Stockbroker Fraud Attorneys

Hiring a stockbroker cannot guarantee success in the stock market, but it does entitle you to service that meets certain professional standards. Your stockbroker is required to manage your money honestly, professionally, and prudently. Whether done intentionally or through incompetence, when your stockbroker mismanages your funds, the financial effects can be devastating to you and your entire family.

A stockbroker’s duties to his or her clients are outlined in both state and federal securities laws, as well as professional guidelines set forth by the New York Stock Exchange and the National Association of Securities Dealers. In addition to these specific rules, stockbrokers are expected to perform to certain minimum standards of competence for their profession.

Your Broker and Your Information

When you begin working with a broker, you would usually give him or her relevant information to help in decision making. This enables your broker to make appropriate decisions that match your situation and preferences. If for some reason you don’t give this information, the Suitability Rules require that the broker try to get it from you before starting on any investment activity.

The information you give to your broker generally includes:

• Your financial status
• Your tax status
• Your investment goals

The NASD Conduct Rule 2310 and the NYSE rule 405 both state that the broker should have “essential” or “reasonable” information about a client before making any investments for them, and that if they don’t have enough information about that client, they should use “reasonable efforts” or “due diligence” to get it.

What Is Investment Fraud?

Stockbroker fraud (also referred to as investment fraud) occurs when a stockbroker makes recommendations and claims that are inaccurate or that are primarily intended in the broker’s best interests rather than the clients. These fraudulent recommendations and actions might include making outright false statements, leaving out important information (factual omissions), intentional exaggerations, and other mischaracterizations.

Other types of stockbroker malfeasance that may constitute fraud include failure to properly and promptly execute orders and performing unauthorized and/or excessive trades. It can often be difficult to establish fraudulent behavior as not all bad trades or stock market losses are attributable to fraudulent activity. Honest and competent stockbrokers can make mistakes and bad recommendations without it rising to the level of fraud, and investments always carry some degree of risk. It is only when a stockbrokers or brokerage houses engage in self-serving behaviors to the detriment of their clients, or when they fail to uphold a minimum standard of care and competence that activities are considered fraudulent.

Violations Stockbrokers Can Make

If you believe that you have been the victim of stockbroker fraud, one of the first things you can do is research your broker’s record to establish whether previous complaints have been filed against him or her. The National Association of Securities Dealers offers a comprehensive online service called the Central Registration Depository (CRD), which allows you to research any of their approximately 500,000 members and see detailed information on their history including professional qualifications and employment history as well as any reports of misconduct and previous fines and settlements for violations such as

• Unsuitable recommendations
• Over concentration
• Excessive trading, referred to as “churning”
• Unauthorized investments
• Failure to diversify
• Breach of fiduciary duty
• Annuities fraud
• Mismanagement of accounts
• Misrepresentations and omissions
• Stock market trading losses

If you have reason to think that something illegal was done with your investments, you have the right to file a lawsuit.

Unsuitable Recommendations

One of a stockbroker’s major responsibilities is to guide clients to investments that are appropriate to their needs, interests, and level of expertise. This includes recommending appropriate investments according to risk, diversity, long-term goals, and other factors. Based on this profile and the information available, your stockbroker is responsible for recommending a stock profile that is appropriate for your specific needs and interests. Unsuitable recommendations may cause significant financial damage, particularly for clients new to investments.

Overconcentration

One of the most important factors in building a successful stock portfolio is diversification. This tactic can help spread out your risk, so that losses from a specific company or sector are mitigated by other holdings in other markets and companies. When a stockbroker over-concentrates your portfolio in too few companies, or too few markets, you run a great risk of incurring significant stock losses as a result of normal market fluctuations.

Churning

Stockbrokers get paid for trading with their customers’ money. Each account has parameters based on the customer’s income, tax needs, and risk tolerance. When you open an account with a broker you give that information as the basis for trading activity.

Churning is too much trading of securities for that particular account. The more trading the broker does, the more he or she earns, and sometimes it’s tempting for a broker to trade for that reason, rather than in accordance with customer preferences.

When such trades make money, perhaps nobody is upset. The broker is paid and you, as the customer, come out ahead in your investment situation. When these trades lose however, your investment situation worsens, but the broker doesn’t owe you anything in compensation, unless you discover what’s happened and file a lawsuit.

Churning Is a Violation

Churning usually happens when you’ve given your broker discretion to trade your account. That means you don’t have to give permission for each trade separately, and if you trust your broker you might give this discretion to avoid having to decide so many things yourself.

If your account is set up so that your broker must obtain your permission for each trade, churning would probably not happen, because you’d be more personally involved in each trading decision.

