Find a Business Litigation Lawyer for a Fraudulent Stockbroker
What are forms of investment losses considered fraud and negligence by brokers?
Unfortunately, there are several avenues for a financial professional to conduct their company illegally. This can be done by complex strategies to exploit or target investors, or it can be done by their lack of action, which can be used as the basis for a legal case.
Negligence
Negligence is described as failing to take appropriate precautions to protect oneself or others from injury. By acting or failing to act, an individual may be negligent. An individual is negligent if he or she does something in a situation that a fairly cautious person would not do or fails to do.
The formulation of the quality of treatment is often noted in published appellate decisions as a legal matter for the court to decide. If fair minds disagree on whether a party's actions complied with the norm, the court must apply it to the facts of the case. 6 Cal.4th 539, 546 in Ramirez v. Plough, Inc.
Section 282 of the Restatement Second of Torts describes negligence as "conduct that falls below the legal requirement for the defense of others against excessive risk of injury." "Unless the actor is an infant, the level of conduct to which he must adhere to avoid being incompetent is that of a fair man in like circumstances," according to section 283 of the Restatement Second of Torts.
The proper behavior of a reasonable person in a given situation may be defined by law or administrative rule, or it may be determined by judicial judgment. 6 Cal.4th at p. 547 in Ramirez, supra. The act of performing an act, as well as the inability to perform an act, are examples of negligence—284 of Restatement 2d Torts.
However, in cases against banks, financial firms, and investment advisers, it is possible to get negligence claims for economic damages dismissed at the summary judgment and post-trial phases of litigation. The economic loss rule, which is based on consumer liability law, prevents solely economic damages resulting from contractual violations from being recovered in tort. A defendant acts in a fiduciary capacity, takes ownership of physical property, or provides "professional services" under California law. This dismissal tactic based on enforcement of the economic loss rule is usually ineffective. On the other hand, where the defendant is only offering financial planning, bond trading, standard accounting advice, or even in certain investment banking situations, this approach could work.
The following are some of the more popular forms of broker fraud and negligence cases:
1. Suitability
Promoting investments for their clients that meet their financial needs and aspirations is one of an investment broker's responsibilities. It is unethical and illegal to suggest or use high-pressure techniques to persuade clients to make obviously incorrect financial decisions.
A stockbroker or investment firm's primary responsibility is to consider the investor's needs and make recommendations for investments that meet those needs. Brokers must conduct due diligence to determine the investor's needs, how much they can afford to spend, and how much risk the investor is willing to take. Brokers can also study the different types of investments to fully comprehend the advantages, threats, and costs associated with each one. One of the most common forms of claims heard in FINRA arbitrations is suitability claims.
What are some of the variables that determine suitability?
A broker must know their client in order to make appropriate recommendations. The "know your customer" rule allows a broker to know specific details about each client. The investor's is one of them.
- Age
- Goals for Investment
- Tolerance for risk
- Sophistication level
- Earnings
- Net worth
- Status in terms of taxes
- The time horizon for investment
- Liquidity needs
Every investor has different objectives. Investment advice should be tailored to each person.
When is it possible for an investor to file a suitability claim?
Before providing any advice about future investment transactions or sales, brokers and brokerage companies owe a duty of care to their clients to ensure that they correctly and adequately measure the client's priorities and risk tolerance. An investor, on the other hand, may file a claim for unsuitability if:
- The broker fails to correctly define and/or clarify an investment's risk.
- The broker acts in a way that is at odds with the investor's specified goals
- The broker has committed a criminal act or engaged in deception.
The broker's manager or supervisor did not adequately supervise or train the broker, which resulted in improper or mismanaged investments.
Our business litigation lawyers will help you decide whether you have a claim if you think your broker's recommendations were unsuitable. They will collaborate with you to get you the compensation you deserve.
2. Selling away
Although it's appealing to believe that the investment advisor knows something about a stock that his company doesn't, the fact is that these situations are usually designed to benefit the broker rather than the investor.
Dishonest brokers will often try to get around the firm's enforcement laws by selling securities that the firm does not own or deliver. In order to earn a commission, stockbrokers can try to sell non-firm securities. Brokers who choose to avoid investment company regulatory criteria should be held liable for any financial losses they cause. Companies that allow brokers to get away with this type of behavior should be held liable for the damage they inflict.
What are the "signs" that the broker is selling securities for a profit?
According to the SEC Division of Market Regulation's Staff Legal Bulletin No.17 (Remote Office Supervision) (March 22, 2004), some red flags supervisors can look for to detect selling away are:
- Previous customers' complaints
- An emphasis on senior investors
- A concentration of investments that are particularly illiquid or risky
- A significant shift in the types of investments is suggested, especially by one representative in a distant office.
- A registered representative's sudden or unexplained increase in output.
- Unexpected or illogical transfers between customer accounts or to or from the registered representative's account
- Disciplinary action has been taken against a registered official.
