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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.
Read more on broker misconduct.
New York Broker Jonathan A. Francis Barred by FINRA for Issuing Unauthorized ATM Cards to Clients
The Hanley Law (239) 649-0050 recently discovered that according to FINRA’s Disciplinary and Other FINRA Actions Publication, Jonathan A. Francis (CRD #5204602) allegedly issued unauthorized ATM cards as part of a scheme to convert funds from bank customers’ accounts.
FINRA alleged that between 2012 and 2013 while registered with Chase Investment Services Corp., J.P. Morgan Securities, LLC, and the affiliated banks, Francis allegedly issued seven (7) ATM cards in the accounts of six (6) deceased customers. The ATM cards were used to withdraw approximately $210,000 from the accounts of the customers. FINRA further alleged that Francis failed to cooperate with FINRA’s investigation by refusing to respond fully to requests for documents and information.
According to FINRA’s Broker Check, Jonathan A. Francis has been permanently barred from acting as a broker or otherwise associating with firms that sell securities to the public. (See FINRA Disciplinary Proceeding No. 2013038988301)
Francis was registered in the securities industry for three (3) years with the following firms:
J.P. TURNER & COMPANY, LLC
CRD #43177
BROOKLYN, NY
10/2013 – 11/2013
J.P. MORGAN SECURITIES, LLC
CRD #79
BROOKLYN, NY
10/2012 – 10/2013
CHASE INVESTMENT SERVICES CORP.
CRD #25574
BROOKLYN, NY
04/2010 – 10/2012
If you have suffered financial losses as a result of your broker’s or brokerage firm’s misconduct, contact the Hanley Law to discuss your legal options. The Hanley Law is dedicated to helping investors who have been victims of securities fraud. If you have been a victim of securities fraud, you may be entitled to recover your financial losses. Contact the Hanley Law toll free at (239) 649-0050 for a complimentary initial consultation.
5 Most Common Types of Fraud Identified by FINRA
The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called Avoiding Investment Scams which described common types of fraud. Below are the 5 most common types of fraud identified by FINRA:
- Pyramid Schemes: Fraudsters claim that they can take a small investment and turn it into large profits in a short amount of time. However, participants make money solely by recruiting new participants and the schemes quickly fall apart when new participants are no longer available. Pyramid schemes may appear to be legitimate multi-level marketing programs.
2. Ponzi Schemes: Fraudsters recruit new investors and use their funds to pay earlier-stage investors, instead of investing the funds as promised. This type of scam is named after Charles Ponzi, who in the 1920s tricked thousands of investors to place their funds in a price arbitrage scheme involving postage stamps. Ponzi schemes are similar to pyramid schemes with the exception that in ponzi scheme investors do not have to recruit new investors to earn a share of profits. Ponzi Schemes usually collapse when new investors cannot be attracted or when too many investors try to cash out.
3. Pump-and-Dump: Fraudsters buy shares of a low priced stock from an unknown company and then trump up interest in the stock to increase the stock’s price. Investors are tricked into believing they are getting a good deal and create buying demand at high prices. At this point the fraudsters sell their shares at the high prices and disappear, leaving the unsuspecting investors with worthless stock. Previously, these schemes were conducted by cold callers, facsimiles or online newsletters, but now the most common medium is through spam emails or text messages.
4. Advance Fee Fraud: The scams starts by an offer placed to buy a worthless stock for a high price, but to facilitate the deal the investor must send a fee for the service. Once the fee is sent, the investor never hears from the fraudster again.
5. Offshore Scams: These scams include any of the above mentioned scams and may also involve Regulation S. Offshore scams can be difficult for U.S. law enforcement agencies to investigate or rectify.
If you and have suffered investment losses, please contact the Hanley Law to explore your legal options. The Hanley Law is dedicated to helping investors who have been victims of securities fraud. If you have lost money as a result of securities fraud, you may be able to recover your financial losses. Contact us today toll free at (239) 649-0050 for a free initial consultation.
FINRA Issues New Investor Alert, Frontier Funds—Travel With Care
The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called Frontier Funds—Travel With Care cautioning investors interested in funds that invest in frontier markets to carefully consider the heightened risks in these markets. While there is no precise definition of a frontier market, frontier funds generally invest in companies located in countries with developing securities markets such as Argentina, Lebanon, Nigeria, Slovenia and Vietnam.
“Investors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk—and the past performance of any fund is never a guarantee of future results,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education. “Before investing in a frontier fund, investors should consider whether and how such an investment might fit as part of a well-diversified portfolio.”
As with any investment, frontier funds have their pros and cons. Frontier Funds—Travel With Care, provides investors with a series of tips to avoid problems.
• Know which frontier markets the fund invests in. Risk factors vary by country—and no two countries share identical risk elements.
• Monitor changes in index components. If you are investing in a frontier ETF or index mutual fund, make sure you know and understand the index that the fund tracks and also the components of that index. The countries included in a frontier index can change over time.
• Geopolitical and currency risks are real. Be aware that some frontier markets are located in parts of the world with unstable political or market environments.
• Factor in costs and fees. Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds.
