The Beck Law Firm helps investors who have been the victim of stockbroker and investment adviser fraud and other violations. Drawing on Joel Beck’s 10 years as a securities regulator, we can help you fight back against a brokerage firm or adviser that has harmed you and abused your trust. Common claims against brokers and advisers include unauthorized trading, unsuitable recommendations, excessive trading or churning, theft of funds, fraudulent misrepresentations and omissions, and failure to supervise. If a firm or broker has caused losses in your account, you may be able to recover some or all of your losses.
You may be surprised to learn that when you opened a brokerage account at a broker-dealer, you gave up your rights to take your case to court. In almost every case, the brokerage firm’s account agreement you signed requires disputes between you and the firm to be handled in arbitration, through FINRA’s (the Financial Industry Regulatory Authority) dispute resolution process. Arbitration is different from a court case, and is governed by different rules and procedures.
The Beck Law Firm is experienced in securities arbitration matters and can provide you with practical advice and counsel on how best to seek to recover investment losses caused by stockbroker fraud. Click the links below to learn more about the common types of stockbroker fraud. If you believe that you have been the victim of broker fraud, contact us today.
A broker has an obligation to recommend that his or her client invest in only appropriate, or suitable, investments, given the client’s financial condition and the objectives for the account. In making a recommendation to a client, a broker should usually consider the client’s age, net worth, investment objective, risk tolerance, and other holdings.
An example: A broker makes an unsuitable recommendation when he advises an unsophisticated, elderly client of limited means who wants to preserve his or her assets, to invest in a speculative investment.
When a broker makes unsuitable recommendations, the investor purchase the recommended investment, and then suffers damages, the investor may be able to recover his or her losses through securities arbitration. If you believe that you’ve suffered losses due to unsuitable recommendations, contact The Beck Law Firm today for a consultation.
Investors are oftentimes curious about what “churning” is and how it relates to a brokerage account. Churning is a form of unsuitable recommendations and is also called excessive trading. Churning occurs when a securities broker engages in securities transactions and manages a customer’s account for the purpose of generating commissions, at the expense of (instead of the benefit for) the client.
Churning typically has three elements:
- Control. For churning cases, the broker must control the account. Control can be through explicit control such as a written discretionary agreement, or it can be de facto control, where the broker assumes control of the account through the client’s acquiescence, trust, or reliance. For example, if a client always follows a broker’s advice, the broker may be found to have de facto control over the account.
- Excessive trading. The trading in the account must be considered excessive in view of the customer’s investment objectives and other suitability information.
- Scienter or Intent. There typically must be some type of required mental state of the broker (an intent element) to prove churning.
How is it determined that the trading in an account is excessive? A primary test for excessive trading is the relationship between the net amount of money invested and the transaction costs (commissions, margin interest, etc.) that are incurred. To that end, when evaluating whether an account was churned, an expert typically reviews the account activity and determines the cost to equity maintenance factor (or break-even factor). This demonstrates that percentage of return on the customer’s average net equity needed to pay the commissions and other expenses, such as margin interest, associated with the trades. In many instances, a break-even rate of 8% may be presumed to be excessive trading, while a 12% rate is generally conclusive. But, this factor cannot be used alone, but must be considered along with the nature of the accounts, the stated investment objectives, the control exercised by the broker over the account, and that character of the trading. Another method used in analyzing excessive trading is the average annualized turnover rate, which measures the number of times an account turns over in a given year.
If you think your account may have been churned or excessively traded, contact The Beck Law Firm today for an evaluation.
A common broker misconduct area is what we call fraud, or making material misrepresentations or omissions of material fact in connection with the purchase or sale of a security. When a broker recommends an investment, he or she is obligated to disclose all material, or important, information about that investment to the client – both the good information and the bad. Making false and misleading statements, or failing to disclose material information is considered fraud, and is prohibited by the federal securities laws, as well as other industry rules and regulations (including FINRA Rule 2110).
Examples of fraudulent statements and omissions by brokers include failing to disclose the financial condition of a company when recommending its stock. An example: a broker had been recommending that his clients purchase the stock of a little known, financially weak company. The stock was a penny stock, was very thinly traded, and had no real good prospects at the time. Nevertheless, because the firm was apparently pushing the stock, the broker “sold” it to his clients, never bothered to tell them that the company had never made a profit in its existence, and had no realistic expectations of making a profit in the near future, and never told the customers that the company’s largest asset was its “goodwill.” These misstatements and omissions were fraudulent conduct by the broker.
When an investor relies on these fraudulent statements by a broker, and suffers losses, the investor may be entitled to recover his or her losses through securities arbitration. If you think you’ve been harmed through securities fraud, contact The Beck Law Firm today for a consultation.
Unauthorized trading occurs when a broker places a trade in a client’s account without that client’s prior authorization, unless the client has previously given the broker discretionary authority over the account, in writing. A broker violates industry rules (FINRA Rule 2110) when he or she makes unauthorized trades. Securities industry regulators oftentimes sanction brokers for effecting unauthorized trades.
How do you prevent unauthorized trading? You really can’t, because it is the broker who commits the act. But, you can identify these trades by reviewing your trade confirmations and monthly account statements and ensuring that you authorized all trading activity. If you identify unauthorized trading in your account, contact The Beck Law Firm today for a consultation.