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How is investment fraud discovered?

By November 14, 2017December 7th, 2017Investment Fraud

Let’s face it, most everyday people don’t have the time or depth of knowledge to make the best the financial decisions on their own.  Accordingly, we choose to use to rely on the advice and recommendations of financial advisors regarding our investments because they’re the experts–not us. But what happens when our broker or financial advisor goes astray?

Discovering financial fraud or abuse is a challenging process, and dishonest financial advisors may go to great lengths to cover their tracks. It’s no surprise that financial fraud or mismanagement can go undetected for years.

Often the person who discovers the fraud or misconduct is not the client, but rather a client’s CPA, skeptical friend, or even a new broker going over accounts. However, if you suspect that your advisor may be committing fraud or mismanaging your finances, there a some signs to watch out for and ways to protect yourself.

Avoid common problems

According to the Financial Industry Regulatory Authority (FINRA), there are a few commonly-investigated complaints that can be avoided.

Cold-Calling occurs when a stockbroker or financial advisor makes aggressive, high pressure calls to the investor. These calls are unsolicited as the caller makes sales pitches to that encourage the investor to buy securities. The Federal Trade Commission observes that in these calls, the broker often promises that the investments are low-risk and offer a high return.

Cold-calls should be viewed with a high degree of skepticism. Take time to do your research, and do not commit to investment opportunities right off the bat. Collect information, and find out who you are dealing with first.

Misrepresentation occurs when the financial advisor provides misleading or false information to the client, generally to induce the client to purchase an investment. The falsity of the statement is often discovered when a client experiences losses, is unable to sell their investments, or the investor discovers information that contradicts the financial advisors’ reports.

Make sure you keep notes of conversations with your broker. Also, make sure your broker provides you with information that supports his representations and verify this information by conducting your own research and reading through reports.

Unsuitability becomes an issue when the broker does not make financial decisions that are in line with the investor’s financial goals. An example of this could be when the investor agrees to a more conservative yet stable financial plan, but the broker then pursues a high-risk or speculative investment scheme.

This problem is detected when investors notice something in a report that leads them to have more questions for their broker. It can also be detected when investors conduct research and notice that other sources suggest that an investment does not match their goals and objectives. In other cases, unsuitability may be detected when a tax professional notices that the investment does not meet the needs of his client based on the client’s income.

Avoiding unsuitability (and other investment pitfalls) requires you to do your homework, read and keep records of your investments and the documents provided by your broker. You also need to be forthcoming when discussing your investment plans (e.g., do not inflate your wealth or assets or sophistication).

FINRA has a good tip to avoid making investment decisions that do not meet your objectives:    “If you can’t explain it, don’t buy it.”  That is, if you do not understand an investment, what the investment is supposed to do, and why you have the investment in your portfolio, you should not own it.

Unauthorized trading is the last of the four types of frequent complaints received by FINRA. With brokers earning commissions for any trade made, it is tempting for them to make trades without the client’s knowledge. Sometimes a broker will even make the trade after the investor has declined authorization for the trade.

Investors spot this fraudulent act by reading account statements that show activity, or by receiving a confirmation certificate for a trade that they did not approve.

Time is critical in stopping unauthorized trading. Clients suspecting unauthorized trading should keep all financial records and contact the broker’s branch manager or the firm’s compliance officer immediately. FINRA suggests sending an overnight registered letter confirming refusal of the purchase. In essence, leave a documented paper trail that outlines what you did or did not approve.

Even by following all the above tips, it may still be difficult for the average investor to prove fraud–sometimes all we have is our strong suspicions of wrongdoing. Understanding financial transactions is a complicated matter that can be lead to feelings of frustration or anger. An experienced securities lawyer can help you determine if you are a victim of investment fraud.

Fishman Haygood lawyers handle securities litigation and arbitration matters across the country.  Please contact the offices of Fishman Haygood at 504-207-5010 to learn more about your course of action in cases of investment fraud.

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