There are many ways a stockbroker can violate legal and ethical obligations to a customer, and in most cases, the broker’s employer — often a large brokerage firm — will be obligated to pay the damages.
Common Types of Stock Broker Misconduct
Recommending Unsuitable Investments
A great investment for one person can be a very foolish investment for someone else. For that reason, an investor’s personal circumstances must be carefully considered by the broker when he or she is recommending investments.
A 40-year old unmarried surgeon should probably invest very differently from a middle-class parent planning for her kids’ college years. A 70-year old retiree on a pension should not invest in the same way as a wealthy 70-year old business owner who is still working.
Stockbrokers have the duty to know their customers and to ensure that each recommended investment is suitable for that customer in light of factors such as the customer’s age; financial status; investment knowledge and experience; short term and long term needs and objectives; and ability and willingness to tolerate risk and withstand loss. If you lose money in an unsuitable investment, the broker is responsible.
Misrepresenting or Omitting Facts
You need to know a lot of facts to intelligently decide whether to buy or sell an investment. Some brokers lie about things you need to know. Some brokers don’t necessarily lie, but they withhold certain facts that might affect your investment decision. And some brokers who misrepresent or omit facts are simply careless. But whether the broker’s misrepresentation or omission is fraudulent or simply negligent, if it caused you to make a poor investment, the broker may be liable for your loss.
Excessive Trading or “Churning”
Remember that any broker who is compensated by commissions earns those commissions whenever you buy or sell, and whether you make money or lose money. When a broker who has discretion to control the investments in your account engages in excessive trading in order to generate commissions, that’s churning, and churning is fraud. Your broker can be sued for churning your account.
Engaging in Unauthorized Trading
In most instances, a broker is permitted to buy or sell a security only after receiving your permission to do so. But sometimes, brokers engage in unauthorized trading. Unless you have given the broker the right to exercise his or her own discretion in handling your investments, unauthorized trading constitutes a breach of the broker’s fiduciary duty and a violation of your rights. The unauthorized trades can be voided and resulting losses can be recovered from your broker.
Failing to Follow Instructions
Your broker usually is obligated to follow your instructions with respect to buying or selling a stock. If you instructed your broker to buy or sell and he or she failed to do so, the upward or downward movement of that stock might cost you a lot of money. In some instances, the broker won’t necessarily ignore your instructions but, for his or her own benefit rather than yours, might pressure you to hold the stock wanted to sell. Failure of a broker to follow your instructions, and even improper pressure to change your instructions, can be grounds for recovering your loss.
Misappropriation and Other Criminal Activity
Occasionally, a broker will engage in plainly criminal acts like theft, fraud, and forgery. In essence, the broker hatches a scheme to steal your money. Sometimes this scheme will involve what is known as “selling away,” meaning the broker’s investment activities are being done on the side and aren’t being reported to or approved by the brokerage firm that employs him or her. Brokers have even been known to sell investments that don’t exist. You have the right to seek recovery for any fraudulent conduct that results in misappropriation of funds by a broker.
A broker generally has the duty to recommend that the customer’s account be diversified among different investments, investment classes, and industries. Proper diversification is one of the best ways to control risk and avoid excessive losses. If a broker concentrates too much of your portfolio in one type of investment, (such as stocks), or puts too much of your money in only one or two different stocks, or buys too many stocks in the same industry, you face a much greater risk of suffering a large loss. For instance, millions of investors lost money beginning in early 2000 because their brokers had concentrated their accounts in high-flying technology stocks that plummeted en masse. A broker who fails to recommend a properly diversified account can be liable for some or all of your losses.
I lost a lot of money in my investment accounts. Is it my broker’s fault?
Maybe yes, maybe no. Brokers are not guarantors of profitable investing. Most investments involve some degree of risk and uncertainty, and no broker can guarantee that you’ll make money. In fact, if a broker promises you’ll make money in a particular stock or in the stock market, you should get another broker. Nevertheless, in dealing with you and your investments, your broker is required to comply with high standards of commercial honor and just and equitable principles of trade. If the broker breaches his or her duties to you, and you suffer a loss as a result, the broker and his or her employer may be made to compensate you for that loss.
What duties are owed by a Stockbroker?
Stockbrokers are fiduciaries and owe a duty of care and loyalty to their customers. Your broker was therefore obligated – at a minimum — to do the following in making recommendations to you:
-Study any recommended investment to become sufficiently informed about its nature, price, and financial prognosis;
-Inform you of the risks involved in any purchase or sale;
-Disclose any conflict of interest he or she had in recommending security, and refrain from putting his or her self-interest ahead of your interest;
-Disclose or refrain from misrepresenting any fact that a reasonable customer might have found to be important to the investment decision;
-Refrain from transacting any purchase or sale until he or she obtained your express prior authorization; and
-Ensure that each recommendation is suitable.
If your broker violated any of the above-described duties, and the violation caused you to lose money, you have a valid claim for damages.
How do I find out whether my broker was at fault?
All losses are in some way “caused by the market.” But there’s always more to the story, and often a broker who blames your losses on a bad market will be hiding the fact that your investments were not as safe as he or she represented to you. As to how you can find out, there are several ways. If you have changed stockbrokers, your new broker might detect wrongdoing by his or her predecessor. (We get many referrals from stockbrokers who make such discoveries.) Your accountant or tax-preparer also might notice problems in your accounts and alert you to possible wrongdoing. But eventually, you will need to have a qualified attorney to review your investments. That’s where we come in.
WARNING: Deadlines apply to all of these rights of recovery. Delay can result in your claim being time-barred, or a particular forum may refuse to hear your complaints. But these deadlines are complicated. Don’t procrastinate in seeking qualified legal assistance. Likewise, don’t give up because you assume you’ve waited too long. Hugh Berkson is broker misconduct lawyer who exclusively represent clients hurt by the misconduct of investment professionals such as stockbrokers. Ask us to look at your case. We’ll let you know how much time you have to proceed and what we can do to help you.