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Representing Investors in Disputes with their Brokers or Financial Advisors
- Churning or excessive trading in their accounts
- Churning is also defined as excess trading in a customer's account for the purpose of generating commissions for the broker's financial benefit. In order to prove churning, a customer must prove that the broker had control over the account, that the trading was "excessive" given the customer's investment objectives, and that the broker acted recklessly (or intentionally) with the intent to benefit himself to the detriment of the customer. In order to establish "control," a customer must show that the broker was making the investment decisions, whether the account is discretionary or non-discretionary.
- Material misrepresentations or omissions
- Under most states' securities laws, as well as the Securities Exchange Act of 1934, a broker may be liable to a customer if (s)he intentionally or recklessly misleads an investor or fails to disclose material facts about an investment.
- These claims are often decided on three different issues: (1) the documentation maintained by the customer and broker; (2) the credibility of each; and (3) the sophistication of the investor.
- Breach of Fiduciary Duty
- In many states, and in certain circumstances, stockbrokers and financial advisors owe their clients the duty of a fiduciary, which is defined as a duty of utmost good faith, integrity, and loyalty.
- Registered Investment Advisers and ERISA plan administrators owe their clients a fiduciary duty under the laws that govern their activities.
- Unsuitability
- A broker or financial advisor must have a reasonable basis for believing that an investment recommendation is appropriate for the customer based on his or her investment objectives.
- The NASD and NYSE require brokers to "know their customer," which includes knowledge of the customer's risk tolerance, other investments, net worth, financial needs, and investment objectives.
- Unauthorized Trading and Failure to Follow Instructions
- These claims usually involve a broker trading in a customer's account without the customer's knowledge and/or permission. In a securities account where the customer has not given the broker permission to make trades in the account, if the broker makes a trade without obtaining permission, the broker may be liable for losses related to the trade.
- These claims require the customer to be diligent in reviewing account documents, such as statements and confirmations, because the statute of limitations often runs from the date the customer receives these documents.
Examples of stock broker misconduct include: (1) unsuitable recommendations, including brokers who over-concentrated their customers' accounts in high-tech stocks; (2) mutual fund switching; (3) the improper use of margin to increase the buying power of an account; (4) pension and retirement account mismanagement; (5) stock manipulation and pump and dump schemes; (6) day trading fraud, internet scams, and pyramid schemes; and (7) insurance company pricing and sales practices fraud
Click here to read current news articles discussing securities fraud and/or investor fraud.
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