(888) 637-5510

Types of Investment Fraud

Types of Investment Fraud Featured by top securities fraud attorneys, the White Law Group

How to Recover Investment Fraud 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 may be able to file a FINRA arbitration claim to recover your money. The national investment fraud attorneys at The White Law Group represent investors who have been harmed by their financial advisor and/or brokerage firm. The following are some of the common types of investment fraud we see:

Unauthorized Trading

Unauthorized trading in brokerage accounts occurs when a broker buys or sells securities without a customer’s prior consent or authorization. This can be when a broker makes trades in the account without their knowledge or approval, or when a broker exceeds the trading authority. Unauthorized trading is prohibited. Sometimes a broker may call the customer after the fact and say that he has just placed a particular trade in the account. The mere fact that the broker informed the customer of the trade afterwards does not make that manner of trading acceptable. 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.

If your broker engages in unauthorized trading, 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 when a broker is constantly buying and selling in the customer’s account in order to generate commissions. Such activity constitutes a type of investment fraud. Even if the broker is constantly calling the customer prior to placing the trades, this activity is improper 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 may result in significant losses and can expose the client to unnecessary tax liabilities.   When this happens, a FINRA arbitration claim against the financial advisor or the financial advisor’s employer is often the best way to recover the damages. See: Is your Broker Churning your Account?

Unsuitable Investments & Misrepresentations

Customers rely upon the recommendations of their broker, and failure to properly disclose the risk is considered broker misrepresentation or omission.

Brokers must recommend investments that align with their clients’ financial objectives, risk tolerance, and investment experience. If a broker recommends investments that are not suitable for a client’s circumstances, such as excessively risky or illiquid investments, it may constitute negligence. See: FINRA Rule 2111 Suitability

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 securities complaint is when the stockbroker promised that the stock would go up and that the investment was 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, then such statements may constitute unlawful misrepresentations.

“Selling Away”

Selling away is when 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 that the broker has some pecuniary interest in.

In this case, the investment is generally a violation of securities rules because the brokerage firm has not researched the risks of the investment or approved the investment for sale to its clients. Often, the broker is 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 adequately supervise its employees and protect its clients.

Ponzi Schemes

Ponzi schemes are a type of investment fraud that operates 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.

There have been a slew of financial advisors perpetrating 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.

The key characteristic of a Ponzi scheme 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 more investors who are eager to profit from the seemingly lucrative opportunity.

Ponzi schemes are illegal because they rely on deception, misrepresentation, and a continuous influx of new investments to sustain the fraud. As an investor, it’s crucial to exercise caution, conduct due diligence, and be 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 perpetrated by a broker or financial advisor may include manipulating or deceiving older adults to gain access to their money or making inappropriate investments that serve their own interests. Perpetrators of elder financial 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 elderly person to gain access to their finances.

The broker may use the types of investment fraud we referred to previously 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 manipulation. Unethical brokers may take advantage of this cognitive impairment to convince clients to make inappropriate or uninformed investment decisions.

If there are concerns about elder financial exploitation, reporting suspicious activity to regulatory authorities such as FINRA or seeking legal advice from a securities fraud attorney is crucial to protect the elderly individual’s financial 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 type of investment fraud and refers to a situation where a broker or financial advisor fails to fulfill their duty of care and acts negligently in handling a client’s investments. It occurs when a broker breaches the standard of care expected of them, 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. If a broker fails to conduct proper due diligence, such as not investigating the risks or verifying the accuracy of information, it can lead to unsuitable or risky investments.

Brokers also have a duty to communicate with their clients in a clear and timely manner. 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.

Occasionally it may seem that a particular broker just does not know what he is doing. This may be in terms of executing trades, following instructions, or general performance of the portfolio. Brokers are held to certain standards of the securities industry and must pass various examinations to be licensed. Failure to maintain a certain level of competence in the management of an account may constitute broker negligence or a form of broker malpractice. However, poor performance of a portfolio is not a legal cause of action on its own.

Margin Trading Problems

Another type of investment 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, there are special risks that must be explained to a customer at the outset. When a customer receives “margin calls” which 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 the fact that he never understood margin trading properly from the outset, and therefore he did not knowingly consent to the use of margin in his account.

The Financial Industry Regulatory Authority (FINRA) created FINRA Rule 4210 in response to the financial crisis of 2008. The rule was designed to address concerns about excessive leverage and potential systemic risk in the securities lending market.

Insider Information

Another type of investment fraud is when a broker says that he has information from certain sources inside the company which is not available to the public. A broker may indicate that he is certain that 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 clear in all cases.

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: September 22, 2023

Comments are closed.