Margin fraud occurs when a broker unsuitably extends margin credit to a customer’s account in order to facilitate excessive activity, resulting in additional commissions and interest for the broker and/or firm. To understand margin fraud, however, you must first understand margin trading.
When you buy securities on margin, your broker lends you funds to pay for them. For example, a $100,000 margin account, can be used to buy $200,000 worth of stock; that second $100,000 is loaned by the firm. The benefit of a margin account is that it can effectively double your potential gains on an investment. However, it also doubles the risk—not only because you stand to lose more than your investment if the stock depreciates, but because you are also required to repay the firm’s loan with interest.
Naturally, brokers and brokerage firms stand to realize great profits from margin accounts—not only from increased commissions, but from the interest mentioned above.
An additional risk of margin accounts is self-perpetuating loss for the investor: a loss in one investment might result in a “margin call,” or a notification that you must deposit more money into your account (or sell other assets) in order to bring it up to the required minimum. In general, your broker is not required to seek your permission before selling your investments in a margin account.
The high risk of margin trading makes it unsuitable for many investors who lack the experience and/or means to meet margin calls. If a broker uses margin to generate excessive trades and commission, he or she may be subject to disciplinary action; the same goes for brokers who put accounts on margin without the investor’s full knowledge or authorization.
If you have lost money as a result of margin trading, call the securities and investment fraud law firm Fitapelli Kurta at (877) 238-4175 for a free consultation. You may be qualified to recover your losses. All cases are taken on contingency: we only get paid if and when you recover money. Time to file your claim may be limited, so we encourage you to avoid delay. Again, you spend no money out of pocket. Call (877) 238-4175 now to speak to an attorney for free.