Types of Investment Fraud and Common Securities Violation
Have you lost money because of your financial advisor or brokerage firm? Some investment losses occur because of market fluctuations, but others may result from broker misconduct or securities fraud.
Investment fraud occurs when a broker, financial advisor, or brokerage firm violates securities laws or industry rules and causes financial harm to investors. In many cases, investors may be able to recover losses through FINRA arbitration claims.
The investment fraud attorneys at The White Law Group represent investors nationwide who have suffered losses due to broker misconduct. Below are some of the most common types of investment fraud and securities violations that lead to investor claims.
Unauthorized Trading
Unauthorized trading occurs when a broker buys or sells securities in a client’s account without the client’s prior consent or authorization.
Investors typically discover unauthorized trading when reviewing account statements or trade confirmations showing transactions they never approved.
Unauthorized trading may occur when:
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a broker places trades without contacting the client
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a broker exceeds the scope of discretionary authority
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trades occur after the client specifically declined the recommendation
Even if a broker informs a client about the trade after it has been placed, the trade may still be considered unauthorized.
Unauthorized trading can violate securities industry rules and may give investors the right to pursue recovery through FINRA arbitration.
Excessive Trading (Churning)
Churning occurs when a broker excessively buys and sells securities in a client’s account primarily to generate commissions.
Because brokers earn commissions on transactions, some brokers may engage in unnecessary trading that benefits them financially but harms the investor.
Warning signs of churning include:
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unusually high trading activity
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frequent buying and selling of the same securities
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high commission charges relative to account size
Churning can lead to substantial financial losses and may expose investors to unnecessary tax consequences.
Unsuitable Investment Recommendations
Financial advisors have a duty to recommend investments that are suitable for a client’s financial situation, risk tolerance, and investment objectives.
Recommending investments that are excessively risky, illiquid, or inconsistent with an investor’s goals may violate FINRA Rule 2111 (Suitability Rule).
Examples of unsuitable recommendations may include:
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high-risk private placements for conservative investors
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complex structured products for retirees
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concentrated positions in speculative securities
Unsuitable investment recommendations are one of the most common claims filed in FINRA arbitration.
Overconcentration in Risky Investments
Another common type of broker misconduct occurs when a financial advisor places too much of an investor’s portfolio into a single investment, sector, or type of security. This practice is commonly referred to as overconcentration.
Financial advisors generally have a duty to help clients maintain proper diversification in their investment portfolios. Diversification helps reduce risk by spreading investments across different asset classes, industries, or securities.
Overconcentration may occur when a broker:
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places a large percentage of a portfolio into a single stock
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concentrates an account in one sector, such as energy or technology
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recommends multiple investments from the same sponsor or product type
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invests most of a retirement portfolio into illiquid alternative investments
When a portfolio is heavily concentrated in one investment or sector, even a small decline in that investment can cause significant losses.
For example, many FINRA arbitration claims have involved investors whose portfolios were heavily concentrated in products such as:
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non-traded real estate investment trusts (REITs)
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oil and gas partnerships
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private placements
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speculative technology stocks
If an investor’s portfolio was overly concentrated in risky investments and suffered significant losses, the brokerage firm may be liable for failing to make suitable recommendations or failing to properly supervise the broker.
Misrepresentations and Omissions
Another common type of investment fraud occurs when brokers misrepresent important facts or fail to disclose key risks about an investment.
Investors rely on their financial advisors to provide accurate and complete information. When a broker exaggerates potential returns or minimizes the risks involved, investors may make decisions based on misleading information.
Examples include:
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describing speculative investments as “safe”
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failing to disclose liquidity restrictions
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omitting material information about fees or conflicts of interest
Misrepresentation and omission claims frequently arise in cases involving non-traded REITs, private placements, and complex investment products.
Selling Away
“Selling away” occurs when a broker sells investments that are not approved by the brokerage firm.
These investments are often private placements or outside business opportunities in which the broker may have a personal financial interest.
Because the brokerage firm has not conducted due diligence or approved the investment for sale, selling away can expose investors to significant risks.
