Types of Stock Broker Misconduct
Claims by investors against their stockbrokers and other investment advisors fall into four basic categories. The most common claims that we have seen are:
Misrepresentation and Omissions
The Compass Law Group offers a free initial consultation to any investor who believes he or she may have a claim against a stockbroker or brokerage.
Churning occurs when a broker engages in excessive trading in your account. A broker churns an account in an attempt to generate commissions. Many times he will sell the winners to show a small profit, and keep the losers.
To establish proof that your broker has churned your account, we will have to show that the pattern of trading activity in your account was excessive. This can be done in a number of ways including calculations to determine the annualized rate of return that would be necessary to cover the commissions charged in your account; the number of times the equity in your account is turned over to purchase securities; and the purchase and sale trading activity that occurs in your account.
If a broker is buying and selling securities in your account to generate commissions that seem excessive, and he or she always has some reason why you should take quick profits, there is a strong possibility that your account is being churned.
In making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer's risk tolerance, needs and investment objectives. A broker has a duty to know his client and to recommend only those investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, or if the investment was not in line with the investor's financial needs. An investment may also be unsuitable if the customer did not know or understand risks associated with certain investments.
A broker has a duty to understand the risk tolerance of the investor, the tax considerations for the client, the client's prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client's circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker may be liable to that client.
One of the most important rules of investing is diversification. If a broker concentrates your portfolio in any individual investment or type of investment, then the risk of losses with that portfolio is dramatically increased. It’s the old adage that it is unwise to place all of your "investment" eggs in one basket. A broker who does not diversify his client's portfolio is potentially liable if that investment declines in value.
Misrepresentation and Omissions
A broker is liable to a client if he or she misrepresents or omits material facts to the investor regarding an investment, and that client loses money as a result. Often these misrepresentations or omissions disguise the risk associated with a particular investment. A broker has a duty to fairly disclose all of the risks associated with an investment.
Stock brokers can be negligent in many ways. The above is a brief analysis on the types of cases most commonly seen.