Examples of Investment Fraud and How to Recover Your Losses– Investment Fraud Attorneys
Have you suffered losses investing with your financial advisor or broker? If your financial losses are due to broker misconduct or investment fraud, you can file a FINRA arbitration claim to recover your money. The national investment fraud attorneys at The White Law Group represent investors harmed by their financial advisor and brokerage firm. The following are some of the common examples of investment fraud we see:
Unauthorized Trading
Unauthorized trading in brokerage accounts is a type of securities fraud in which a broker buys or sells securities without a customer’s prior consent or authorization. This can be when a broker trades in the account without their knowledge or approval or exceeds the trading authority. Unauthorized trading is prohibited. Sometimes, a broker may call the customer after the fact and say he has just placed a particular trade in the account. The fact that the broker informed the customer of the trade afterward does not make that trading acceptable or exclude it from being an example of investment fraud. Unauthorized trading may result in financial losses, as the trades made without your knowledge or approval may not align with your investment objectives or risk tolerance.
Further, unauthorized trading can also violate securities industry regulations and rules. Brokerage firms are required to obtain prior written authorization from their clients before making any trades in their accounts, and they are also required to notify their clients promptly of any trades made in their accounts.
Suppose your broker engages in unauthorized trading or any of the additional examples of investment fraud listed below. In that case, you may be able to recover any losses by filing a FINRA claim with the help of our investment fraud attorneys. FINRA (the Financial Industry Regulatory Authority) is the self-regulator that oversees brokers and brokerage firms.
Excessive Trading/Churning
Churning or excessive trading is a type of securities fraud in which a broker constantly buys and sells in the customer’s account to generate commissions. Such activity constitutes an example of investment fraud. Even if the broker constantly calls the customer prior to placing the trades, this activity is considered fraudulent because the broker is abusing the account for his own selfish purposes.
Churning fraud is an illegal and unethical practice. The more a broker trades, the more they get paid. In many cases, this is enough incentive for unscrupulous brokers to over-trade in a client’s account. Often, churning fraud occurs when a broker has discretionary authority, either actual or implied, to a client’s account, meaning they do not need the client’s consent to trade on their behalf. Churning is a pernicious example of investment fraud because it can result in significant losses and expose the client to unnecessary tax liabilities. When this happens, a securities fraud attorney with experience handling churning cases can help clients file a FINRA arbitration claim against the financial advisor or the financial advisor’s employer, which is often the best way to recover the damages. See: Is your Broker Churning your Account?
Unsuitable Investments & Misrepresentations
Customers rely upon their broker’s recommendations, and failure to properly disclose the risk is considered broker misrepresentation or omission. This is a fairly common example of investment fraud.
Brokers must recommend investments that align with their clients’ financial objectives, risk tolerance, and investment experience. If a broker recommends investments unsuitable for a client’s circumstances, such as excessively risky or illiquid investments, it may be a type of securities fraud. See: FINRA Rule 2111 Suitability. For example, in the past, some brokers have persuaded clients to invest in non-traded real estate investment funds. These funds have high upfront fees compared to more well-known securities, and their prices can be difficult to track since they are not publicly traded.
Unfortunately, many investors do not discover the truth in such cases until after they have incurred substantial losses and then realize that the investment was not safe in the first place.
Another example of a misrepresentation is the “Guaranteed sure winner.” This common example of investment fraud occurs when the stockbroker promises that the stock will go up and that the investment is a “guaranteed sure winner.” Most experienced investors realize that there are no guarantees in the stock market and that brokers may be prone to a certain degree of exaggeration or puffery in their salesmanship. When a broker’s aggressive sales tactics go too far, and the customer relies upon his representations, such statements may constitute unlawful misrepresentations.
“Selling Away”
Selling away is an example of investment fraud in which a broker or financial advisor solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities are a violation of securities regulations. Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments, and often, these are investments in which the broker has some financial interest.
In this case, the investment is generally considered an example of investment fraud because the brokerage firm has not researched the risks of the investment or approved the investment for sale to its clients. Often, this type of securities fraud is characterized by the broker selling the investment without the knowledge of his employer. Nonetheless, a broker-dealer can be held liable for a financial advisor’s “selling away” for failing to supervise its employees and protect its clients adequately.
Ponzi Schemes
Ponzi schemes are examples of investment fraud that operate on a false promise of high returns to investors. The scheme is named after Charles Ponzi, an Italian swindler who became infamous for orchestrating such a scam in the early 20th century.
A slew of financial advisors have perpetrated Ponzi schemes in the past few years. The broker typically presents an investment opportunity that seems highly lucrative and offers unusually high returns within a short period. Perhaps the most famous Ponzi Scheme in U.S. history was orchestrated by Bernie Madoff, a New York City-based money manager convicted in 2008 of defrauding his clients out of more than $68 billion.
