Types of Investment Fraud and Common Securities Violations
Have you lost money because of your financial advisor or brokerage firm? Some investment losses come from market fluctuations, but others may result from broker misconduct or securities fraud. Continue reading to learn about the many types of investment fraud.
Help for Investment Fraud
Investment fraud occurs when a broker, financial advisor, or brokerage firm violates securities laws or industry rules and harms investors financially. 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 and other violations. 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:
- A broker places trades without contacting the client
- A broker exceeds the scope of discretionary authority
- 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 is a type of investment fraud that can violate securities industry rules and may give investors the right to pursue recovery through FINRA arbitration. It’s one of several types of common securities violations that may support a FINRA claim.
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. Unfortunately, it’s one of the most common types of investment fraud.
Warning signs of churning include:
- Unusually high trading activity
- Frequent buying and selling of the same securities
- High commission charges relative to account size
Churning can lead to substantial financial losses and may expose investors to unnecessary tax consequences. It is a type of investment fraud that can drain an account through repeated commissions and trading costs.
Investment Losses? Contact us now for a free consultation!
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. That means avoiding risky investments.
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 that can lead to risky investments may include:
- High-risk private placements for conservative investors
- Complex structured products for retirees
- Concentrated positions in speculative securities
Unsuitable investment recommendations are one of the most common types of investment fraud. These recommendations can leave investors exposed to risky investments that do not fit their financial goals.
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 called 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 is a type of investment fraud that may occur when a broker:
- Places a large percentage of a portfolio into a single stock
- Concentrates an account in one sector, such as energy or technology
- Recommends multiple investments from the same sponsor or product type
- 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 can cause significant losses.
For example, many FINRA arbitration claims have involved investors whose portfolios were heavily concentrated in products such as:
- Non-traded real estate investment trusts (REITs)
- Oil and gas partnerships
- Private placements
- 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 properly supervise the broker.
Overconcentration is a type of investment fraud that can magnify losses when one investment or sector declines.
Investment Losses? Contact us now for a free consultation!
Misrepresentations and Omissions
Another common type of investment fraud occurs when brokers misrepresent important facts or fail to disclose key investment risks.
Investors rely on financial advisors to provide accurate, complete information. When a broker exaggerates potential returns or downplays the risks, investors may make decisions based on misleading information.
Examples of this type of investment fraud include:
- Describing speculative investments as “safe”
- Failing to disclose liquidity restrictions
- 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.
Claims involving misrepresentation and omissions often depend on what the broker said, what was left out, and what the investor reasonably understood.
Selling Away
“Selling away” occurs when a broker sells investments that the brokerage firm does not approve.
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 risky investments.
Brokerage firms may still be liable if they failed to supervise the broker properly. Selling away can also involve common securities violations when brokers recommend outside investments without proper approval or oversight.
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 types of investment fraud 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 run out.
Ponzi schemes remain among the most damaging types of investment fraud because losses can grow before investors realize the returns are not legitimate.
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:
- Recommending unsuitable high-risk investments
- Excessive trading in retirement accounts
- Manipulating seniors into transferring assets
FINRA adopted Rule 2165 to help protect seniors from this type of investment fraud. Older investors may be especially vulnerable to risky investments that don’t match their needs or financial circumstances.
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:
- Failing to properly research investments
- Recommending overly concentrated portfolios
- Failing to monitor client accounts
Broker negligence may overlap with other common securities violations when poor oversight or unsuitable recommendations contribute to losses.
Poor investment performance alone is not proof of fraud, but negligence may occur when brokers fail to exercise reasonable care in managing a client’s account.
Investment Losses? Contact us now for a free consultation!
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:
- Place accounts on margin without proper authorization
- Fail to explain margin risks
- Expose investors to excessive leverage
Margin-related disputes are a type of investment fraud that frequently arises 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 a common securities violation.
Investors should be cautious when brokers promote investments as “guaranteed winners” or claim to possess secret information about a company. False claims about secret information may also involve misrepresentations and omissions about the real basis for an investment recommendation.
What Should Investors Do if They Suspect Investment Fraud?
Investors who suspect broker misconduct should take steps to protect themselves, including:
- Reviewing brokerage account statements carefully
- Documenting suspicious transactions or communications
- Preserving emails and written communications with the broker
- 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. Additionally, preserving emails and written messages can help document possible misrepresentations and omissions.
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.
With offices in Seattle and Chicago, 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. You can call our offices at (888) 637-5510.
Frequently Asked Questions (FAQs)
Some of the most common types 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 investment fraud may allow investors to pursue recovery through FINRA arbitration.
