August 21, 2019

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Broker Fraud

As an investor, you most likely use an investment broker (stock broker) to help you buy and sell your investments, such as mutual fund shares, stocks and bonds. These financial investments are generally termed “securities”, even when they do not turn out to be very “secure”.

If a broker is dishonest, does not act in good faith or fails to disclose all of the facts, he may be guilty of broker fraud and his agency (brokerage firm) could be held liable for any losses to investors. The defrauded investors could then attempt to recover their capital through legal proceedings.

Brokers who mislead investors regarding the financial security of investments can be held liable for losses through Investor Fraud Lawsuits. If you become concerned about the actions of your broker, you should contact a Securities Attorney prior to entering into the transaction or if you become suspicious.

View qualified Securities Law Firms in your area to find Securities Lawyers to get help with this process. In many alleged fraudulent securities matters the Securities and Exchange Commission (SEC) will undertake a formal investigation. Many of these larger federal matters also have investor class action lawsuits to group similarly-situated investors (class members) and provide efficiency in the civil judicial process.

Types of Fraud

The most common types of fraud committed by brokers are:

  • Misrepresentation where the broker deceives you by giving false or misleading information, or fails to give you important information (omission).
  • Churning where the broker (who collects a fee each time he completes a transaction) buys or sells for you more stock than you really need to increase his commissions.
  • Overconcentration where the broker fails to diversify your portfolio (invest in many types of stocks, bonds & funds to protect against any particular asset’s decline in value)
  • Unauthorized Trading where the broker fails to get your permission before buying or selling on your behalf.
  • Unsuitability where the broker recommends a transaction that benefits him, but is not suited to your investment goals or is riskier than you like.
  • Breach of fiduciary duty where the broker, who has a legal duty to act in your best interest (he is your fiduciary), fails to do so and hurts your interests. This may happen even if the broker is not trying to defraud you, but is just negligent (insufficiently careful).

Since most fraud happens when investors do not have sufficient information, a careful investor can inform himself by reviewing common reports made public by most companies, including:

  • Articles of Incorporation are filed typically with a state agency such as the Secretary of State and identify the company’s management and ownership
  • Prospectus is a disclosure filed when the company first goes public, otherwise called an initial public offering (IPO). This report will generally include cash flow information, earnings statements and balance sheets.
  • Quarterly, Annual or Biennial Reports are the periodic reports filed by a company that update investors on the financial status of the company.

Another type of well-known fraud is insider trading. This type of fraud may be committed by any of a number of market participants, including brokers and happens when someone with secret, inside information makes a transaction or helps someone else make one, and gets an extra benefit by exploiting the secret.

Related areas:

Contract Law, Fraud, Business Law, SEC, Securities Law