There are several types of Ponzi schemes, but a vital characteristic of all of them—and what makes them an example of investment fraud—is that the returns paid to earlier investors are not generated through legitimate business activities or investments.
Instead, the broker or advisor uses the money from new investors to fulfill the promised returns to older investors. This creates an illusion of success and attracts eager investors to profit from the seemingly lucrative opportunity.
Ponzi schemes are illegal and an example of investment fraud because they rely on deception, misrepresentation, and a continuous influx of new investments to sustain the fraud. As an investor, you can avoid this type of securities fraud by exercising caution, conducting due diligence, and being wary of any investment opportunity that appears too good to be true. If you are a victim of a Ponzi scheme, you may need to hire an experienced investment fraud attorney.
Elder Financial Exploitation
Elder financial exploitation is perpetrated by a broker or financial advisor. Examples of this type of investment fraud may include manipulating or deceiving older adults to gain access to their money or making inappropriate investments that serve their interests. Perpetrators of elder exploitation often target vulnerable seniors who may be isolated, physically or cognitively impaired or lack knowledge about financial matters. They may establish a relationship of trust with the older person to gain access to their finances.
The broker may use examples of investment fraud to take advantage of the elderly, including unsuitable investments, excessive trading, misrepresentation or omission of information, and unauthorized trading.
Elderly individuals may experience cognitive decline or dementia, making them more vulnerable to different types of securities fraud. Unethical brokers may use this cognitive impairment to convince clients to make inappropriate or uninformed investment decisions.
If you are concerned an elderly individual you know is being subjected to one of the examples of investment fraud mentioned above, reporting suspicious activity to regulatory authorities such as FINRA or seeking legal advice from a securities fraud attorney who specializes in elder financial exploitation is crucial to protect the elderly individual’s economic well-being. FINRA Rule 2165 was created to protect seniors from exploitation. If you or your loved one has been a victim of elder financial exploitation, our investment fraud attorneys can help you file a FINRA arbitration claim against your brokerage firm.
Broker Negligence
Broker negligence is another example of investment fraud. It refers to a situation where a broker or financial advisor fails to fulfill their duty of care and negligently handles a client’s investments. It is a type of securities fraud in which a broker breaches the expected standard of care, resulting in financial losses or harm to the customer. One example of broker negligence is when a broker fails to thoroughly research and analyze investment products before recommending them to clients. Suppose a broker fails to conduct proper due diligence, such as not investigating the risks or verifying the accuracy of information. In that case, it can be considered an example of investment fraud because it can result in unsuitable or risky investments.
Brokers also must communicate clearly and timely with their clients. If a broker fails to provide essential information about investments, neglects to explain risks or fees, or does not respond to client inquiries, it can hinder the client’s ability to make informed decisions and possibly represent an example of investment fraud.
Occasionally, it may seem that a particular broker does not know what he is doing. This may include executing trades, following instructions, or general portfolio performance. One common form of negligence could be a broker failing to help a client build a diversified portfolio. For instance, a portfolio in which most securities come from the same industry could be disproportionately impacted by a market downturn. If the client cannot afford the loss, this could be an example of investment fraud.
Brokers are held to specific securities industry standards and must pass various examinations to be licensed. Failure to maintain a certain level of competence in managing an account may constitute broker negligence or a form of broker malpractice. However, the poor performance of a portfolio is not a legal cause of action on its own. A securities attorney can assess your case and determine if it is an example of investment fraud.
Margin Trading Problems
Another type of securities fraud is related to margin trading—or money borrowed from the brokerage firm. A customer may complain that the broker put the account on margin without his authorization. Often, the problem is not that the account was put on margin without any prior authorization but rather that the broker put the account on margin without explaining the risks and problems associated with margin trading.
Since margin trading means borrowing funds to trade, unique risks must be explained to a customer immediately. When a customer receives “margin calls” that he does not understand or is shocked to discover that positions in his account are being liquidated due to margin maintenance requirements, it may reflect that he never understood margin trading correctly from the outset. Therefore, he did not knowingly consent to using the margin in his account.
The Financial Industry Regulatory Authority (FINRA) created FINRA Rule 4210 in response to the 2008 financial crisis. The rule was designed to address concerns about excessive leverage and potential systemic risk in the securities lending market.
Insider Information
Another type of securities fraud is when a broker says that he has information from specific sources inside the company that is unavailable to the public. A broker may indicate that he is confident the stock will be going up based upon such information and urge the customer to invest on what he may describe as a “hot tip.” This may constitute trading on “insider information,” which is illegal. The line between permissible tips, research department analysis, and insider information may not be apparent in all cases.
Laws regulating the sharing of insider information were enacted in the years following the 1929 stock market crash. In the years leading up to the crash, insider training largely went unpunished on Wall Street. The laws were enacted to prevent wild swings in the market caused by manipulated stock prices.
For more information or to speak with one of our investment fraud attorneys, please call the offices of The White Law Group at (888) 637-5510.
Last modified: December 2, 2024