Types of Broker Misconduct

Broker misconduct makes up a large portion of securities lawsuits. Understanding the different types of broker misconduct is essential if you’re having issues with your stock broker. Most of these claims can be categorized as churning, unsuitability, overconcentration, or misrepresentation & omissions.

Churning happens if your stock broker is engaging in excessive trading on your behalf to increase their commissions. Be wary if they always have some “good” reason you should just take quick profits. To actually establish proof of this, we recommend doing as much as possible of the following:

  • Calculate the annualized rate of return that would be necessary to cover commissions charged in your account.
  • Determine how many times your account’s equity has been turned over to purchase securities.
  • Determine all purchase & sale trading that occurred in your account.

Armed with this information you will have the necessary proof to determine if your stock broker has been churning your account illegally.

A broker might also be on the hook for making any investments that would be considered “unsuitable” for their clients. When a broker makes a decision on your behalf, it must be consistent with that client’s needs, their tolerance for risk, and the objectives of their investment. For example, an investor may have made what could be considered a “high risk” investment if their client’s financial situation couldn’t reasonably incur the associated risk, or if the client was unaware of or didn’t understand these risks. Because a broker should be well aware of a client’s investment goals and their financial situation, they are responsible to make suitable investments.

Another common type of misconduct occurs when a broker has concentrated too many of a client’s investments in one individual investment or one type of investment. Focusing like this greatly increases the risk for potential losses as you are essentially ‘putting all your eggs into one basket’. If this one investment or this investment area declines in value, you don’t have any other investments to fall back on and help the health of your portfolio. If your investment fails and you find that your broker hasn’t properly diversified your portfolio, they are potentially liable for your losses.

You might also feel like an investment wasn’t explained or presented to you in an entirely truthful way. Misrepresenting and omitting information that may prove important in a client’s decision making process is considered broker misconduct. Brokers will misrepresent certain investments so they can better disguise the potential risk involved. Obviously, this can lead to clients losing money due to the trust they placed in their broker.

When hiring a broker there is a certain amount of trust involved, but they are also required to adhere to certain standards and guidelines. At Hanley Law we are well-informed about all types of broker activity and have handled our share of misconduct cases. Contact us today for an evaluation of your broker misconduct case.

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