Possible Indications of Securities Fraud by a Broker

By October 2, 2015 September 20th, 2017 Resources
  1. OVERCONCENTRATION. Having a well-balanced investment portfolio helps investors survive the ups and downs of the market. But overconcentration in a particular product type or market sector can expose investors to great risks. Review your investment portfolio: Are you overconcentrated in a particular product, like Real Estate Investment Trusts (REITs)? Is a large percentage of your portfolio in private placements? Brokers may have fraudulently orchestrated the overconcentration in order to generate higher commissions for themselves.
  1. HIGH COMMISSION PRODUCTS. Brokers, and their firms, make money by selling products that generate commissions. But the commissions for various investment products vary greatly. Private placements, for instance, generally generate commissions in the 7-8% range, which is much higher than brokers will earn from more traditional products like stocks, bonds, or mutual funds. If your investment portfolio contains a higher percentage of products that generated large commissions for the broker, that may be a tell-tale sign that the broker put his profit-generating interests above yours.
  1. CHURNING. Churning occurs when a broker executes excessive trades in an investor’s account in order to generate commissions for the broker and his firm. Does your broker buy stocks, only to sell them and buy new stocks a few months later? Does he place you in a mutual fund, only to flip you into another one soon after? If your broker is buying and selling products without an obvious reason – other than to generate commissions for him – your broker may be committing securities fraud.
  1. FAILING TO FOLLOW INSTRUCTIONS. Your investment portfolio is YOUR investment portfolio. Even though you have hired a broker/financial advisor to guide you regarding your investments, you have the right to make the decisions regarding your account. If a broker tries to sell you a high risk product, and you refuse to purchase it, but then you notice the product in your portfolio on your monthly statement, this is wrong. Brokers may have their opinions and recommendations about your account, but they must follow your instructions. If they do not, you may have a claim for securities fraud.
  1. FAILING TO “KNOW THE CUSTOMER.” FINRA Rule 2090 provides that a broker or financial advisor “shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.” In essence, a broker is responsible for knowing the investor and knowing how the investor wants his/her money invested. To make appropriate decisions regarding your investment strategy, your broker needs to know your current needs, your retirement objectives, your income, your education and investment sophistication, and the amount of money on which you need to live. If your broker is disregarding this crucial information (or worse, not even asking you about it) when providing his advice and recommendations to you, he may be liable for your investment losses.