• Consider Performance History. Frontier funds are relatively new, and most have limited performance histories.
Frontier Funds—Travel With Care
“Frontier funds” that invest in securities of companies in countries with developing securities markets—like Argentina, Lebanon, Nigeria, Slovenia and Vietnam—are gaining investor attention. Some see investing in frontier funds as a way to diversify assets—going beyond funds that invest in established international and other more developed emerging markets. Frontier funds are also sparking the interest of some investors who are lured predominantly by potential gains.
FINRA is issuing this alert to caution those interested in funds that invest in frontier markets to carefully consider the heightened risks in these markets. Frontier fund investments may provide potential diversification and periods of higher returns than can be obtained through more traditional investments. But products or asset niches that promise higher returns nearly always carry more risk—and the past performance of any fund is never a guarantee of future results.
Frontier Markets
There is no precise definition of a frontier market, or a country classified as such—but words like “small” and “illiquid” are often used to describe these markets.
Frontier economies tend to be smaller, and their markets for trading securities less developed, than emerging economies such as Brazil, Russia, India and China. In addition, compared to more established markets, the legal, financial accounting and regulatory infrastructure of frontier markets may be weaker or less developed, and political stability may be more of a concern. Financial market depth and breadth also may be more limited, and capital flows may be more restricted. Frontier markets may have less investor participation, fewer large global companies and limited international trade compared to established and emerging economies.
At the same time, frontier market countries are often characterized by populations that are making strides in education and entrepreneurship, an expanding economy and a rising standard of living.
Frontier Funds
Currently, there are a limited number of funds that focus specifically on frontier markets. Just as every frontier market is different, so is every frontier fund. Some funds invest in more than 30 frontier markets around the globe. Others invest more narrowly, perhaps focusing on only one region such as Asia, Africa or the Middle East—or even one country. Some mutual funds and exchange-traded funds (ETFs) may concentrate their holdings in a single or small number of economic sectors—such as banking, energy or agriculture—within various frontier markets. Others may track an index that encompasses virtually all of the countries in the frontier market universe. Still other funds invest in both frontier and the generally larger and more developed emerging markets, and some global or international funds may allow for sizable allocations to frontier markets.
A frontier fund that is registered under U.S. law—whether it is a mutual fund, ETF or closed-end fund—is required to provide investors with a prospectus that details the fund’s investment objective, major holdings or index that it tracks, historical returns and information about fees and risks. Think of this prospectus as your “frontier market guide,” complete with advisories and warnings. Read it carefully before you invest. Most frontier funds are designated for “aggressive growth” and described as high risk. Investors interested in frontier funds should carefully consider whether and how such an investment might fit as part of a well-diversified portfolio.
Before You Invest
Like any investment, frontier funds have their pros and cons. Before you invest, here are some tips to help you avoid problems:
• Know which frontier markets the fund invests in. Risk factors vary by country—and no two countries share identical risk elements. Read the fund’s prospectus to determine whether you are buying a fund that is or may become broadly diversified across many frontier markets, or that narrowly invests in only a few frontier markets, sectors or a single region or country.
• Monitor changes in index components. If you are investing in a frontier ETF or index mutual fund, make sure you know and understand the index that the fund tracks and also the components of that index. Be aware that the components or “constituents” of an index can change, potentially affecting the return of the fund. For example, components of the MSCI Frontier 100 Index are undergoing changes after Qatar and the United Arab Emirates—which accounted for more than 30 percent of the value of the MSCI index—were reclassified from “frontier” to “emerging” markets. Following a transition period over several months, these markets will no longer be represented in the index.
• Geopolitical and currency risks are real. Be aware that some frontier markets are located in parts of the world with unstable political or market environments. Regional conflict, civil unrest and regime change are all significant risk factors, as is the risk that currency exchange rates may fluctuate, resulting in changes in the value of a given fund.
• Factor in costs and fees. Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds. Even small differences in expenses can make a big difference in your return over time, so it’s important to know just how much you are paying for your investment. Use FINRA’s Fund Analyzer to help you compare how sales loads, fees and other fund expenses can impact your return. ETFs have a fee structure that includes trading fees, which can add up if you plan to actively buy and sell.
• Learn as much as you can about the fund manager. Understanding frontier markets and managing investments is a specialized skill. Research the fund manager’s professional experience, including fund management tenure and performance record. Research the professional background of a fund manager and the broker selling you the fund using FINRA BrokerCheck.
• Performance History. Frontier funds are relatively new and most have limited performance histories. Like all investments, performance may fluctuate. You can lose money.
As with any investment that holds out the potential for greater returns, it pays to ask whether you are willing to take on the higher risk that comes with it. In short, are you comfortable with a higher risk of significant investment losses? If not, an investment in frontier funds may not be a destination you want for portfolio.
If you suffered investment losses, please contact the Hanley Law to explore your legal options. The Hanley Law is dedicated to helping investors who have been victims of securities fraud. If you have lost money as a result of securities fraud, you may be able to recover your financial losses. Contact us today toll free at (239) 649-0050 for a free initial consultation.