Brokerage firms may still be liable if they failed to properly supervise the broker.
Ponzi Schemes
Ponzi schemes are fraudulent investment operations that pay returns to earlier investors using money from new investors rather than legitimate investment profits.
These schemes often promise high or consistent returns with little risk, which should raise red flags for investors.
The most infamous Ponzi scheme in U.S. history was orchestrated by Bernard Madoff, which resulted in billions of dollars in investor losses.
Ponzi schemes rely on deception and eventually collapse when new investor funds are no longer available.
Elder Financial Exploitation
Elder financial abuse occurs when brokers or financial advisors take advantage of older investors who may be vulnerable due to age, isolation, or cognitive decline.
Common examples include:
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recommending unsuitable high-risk investments
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excessive trading in retirement accounts
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manipulating seniors into transferring assets
FINRA adopted Rule 2165 to help protect seniors from financial exploitation.
Broker Negligence
Broker negligence occurs when a financial advisor fails to meet the expected professional standard of care when handling a client’s investments.
Examples may include:
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failing to properly research investments
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recommending overly concentrated portfolios
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failing to monitor client accounts
While poor investment performance alone is not proof of fraud, negligence may occur when brokers fail to exercise reasonable care in managing a client’s account.
Margin Trading Problems
Margin trading involves borrowing funds from a brokerage firm to purchase securities.
While margin can increase potential returns, it also exposes investors to significant risks.
Problems may arise when brokers:
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place accounts on margin without proper authorization
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fail to explain margin risks
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expose investors to excessive leverage
Margin-related disputes frequently arise in FINRA arbitration cases.
Insider Information or “Hot Tips”
Another red flag occurs when a broker claims to have inside information about a company that is not available to the public.
Trading on material non-public information is illegal and violates federal securities laws.
Investors should be cautious when brokers promote investments as “guaranteed winners” or claim to possess secret information about a company.
What Should Investors Do if They Suspect Investment Fraud?
Investors who suspect broker misconduct should take steps to protect themselves, including:
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reviewing brokerage account statements carefully
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documenting suspicious transactions or communications
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preserving emails and written communications with the broker
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consulting an experienced securities fraud attorney
Many investor disputes are resolved through FINRA arbitration, which allows investors to pursue recovery of losses caused by broker misconduct.
Frequently Asked Questions About Investment Fraud
What are the most common types of investment fraud?
Some of the most common types of investment fraud involve misconduct by brokers or financial advisors. These may include unauthorized trading, excessive trading (churning), unsuitable investment recommendations, misrepresentations or omissions of risk, selling away, and Ponzi schemes. These types of securities violations may allow investors to pursue recovery through FINRA arbitration.
How do I know if my broker committed investment fraud?
Signs of potential broker misconduct may include unauthorized trades, unexplained losses, excessive trading activity, investments that do not match your risk tolerance, or investments that were described as “safe” but turned out to be highly risky. Investors who suspect misconduct should review account statements and consult with an experienced securities attorney.
Can I recover money lost because of broker misconduct?
In some cases, investors may be able to recover losses caused by broker misconduct through FINRA arbitration. This process allows investors to bring claims against brokerage firms and financial advisors who violated securities industry rules or failed to properly supervise their brokers.
What is the time limit for filing an investment fraud claim?
Many investor disputes are resolved through FINRA arbitration, which generally requires claims to be filed within six years of the event giving rise to the dispute. However, determining the exact deadline can be complex, and investors should consult a securities attorney as soon as possible if they suspect misconduct.
What should I do if I suspect investment fraud?
Investors who suspect fraud should document suspicious activity, preserve communications with their broker, and review brokerage account statements carefully. Speaking with a securities fraud attorney can help investors understand whether broker misconduct may have occurred and whether recovery options are available.
Speak With an Investment Fraud Attorney
If you believe your broker or financial advisor engaged in misconduct, you may have the right to recover your losses.
The White Law Group represents investors nationwide in FINRA arbitration claims involving broker misconduct and securities fraud.
Contact our investment fraud attorneys for a free consultation to discuss your situation and potential legal options.
Last modified: March 13, 2026