Types of Stockbroker Fraud
Many Americans buy stock as part of a retirement investment package. Unless you hold a business degree, you likely hire a stockbroker to manage your portfolio and evaluate potential investments. Letting someone else handle your money can run the risk of fraud by your stockbroker. Taking a few minutes to educate yourself on stockbroker fraud secures your finances and prevent unscrupulous investment practices.
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Profit at Your Expense
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Losing money on a stock on the suggestion of your broker does not automatically qualify for stockbroker fraud. If your stockbroker profits while your investments take a hit, then you might want to investigate the matter further to determine if fraud has taken place. Stockbrokers can use complicated methods to hide the source of poor investments, thus a lawyer specializing in stock fraud is usually required for litigation (Stock Broker Fraud).
Unsuitable Risk
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Federal law demands that stockbrokers consider their client's risk tolerance when making stock suggestions. Important factors for suitable risk include age, net worth and education. Shadier stockbrokers often suggest stocks that have a chance to "blow up" and earn the broker a larger commission, but also carry a greater risk of losing value and turning into "penny stocks."
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Excessive Activity
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Excessive activity--"churning," in stockbroker jargon--occurs when a stockbroker promotes unnecessary transactions. Stockbrokers almost always work on commission, and by suggesting unnecessary movement of investments, the broker can generate a much greater commission for himself or the firm. Whether churning occurs greatly depends on the type of investment the investor holds, but short investment periods can indicate potential churning.
Conflict of Interest
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The movie "Boiler Room" popularized the idea of a shady company that sells worthless stocks for friends of the firm. In general, a stockbroker should not advise investing in companies with which they hold personal ties, but this does not preclude the stockbroker and investor holding shares in the same company. An example of this fraud might occur like this; a fraudulent stockbroker persuades his clients to invest in a relative's company, merely to help prop that company's stock, then quickly sell while the value remains high.
Filing Complaints
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Many firms and stockbrokers require their clients to sign an arbitration form before actual investing happens. If the client feels fraud or other violations of the investor/broker relationship occurred, the arbitration agreement usually requires an in-house settlement. Arbitration agreements often prevent civil lawsuits and most investors settle out of court, according to securitiesfraud.org. If the broker refuses to settle, the investor may file a complaint at the SEC website, sec.gov.
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