Hiring a stockbroker cannot guarantee success in the stock market, but it does entitle you to service that meets certain professional standards. Your stockbroker is required to manage your money honestly, professionally, and prudently. Whether done intentionally or through incompetence, when your stockbroker mismanages your funds, the financial effects can be devastating to you and your entire family.
A stockbroker’s duties to his or her clients are outlined in both state and federal securities laws, as well as professional guidelines set forth by the New York Stock Exchange and the National Association of Securities Dealers. In addition to these specific rules, stockbrokers are expected to perform to certain minimum standards of competence for their profession.
What is Investment Fraud?
Stockbroker fraud (also referred to as investment fraud) occurs when a stockbroker makes recommendations and claims that are inaccurate or that are primarily intended in the broker’s best interests rather than the clients. These fraudulent recommendations and actions might include making outright false statements, leaving out important information (factual omissions), intentional exaggerations, and other mischaracterizations.
Other types of stockbroker malfeasance that may constitute fraud include failure to properly and promptly execute orders and performing unauthorized and/or excessive trades. It can often be difficult to establish fraudulent behavior as not all bad trades or stock market losses are attributable to fraudulent activity. Honest and competent stockbrokers can make mistakes and bad recommendations without it rising to the level of fraud, and investments always carry some degree of risk. It is only when a stockbrokers or brokerage houses engage in self-serving behaviors to the detriment of their clients, or when they fail to uphold a minimum standard of care and competence that activities are considered fraudulent.
Violations Stockbroker's Can Make
If you believe that you have been the victim of stockbroker fraud, one of the first things you can do is research your broker’s record to establish whether previous complaints have been filed against him or her. The National Association of Securities Dealers offers a comprehensive online service called the Central Registration Depository (CRD), which allows you to research any of their approximately 500,000 members and see detailed information on their history including professional qualifications and employment history as well as any reports of misconduct and previous fines and settlements for violations such as
- Unsuitable recommendations
- Over concentration
- Excessive trading, referred to as “churning”
- Unauthorized investments
- Breach of fiduciary duty
Misrepresentations and omissions can take a number of forms. Examples include when a stockbroker falsely guarantees returns on an investment perhaps claiming to have insider information on a company or when a broker leaves out relevant information when recommending a stock.
One of a stockbroker’s major responsibilities is to guide clients to investments that are appropriate to their needs, interests, and level of expertise. This includes recommending appropriate investments according to risk, diversity, long-term goals, and other factors. Based on this profile and the information available, your stockbroker is responsible for recommending a stock profile that is appropriate for your specific needs and interests. Unsuitable recommendations may cause significant financial damage, particularly for clients new to investments.
One of the most important factors in building a successful stock portfolio is diversification. This tactic can help spread out your risk, so that losses from a specific company or sector are mitigated by other holdings in other markets and companies. When a stockbroker over-concentrates your portfolio in too few companies, or too few markets, you run a great risk of incurring significant stock losses as a result of normal market fluctuations.
Some unethical brokers, when given discretionary authority over an account, will engage in excessive buying and selling in order to increase their commissions. Known as churning, this practice rarely benefits the client and is primarily intended to drive up profits for the stockbroker. Other claims may arise from the practice of churning including negligence, breach of contract, common law fraud, and breach of fiduciary duty.
In some cases, a stockbroker who has not been given discretionary authority over your account may make trades without your prior approval. This could include cases in which your specific instructions are ignored and cases in which the broker makes trades without consulting you first and obtaining approval. In certain situations, this can lead to claims for breach of contract or fraud as well.
Breach of fiduciary duty can describe any number of types of claim. Fiduciary duty is a professional standard of care that is required of a person legally entrusted with your finances. This fiduciary duty is a good faith commitment to put your interests and goals above all others in offering advice and making decisions about your investments.
Victims of Stockbroker Fraud
If you or someone close to you believes you have been a victim of stockbroker fraud, please call our Orlando stock broker fraud attorneys today to speak with an experienced securities fraud attorney. We can help you determine whether you have a claim and fight to get your money back.