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Do You Have a Case?

Do You Have a Case? | 3 Questions | Common Broker Misconduct

It can be comforting to know that regulators are on the lookout for bad broker behavior, and that the same broker scams and shortcomings have plagued individual investors for decades, if not centuries. This summary of Common Broker Misconduct tells you what types of behavior constitute securities fraud or mishandling of funds, and are grounds for a formal complaint or lawsuit against a financial advisor. If among these descriptions, you recognize a situation much like your own, you should contact an experienced securities arbitration attorney right away.

Answer 3 Questions

At Maddox Hargett & Caruso, P.C., we often begin an investor consultation with three simple questions:

What did your broker tell you about these investments?
What happened to these investments?
What is your investment experience & expertise?

If your answers send up red flags, your financial advisor or brokerage firm may be liable. In such circumstances it is wise to seek professional guidance.

To pursue the matter further, contact us at Maddox, Hargett & Caruso and ask for a free consultation with an attorney. We can reliably analyze your investment loss, and recommend the best way to proceed.

Reach us at 800.505.5515, or send an e-mail.

Common Broker Misconduct Quick Guide

Breach of Fiduciary Duty

It is a broker's duty to act in your best interest, as they are entrusted to protect your investments by properly managing your account, keeping you informed, and explaining potential risks. Not acting in good faith is breach of this fiduciary duty. more

Brokerage Registration

All brokers and brokerage companies must be registered to sell securities in states that require brokerage registration. Failure to do so is violation of that state's requirements. more

Churning/Excessive Trading

Some brokers are paid a commission for every trade they make, regardless of whether you make or lose money. Excessive trading in your account in order to earn additional commissions is called churning and indicates fraud. more

Federal Securities Laws

If your broker misrepresents or neglects to disclose key investment information, fails to follow your selling instructions, uses fraudulent practices for personal gain, or in some way does not act in good faith, he or she is violating federal securities laws. more

Failure to Sell

Often when a broker is manipulating the price of a security, he or she will refuse to allow a customer to sell that security. If your broker fails to follow your instructions to sell or pressures you to change your instructions, he or she is violating securities laws. more

FINRA Rules and Regulations

The Financial Industry Regulatory Authority, (FINRA), formed by the consolidation of the NASD and NYSE member regulation panels, has many rules and regulations relating to the sale of investments to customers. more

High-Pressure Sales/Fraud

If your broker is using high-pressure sales tactics, making unfounded predictions to promote extremely speculative house stocks, or refusing to allow you to sell your investments, you may be dealing with a dishonest broker. more

Misrepresentation and Omissions

Misrepresenting important facts or failing to disclose key information when recommending an investment can often mean your broker is disguising risk or being careless. If this results in a poor investment decision, your broker can be liable. more

NASD Rules and Regulations

See FINRA Rules and Regulations. more

Negligence/Incompetence

If your broker fails to recommend suitable investments, does not disclose important investment information, or does not diversify your portfolio, he or she may be considered negligent, which can result in undue financial risk or harm. more

On-Line Trading Claims

Recent growth in the on-line trading industry has revealed a number of regulation issues and the need for more stringent evaluation. more

Over-Concentration

A broker who over-concentrates your portfolio in only one type of investment, stock, or industry is risking your money and is not properly diversifying your portfolio. more

Price Manipulation

Brokers can manipulate prices by artificially increasing or decreasing security prices to generate profits, often by fraudulent promotion, high-pressure sales tactics, or refusal to sell a customer's security. This activity violates state and federal securities laws. more

Securities Registration

All brokers must follow a state's securities registration requirements to legally sell particular securities to investors in that state. Brokers who sell an unregistered security can be held liable in violating that state's registration requirements. more

Statute of Limitations/Time Bar

In certain circumstances, time limits may restrict your ability to bring a claim against a broker or brokerage company. Therefore it is important to seek qualified legal assistance early. more

Unsuitability

Your broker is obligated to recommend investments that are right for your financial situation, goals, and level of risk. An investment is unsuitable if these considerations are not followed. more

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Red Flags

Did you receive a “happiness” letter?

Often, when a brokerage firm detects abuses in an investor's account, the firm will send the customer a “happiness” or “comfort” letter. This is an attempt to cover for the fraudulent conduct of their broker. The letter is full of happy talk and generally states something to the effect that “we are pleased to have you as a client, we value your business, if you have a problem with your account please contact the firm.” Sometimes, it may say “unless we hear back from you, we will assume you accept the risks associated with the aggressive trading in your account.” Typically, an investor's failure to respond negatively to one of these letters is not damaging to his or her case, since many times, the investor is not aware of the fraud until some considerable time after the “happiness” or “comfort” letter was issued. In addition, it is common for a broker to tell a client who received a happiness letter not to worry about it and that it is just a formality. A letter of this type is generally not given a great deal of credence in an arbitration hearing.

“Don't rush to invest with someone until you've had a chance to thoroughly check out the adviser and the proposed investments.” Mark Maddox

Indianapolis Business Journal
July 2006

The Lowdown

What you may not know about bonds.

Bonds are one of the investments that are least understood by investors; therefore, few other investments are as wrought with abuse. First, brokers typically do an awful job of disclosing the risks associated with bonds. Brokers sell bonds as a conservative investment, when in fact many times they are not. Government bond funds often load up on mortgage-backed bonds such as Ginnie Maes to increase their yields. While these bonds are backed by the government, they can still be very volatile due to changing interest rates. This is typically not disclosed to investors.

Brokers also fail to tell investors that any bond, regardless of whether it is a government bond or an AAA rated bond, can lose money if it is not held to maturity. For example, a government bond purchased when interest rates are at five percent will plummet in value if interest rates subsequently rise to seven percent. If an investor sells her bond at that point, she will have a loss on the safest investment available.

Another problem is that unlike stocks and mutual funds, bond prices are not readily discernible to most investors. In the usual principal transaction, a broker buys a bond at one price and sells it to the investor at a higher price and the broker and brokerage firm pocket the difference. When a broker buys a bond from an investor, they do the opposite, charging a “markdown.”

“The con artist offers you a shortcut to your American dream. Unfortunately, while the scammer hits it big, the investor's dream becomes a nightmare of unimaginable devastation.” Mark Maddox

Indianapolis Business Journal
February 2007