When Does Bad Investment Advice Constitute Stockbroker Fraud?

Sometimes, brokers get it wrong. They do their research, review their client’s portfolio and investment objectives, and make informed investment recommendations that lead to investment losses. This happens, and it reflects the fact that no one can predict the market with absolute certainty.

But, sometimes, a broker’s bad investment advice will justify a claim for investment fraud.

While no one expects stockbrokers to get it right 100% of the time, brokers owe various duties to their clients. These duties require brokers to ensure that they are making informed recommendations based on all of the information that is available. If a broker overlooks relevant data in the marketplace, fails to consider a client’s risks or objectives, or makes any other mistake that he or she could—and should—have avoided, then a claim for investment fraud in FINRA arbitration may be warranted.

Broker Negligence: When Bad Advice Justifies a Claim for Investment Fraud

When stockbrokers make bad investment recommendations, the key question is whether the recommendation was justified based on the information that was available at the relevant time. If a broker considers all relevant information and makes a recommendation that proves to be unprofitable despite all indications to the contrary, this typically won’t be actionable. However, if a recommendation was not justified based on the information available at the time the recommendation was made, this is a scenario in which a claim for broker negligence may arise.

Within this framework, broker negligence can take many different forms. For example, some of the potential grounds for pursuing a broker negligence claim in FINRA arbitration include:

• Overlooking relevant market indicators
• Failing to read the investment prospectus or other published materials
• Failing to properly analyze or interpret the information that is available
• Making investment recommendations based on a misunderstanding of the nature of the investment product (as is often the case with complex structured investment products)
• Failing to consider an investor’s current portfolio concentration or risk profile

These are just examples. Fundamentally, the concept of broker negligence focuses on the issue of whether a broker’s mistake was avoidable. Overlooking (or failing to give due consideration to) relevant information, performing flawed analyses, incorrectly interpreting investment disclosures, and other similar types of mistakes can all justify claims for negligence.

Broker Misconduct: Another Clear Form of Investment Fraud

While broker negligence is a significant concern for retail investors, it is not the only concern of which investors need to be aware. Unfortunately, broker misconduct is a very real concern for retail investors as well.

Intentionally making decisions that harm investors is a clear form of stockbroker fraud. Stockbrokers have a legal duty to act in their clients’ best interests. This means that brokers must provide their clients with the information they need to make informed investment decisions, and brokers must avoid putting their own financial interests first.

When brokers intentionally withhold information or execute transactions that involve conflicts of interest, they can—and should—be held accountable. Along with the types of broker negligence discussed above, retail investors can also pursue broker fraud claims based on misconduct such as:

• Charging Excessive Fees – While charging excessive fees can, itself, constitute broker fraud, in many cases retail investors will have claims based on their brokers’ intentional failure to disclose the fees they are charging.
• Unauthorized Trading – Conducting unauthorized trades on a client’s account is prohibited unless the client has granted his or her broker discretionary trading authority. Oftentimes, brokers will use unauthorized trades to generate fees and commissions at their clients’ expense.
• Failure to Follow Directions – Similar to unauthorized trading, brokers may fail to follow their customers’ directions because doing so maximizes their personal income. Failure to follow directions is a common form of broker fraud.
• Recommending Alternative Investments – While pursuing alternative investments can be a small part of an overall investment strategy for high-net-worth investors, brokers will often recommend alternative investments because they offer higher commissions than ordinary stocks and bonds.
• Front-Running and Delaying Trades – Front-running is a fraudulent practice that allows brokers to profit at their customers’ expense. If your broker is not making trades promptly upon approval, he or she may be delaying your trades intentionally.

Here, too, these are just examples. From stealing clients’ funds to falsifying clients’ account statements, stockbroker fraud can take numerous other forms as well. If you have any concerns about your broker’s conduct (or misconduct), you should consult with a lawyer as soon as possible. Some signs that you should speak with a lawyer about pursuing a claim for stockbroker fraud include:

• You cannot get in touch with your broker
• The information you receive from your broker is inconsistent with the information you receive from other sources
• Your broker is communicating with you via a personal email account or phone number rather than an email account or phone number affiliated with his or her brokerage firm
• There are trades or transfers on your account that you don’t understand or didn’t authorize
• Your broker is evasive when you contact him or her about your portfolio’s performance or the fees you are being charged

What to Do if You Suspect Stockbroker Fraud

If you suspect that you may be a victim of stockbroker fraud, what should you do? Most immediately, you should discuss your situation with an attorney. An attorney who has experience representing defrauded investors will be able to examine your brokerage account statements and any communications from your broker for signs of fraud. If it appears that you have a fraud claim, your attorney can take appropriate legal action on your behalf, which will most likely involve filing a claim in FINRA arbitration.

Discuss Your Legal Rights with an Attorney at Zamansky LLC

Do you have concerns about stockbroker fraud? If so, we encourage you to contact us promptly. Call 212-742-1414 or tell us how we can reach you online to arrange a free, no-obligation consultation with an attorney at Zamansky LLC.