The National Association of Securities Dealers (NASD) created a rule to cover churning: Rule 2310-2(b)(2) in their Manual. The New York Stock Exchange (NYSE) also has a rule against it: Rule 408(c).

If you claim churning in a court of law, it will be examined in light of your customer information about income, tax needs, and risk tolerance. The court will compare the number of trades and their size with your account’s set-up features and decide whether churning has happened.

If you find that your broker has been trading too much, and if you lose money as a result of that, you have the right to file a lawsuit. At Colling Gilbert Wright, we have significant experience assessing these situations and determining what would be the best step to take next.

Unauthorized Investments

When you hire a broker to handle your investments, you set things up by giving the broker information as to your tax needs and your investment goals. All brokers are required to ask you for this sort of information if you don’t volunteer it, because it forms the basis for their decisions in acting for you.

When you establish this relationship with your broker, you can give him or her written permission to use discretion in trading for you. If you choose not to do this, the broker must get your permission for each separate trade before making it. An experienced stockbroker misconduct attorney can help you file claims if you have experienced unauthorized trading.

Usually, permission is given orally. But there are times when a broker is tempted to make a trade based on his or her own expectation that money will be made from it, and that some of that money will take the form of the broker’s commission. If it does turn out to be a profitable trade, presumably you as the customer won’t object, and the broker will have increased his income.

But if you find that your broker is making such trades without your knowledge or permission, you should immediately complain and ask for it to stop. There’s no guarantee that it will be profitable, and if you should lose money from it, you can hold your broker liable for that. Trading with your money should be done according to your needs, preferences and risk assessment, not your broker’s.

Failure to Diversify

Most of us have probably read books or articles which urge us to diversify in our investments, and this general agreement stems from the market’s performance over the decades. Humanity knew this principle long before our stock exchange was born, and talked of not putting all your eggs in one basket. But what if the basket is dropped?

The market consists of many investment areas. All good brokers advise us to diversify so that when one part of the stock market is paying poorly or even losing money, the others will almost certainly pay better and perhaps very well.

This is essential if you want to follow the advice “Invest for the long-term and don’t panic over each little blip.” You can relax about blips in one part of the market if you have some of your money building in other parts that are progressing steadily. And when it all reverses, you can still be relaxed.

However, your money can be too narrowly invested in several ways:

• Only in one industry (for example, many people were burned by this mistake when the dot-coms collapsed during the 1990s)
• Only in common stocks (and that would include being in mutual funds that invest only in common stocks)

When one area of the market is doing particularly well, it’s tempting to join the rush and transfer your money for a maximum gain. Although many people have theories and developed hundreds of indicators or variables that can supposedly tell you what the future holds, nobody really knows why stock prices change. The company’s earnings are part of it; so are supply and demand, and people’s feelings and attitudes. There’s a mystery at the heart of it all.

So the wise investment strategy is to spread your money out and look ahead. If you’ve instructed your broker to diversify and find one day that your money is all in one small area, you’d have a valid basis for a lawsuit.

Breach of Fiduciary Duty

Fiduciary duty exists where there’s a trust relationship between a customer and a professional. You the customer hire a doctor or stockbroker because of their professional knowledge and training, and you trust them to make good decisions for you.

For their part, the professionals are obligated to be diligent and act in good faith for you, using their superior knowledge and expertise in that particular field. When they violate your trust by taking advantage of you somehow, in a way that you might not immediately recognize, they can be held legally liable for any losses you sustain.

Discretionary Authority

When that professional is a stockbroker, breach of fiduciary duty can arise when the broker has discretionary authority for managing your account. When you set up your account, you give the broker information about your risk preferences, as well as about your tax needs and income situation, and this should be the basis for the broker’s investment decisions for you.

If you give written permission for him or her to make trades for you without necessarily speaking with you each separate time, then that trading should be based on the overall conditions that you give when you open the account. If they’re not, the broker can be held liable for breach of fiduciary duty.

There are many ways a broker can break that fiduciary trust, all of which can cause enormous loss for you as their customer. These include:

• Churning
• Unauthorized trading
• Securities fraud
• Failure to diversify

Breach of fiduciary duty can be pinpointed to certain circumstances, such as when your broker:

• Gives you investment advice
• Carries out your investment orders
• Exercises discretionary authority in your account

In those situations, you’re relying on your broker’s knowledge, honesty, and professionalism, and paying him or her for those things. When a person is a fiduciary, higher standards are imposed on him than average. If you find your broker has been trading in violation of the basic rules of your account and if you lose money as a result of that, you have the right to file a lawsuit.

Annuities Fraud

Variable annuities are often bought by seniors as part of their retirement packet. The insurance company agrees to make periodic payments for the rest of your life, and a death benefit is included which guarantees a specified amount to your beneficiary.

