Common Misconduct Claims

This list is not all-inclusive but is intended primarily to assist investors in recognizing whether they may be able to recover some or all of their losses. Consultation with an attorney experienced in securities arbitration matters is recommended for those who believe they may have suffered losses as the result of stockbroker misconduct.

Unsuitability

A broker's first duty is to know the investor - to acquire necessary information about the investor's financial situation, investment goals and objectives, future needs, and risk tolerance in order to recommend suitable investments for that individual. Also, the broker must know the history and facts of the recommended investment to ensure a suitable match. Indeed, a broker in certain circumstances may have a duty to refrain from taking orders from a customer if such orders are unsuitable for the investor. Brokers must continuously reevaluate the needs of their investor clients to maintain suitability of recommended investments.

Examples of unsuitable recommendations from a broker:

  • The type of securities suggested, such as high-tech or start-up companies as opposed more conservative stocks; or
  • The particular strategy proposed, such as options trading rather than equity trading.

Breach of Fiduciary Duty

It is common for investors to put their complete trust and confidence with a broker based on the broker's stated expertise and superiority of knowledge in the area of investments and money management. Brokers and brokerage firms always have a duty to deal in good faith with investor clients. Many jurisdictions hold that brokers owe their securities customers a heightened duty known as a "fiduciary duty." Brokers and their firms can be held responsible for abusing the investor's trust and confidence and breaching their fiduciary duties.

Churning

Churning occurs when a broker buys and sells securities in an investor's account with excessive frequency for the purpose of generating commissions. To establish churning, the investor must establish that the broker had actual or implied control over the investor's account to make the transactions.

Fraud or Theft

The most blatant of unlawful tactics is fraud or outright theft by a broker. An example of theft is the case where the broker instructs an investor to write a check payable to the broker personally or to a company other than the brokerage firm, and the money never reaches the investor's account. Investors should take all possible precautions when seeking the assistance of a broker, including checking the broker's and the brokerage firm's credentials.

Failure to Supervise

A brokerage firm must supervise its individual brokers and their recommendations to investors to ensure compliance with and prevent violations of the rules of the securities industry, or risk liability to the investor.

Registration Violations

Under federal securities laws and state "blue sky" laws, brokers and brokerage companies must be registered to sell securities to residents of their states. In addition, most states require that the securities sold to their citizens be registered or properly exempt from registration.

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