8 Signs of Stock Broker Fraud

Stock broker fraud is one of the biggest reasons why many small investors lose money in the stock market. Basically, a fraud is committed if the broker puts his personal interests over that of his client's. A stock broker is duty bound to protect the best interests of the client at all times. Here are the common signs of stock broker misrepresentation or fraud.

1. Practicing without License

A stock broker, brokerage company, or any person who is in the business of trading investment products must be registered. If the person handling your investment account is not licensed to do so, you are already a victim of stock broker fraud.

2. Trading without Authorization

You need to give your stock broker authorization before he trades any stock or investment product on your behalf. Your broker can only enter into transactions without asking for your permission in advance if you provide him with discretionary authority.

3. Omitting or Misrepresenting Information

The most common type of stock broker fraud is giving clients misleading facts or withholding important information that can affect the investment decisions of the client. With this in mind, fraud is committed if your stock broker tells you that he has insider information about a certain stock or investment.

4. Giving Unsuitable Investments to Clients


Stock brokers are trained to offer investments that match the income level, assets, risk tolerance, investment goals and experience of the particular client. If you are being pushed by your broker to invest an amount that is beyond your means or risk tolerance, or if you are not given adequate information about the risks that you face, your broker is committing fraud.

5. Failing to Promptly Execute Orders

If your stock broker does not execute your orders or directions immediately he has failed to protect your interests. As a consequence, the broker has committed fraud.

6. Churning

Churning is a type of investment fraud wherein a stock broker trades excessively in your account, especially with the same set of stocks. Even if you have given your stock broker discretionary control of your account, you still need to check for stocks that have an unusually high number of trades. If your broker gets paid through commissions, he gains more profit by increasing the frequency in which he transacts your stocks, even if the circumstances are not favorable to you.

7. Setting up Illegal Accounts

An investment red flag occurs when your stock broker suggests that you lie or give the wrong information when you fill out any investment application. A fraudulent investment application gives rise to an illegal account.

8. Participating in Institutionalized Stock Broker Fraud

Fraud is committed if the only reason why a broker pushes or recommends a certain stock or investment product is because of his secret or back-door commissions from the issuer of the stocks. During the 1990’s, many large brokerage firms pushed their sales people to offer undesirable IPO stocks just for the lucrative commissions they get for every sale.

 

 

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