They’re tax-deferred, but if you withdraw any money ahead of time, there are steep charges. They’re a good money-maker for the insurer, who gets a generous up-front commission as well as annual trailer fees, plus fees charged for the mutual funds that are usually part of the annuity.

Investors don’t always do so well, as the funds aren’t liquid, so there’s a large fee for withdrawing any, and for an elderly person who may have sudden high healthcare costs, this can be a severe blow.

The combination of elderly clients and high commissions and fees for the insurer has made variable annuities a focus of fraud. Morgan Stanley has been facing a large lawsuit in Massachusetts for over-charging for them, after dealing with another such lawsuit only about a year previously, for which they paid a $50 million settlement amount.

If you’ve purchased variable annuities without being told the full story of how they work and what they cost, you may have a valid arbitration claim. Perhaps you’ve been given a promise of guaranteed returns; this would be false, because as their name suggests, variable annuities give returns that vary with the stock market.

At Colling Gilbert Wright we have a lot of experience representing victims of annuities fraud. We can help you assess your situation and determine what would be the best step to take next.

Mismanagement of Accounts

According to the Caribbean Business News, there have been a number of athletes, entertainers and business leaders who have experienced heavy losses in Puerto Rico bonds and related closed-end bond funds (CEF). UBS issued a disclosure notice to clients recently that stated, “You should understand that an investment in Puerto Rico bonds involves risk and that you may lose part or all of your investment.” UBS operates over a dozen closed-end bond funds which have experienced significant losses due to the downturn in Puerto Rico bonds.

Closed End Bond Funds for High Net Worth Investors

Typically, closed-end funds are sponsored by a fund management company which controls how the fund is invested. Financial advisors, like UBS, solicit money from investors in an initial public or limited offering. The investors are awarded shares in securities or other financial assets which correspond to their initial investment. Some funds invest in stocks, others in bonds – such as Puerto Rican bonds – and others invest in some very specific financial products.

It is known that UBS operated over a dozen closed-end bond funds which were hit by the downturn in Puerto Rico bonds. For example, one closed-end UBS fund, the Tax-Free Puerto Rico Fund Inc. had a net asset value of $5.52 on Sept. 11, 2014 down from $6.73 the week before and $9.55 on January 31, 2014. Over 75% of this fund is invested in Puerto Rico government bonds.

Currently, many securities fraud lawyers, including Colling Gilbert Wright, are currently investigating the following closed-end bond funds:

• Puerto Rico AAA Portfolio Target Maturity Fund
• Puerto Rico GNMA US Government Target Maturity Fund
• Puerto Rico Fixed Income Fund
• Puerto Rico Fixed Income Fund II
• Puerto Rico Fixed Income Fund III
• Puerto Rico Fixed Income Fund IV
• Puerto Rico Fixed Income Fund V
• Tax-Free Puerto Rico Fund, Inc.
• Tax-Free Puerto Rico Fund II, Inc.
• Tax-Free Puerto Rico Target Maturity Fund, Inc.
• Tax Free Puerto Rico Fund
• Puerto Rico AAA Portfolio Bond Fund
• Puerto Rico AAA Portfolio Bond Fund II

Did UBS Mislead Investors?

In mid-September 2013, as concerns rose about Puerto Rico’s $70 billion debt load and weakening economy, Puerto Rico bonds took a hit in value, a result of US money managers selling off bonds and taking losses.The losses were magnified because many investors owned the bonds through leveraged closed-end funds, which financial experts say magnifies the risks and potential losses.

Many investors also used margin or other loans to invest in Puerto Rico bonds and Puerto Rico focused closed-end funds. Many investors have received margin calls and have been forced to liquidate their Puerto Rico bond or closed-end bond funds. Allegedly, the risk associated with bonds as well as the use of margin was not fully disclosed to fund investors by their investment advisors.

Particularly hard hit were closed-end funds run by UBS Asset Managers in Puerto Rico, the market leader in closed-end funds. The experienced securities fraud attorneys at Colling Gilbert Wright are investigating closed-end bond funds run by UBS, as well as Santander Securities and Popular Securities.

Misrepresentations and Omissions

Misrepresentations and omissions can take a number of forms. Examples include when a stockbroker falsely guarantees returns on an investment perhaps claiming to have insider information on a company or when a broker leaves out relevant information when recommending a stock.

Speak with a Stockbroker Fraud Lawyer Today

If you or someone close to you believes you have been a victim of stockbroker fraud, please call our Orlando stock broker fraud attorneys today to speak with an experienced securities fraud attorney. We can help you determine whether you have a claim and fight to get your money back.