge was sought or documented?

Change of Customer Risk Profile – Was or should the broker have been aware of material changes in the investor profile including employment, age, health or lifestyle issues affecting risk tolerance and the needs for investment income or appreciation?

Lack of Diversity / Over-concentration – Were the investor’s funds placed in an appropriate mix of investments compatible with his or her preferences, needs and risk profile, not only as to individual companies purchased but also among diverse industrial sectors? A common situation during the 2000 market slide was an over-concentration in the technology sector, which suffered significant losses while other sectors such as financial and healthcare services actually fared quite well. The market as a whole, as measured by the S&P 500 with technology and telecommunications stocks removed, actually made money over 2000 to 2002.

Excessive Use of Margin – Were asset purchases made with margin and was the investor fully aware of the risks, costs (margin interest) and rules relating to such purchases? It is not uncommon that the basic costs of margin activity effectively preclude the possibility of reasonable investment return.

Theft.  The broker simply steals money from a client’s account for his/her own use.

Unauthorized Trading. The broker buys or sells securities without written or verbal permission.

Mutual Fund Churning. Mutual funds are considered long term investments. Mutual Fund churning is the practice and buying and selling mutual funds for the purpose of generating a commission. Mutual Fund switching involves the replacement of a mutual fund with the same type of fund in another mutual fund family for the purpose of generating commissions.

Break Point Selling.  Most mutual funds offer commission discounts that depend on the amount of the investment.  The investment amounts are called the break points.  For instance, a purchase of $24,999 would require a commission of 5%.  However, if the purchase were one dollar more or $25,000, the commission would be lowered to 4.5%.

Mutual fund fraud arises when brokers, in order to maximize their commissions, recommend fund purchases at just below the break point or fail to recommend a suitable share class given the length of time a client anticipates holding the fund or sells a share class that is inconsistent with the client’s objectives.  Unscrupulous brokers maximize their commissions by failing to inform the client of the various methods commissions and expenses can be reduced.

Annuity Abuse.  Annuities command some of the highest commissions and fees available for a broker.  The high commissions and fees provide significant incentive for brokers to misrepresent their benefits when recommending annuities to their clients.

Negligence.  Broker’s have a duty of care to be reasonably diligent and prudent in the handling of client accounts  Negligence occurs when the broker failed in his duty to be reasonably diligent or prudent and did not act as a reasonable and prudent broker would have acted in the same situation.



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