“Broker Misconduct” is an umbrella term for the many ways a broker can betray the trust of his or her client. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), as well as individual states, have established strict guidelines to ensure brokers act in the best interests of their customers. Generally speaking, brokers owe investors a duty of fair dealing: they must disclose material facts pertaining to an investment, charge prevailing market rates, candidly reveal conflicts of interest, follow instructions, and thoughtfully evaluate investments to ensure they are suitable for the investor.
Broker misconduct takes place most often in one of the following ways:
Churning / Excessive Trading - “Churning” refers to the excessive and often-unauthorized purchase and sale of securities in a customer’s account with the purpose of generating fees and commissions for the broker.
Failure to Follow Instructions - Brokers are required to follow their customers’ instructions – it’s as simple as that. Brokers who fail to execute transactions according to the client’s instructions may have breached their fiduciary duty to the client.
Failure to Protect Profits - If an account appreciates significantly, the broker has a reasonable duty to recommend and/or implement a strategy that protects these profits.
Forgery - Brokers are not permitted to fraudulently sign their clients’ signatures on documents; nor are they permitted to present clients with fraudulently-composed documents that misrepresent an investment or investment strategy.
Fraudulent Material Misrepresentation - A broker misrepresents an investment when he/she falsifies facts relating to it so as to induce the customer to make a purchase he/she otherwise might not have made.
Fraudulent Material Omission - A broker engages in omission when he/she neglects to disclose material facts relating to an investment that might have persuaded the customer not to purchase it.
Front Running - “Front running” occurs when a broker makes transactions in his/her own account, based on new information and/or market analysis, before disclosing that information to his/her own clients. A broker, for instance, who purchases 100 shares of a company just before his/her firm purchases 100,000 shares has engaged in unethical front running.
Margin Abuse - Margin accounts can be highly risky for investors and highly profitable for brokers. Margin abuse (or “margin fraud”) occurs when a broker unsuitably extends margin to a customer account with the goal of generating excessive commissions and/or fees.
Misappropriation of Funds - "Misappropriation” refers to a broker using customer funds for purposes the customer has not authorized and/or which may not be legal – for instance, the outright theft and transfer of assets into the broker’s own account.
Negligence - Brokers are required to maintain a reasonable duty of care with respect to customer accounts. “Negligence” describes a broker’s failure to act with diligence and/or prudence in the handling of client funds.
Over-concentration - Generally speaking, a successful portfolio is a diversified portfolio. Brokers who concentrate client funds in a single investment or series of related investments risk substantial loss.
Selling Away - “Selling away” refers to the sale of securities not authorized by the broker’s member firm and without the member firm’s knowledge.
Unauthorized Trading - Brokers may not execute purchases or sales without the customer’s written or verbal authorization.
If you or someone you know has been subjected to broker misconduct, please contact the securities attorneys at Fitapelli Kurta. Our firm prosecutes cases on behalf of investors nationwide on a contingency fee basis.