22 Feb 2018

Securities or Stockbroker Fraud: How it Happens and What You can do

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Securities fraud, also called investment fraud or stockbroker fraud, happens when an investment advisor, stockbroker or brokerage company gives clients incomplete, inaccurate, or otherwise biased information designed to make the advisor, broker, or firm richer, as opposed to the investor or client. There have been many instances of securities fraud in recent years, both at the company level and an individual client level, and the financial scale at which fraud occurs is wide: from multi-million-dollar deals that can affect the entire stock exchange, to penny stocks.

Stock brokers and other investment professionals are all under a legal obligation to provide their clients with the best information and always put their goals and needs ahead of their own or their company’s. There are several laws and regulations at different levels of government to protect investors from fraud. The National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) both instituted self-regulatory rules for securities fraud. There are varying state and federal laws regulating fraud. When a broker or financial advisor harms a client by failing to meet the standards of care set forth by regulation, the client has the right to make an official claim against the broker and the firm for professional negligence and/or securities fraud.

Common examples of securities fraud include:

  • Omission or misrepresentation: Risk factors associated with a stock or investment option are not fully disclosed, obfuscated, or willfully omitted.
  • Unsuitability: Brokers push undesirable, disadvantaged stocks or investment options on a client, resulting in a substantial loss.
  • Over-concentration: Not enough diversification in an investment portfolio causing massive losses because of lack of protection from investing in several areas. Typically, a claim of over-concentration is aimed at brokers for incompetence.
  • Churning: A large amount of transactions, usually small-time stock sales with modest gains, to show an unnatural profit.
  • Unauthorized trades: Brokers making transactions that were never approved by the investor.
  • High-pressure sales of unwanted or unneeded products: Brokers sometimes attempt to trap clients into investment strategies and products to help improve their own standing or the company.
  • Failure to place an order

Recent securities fraud investigations have uncovered high amounts of insider trading by investment companies, such as selling stocks in an Initial Public Offering of a company before its release date to certain clients and associates. Several major brokerage firms have been investigated for insider trading and securities fraud recently, such as Salomon Smith Barney, Merrill Lynch, and Credit Suisse First Boston.

What typically constitutes securities fraud in the eyes of the law is actions or advice by brokers designed to enrich themselves or their companies over their clients. Securities fraud can ruin businesses and individuals, which can affect the stock market itself. One federal governing body, the Securities Exchange Commission, created guidelines for stockbrokers and financial advisors to ensure that they’re giving fair and consistent investment advice and never putting their own financial gains above their clients’. Securities fraud still occurs, however, and if you believe you’ve been a victim, contact an experienced stock fraud attorney to go over your case. You’ll likely have litigation options for recovering your losses, either via an individual lawsuit or a class-action claim.


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