- Customer transactions in one or a few stocks or mutual fund shares that are out of line with the firm's policies.
- Trading that is inconsistent with consumer goals or regular swapping of mutual fund or annuity products
If a broker is caught selling away, you can file a lawsuit against the brokerage company for failure to supervise the broker and vicarious liability. Your Business Law Attorney can advise you on the right strategies to win your case. Consider one of our prescreened California Lawyers in your Cal Bar Attorney Search.
3. Pyramid or Ponzi schemes
Ponzi and pyramid schemes are two of the most well-known forms of schemes in which money is made by recruiting new investors rather than by making money from a specific product.
Investors in Ponzi schemes offer their money to a broker or manager who runs the Ponzi scheme. Investors are often unaware that their contributions are contingent on the operator's ability to actively court new investors. They have no idea they're a part of a scam and don't find out until the operator or manager has taken all of the money – or has been convicted and charged with securities fraud.
What are the signs that you're dealing with a Ponzi scheme?
The Securities and Exchange Commission (SEC) has a list of "red flags" that may suggest a Ponzi scheme. They are as follows:
- Returns on investment that are high while posing little to no risk
- Returns that are excessively stable
- Investing in unregistered funds
- Sellers who aren't authorized
- Strategies that are secretive and/or difficult to understand
- Paperwork problems
- Receiving payments is proving to be difficult.
- Returns on investments are deposited into the broker's personal bank account.
- Last-minute changes to get in on an offer are seen in sales strategies.
- Opportunities to get in on an offer when someone else just got out are used in sales tactics.
- Broker requests to rollover profits into a new investment opportunity
- Broker-drafted promissory notes that guarantee the investment return
In a Ponzi scheme, who can file a claim?
Since Ponzi schemes are a form of securities fraud, the practitioner is likely to face criminal charges. Investors can be entitled to sue the operator or business in civil court. If the broker was previously licensed with a company that failed to discover the Ponzi scam, the chances of recovery are the highest.
4. A lack of supervision
When unethical conduct or unscrupulous recommendations occur inside a brokerage company, more than one person is to blame. Since the firm is responsible for the actions of its staff, when one broker violates the statute, the firm is also liable.
Financial advisors and securities brokerage companies have a legal obligation to track their brokers' conduct and recommendations to ensure that they are following FINRA regulations as well as state and federal securities laws. When a broker fails to supervise a broker's actions, the company may be held liable.
What responsibilities do managers have to investors?
Branch managers or branch office managers supervise stockbrokers (BOMs). The BOM has a responsibility to ensure that the brokers they supervise follow regulatory and internal sales practice rules:
- Prior to recruiting the broker, the BOM must assess and screen him.
- Broker-client emails, order tickets, account opening papers, account holdings, and customer complaints can all be reviewed by BOMs.
- Orders in large quantities
- Order with a high dollar value
- Positions of concentration (too much of one stock in a single account)
- Excessive margin use
- Commissions that are unusual or unnecessary
When a broker commits fraud or incompetence, the BOM should keep a written record of the broker's actions. This written record is often used by our prescreened stock broker fraud attorneys to prove a case against a broker or firm.
Examining a computerized database known as a Central Registration Depository is another way the business law attorney can argue that the brokerage firm's oversight of the broker was inadequate (CRD). The CRD is a record of a broker's previous actions and misdeeds. CRD data can be obtained by conducting a broker search on FINRA's website or contacting the appropriate state securities regulator.
5. A lack of diversification
A conscientious broker will allow a client's assets to be spread around a few different areas or types of securities, no matter how small the investment. This way, if one of the partners fails, the investor will not be left penniless. If a broker disregards this notice or order, he or she may be held responsible for any resulting financial losses.
Diversification Failure Investments are a key component of any business plan. Investor portfolios should never be too focused on a single company or market sector. Investing in a diverse range of firms, using a variety of investment styles – such as stocks, bonds, and Treasury bills – and in a variety of sectors helps investors minimize risk and maximize returns.
When does overconcentration or a lack of diversification happen?
The best investment allocation is determined by the investor's desires and financial situation. Some investors are willing and able to tolerate varying levels of risk in exchange for a higher return. Other investors can be in a hurry for a profit and will only tolerate low or moderate risk. Investors who are younger have more time to see outcomes than those who are older. A good broker first considers all applicable factors before recommending a diversified portfolio that best meets the investor's objectives and risk tolerance.
Overconcentration can manifest itself in a variety of ways, including:
- The concentration of power in a single company. Investing in a single business may result in the investor losing money or receiving a much lower return than anticipated.
- Overconcentration in the industry. Individual businesses can lose money, and markets have their own ups and downs. Typical market volatility, as well as international competition, domestic competition, the emergence of better goods, and economic fears, may all damage an industry sector. It is a mistake to invest solely in one part of the economy.
- Failure to diversify commodity. Equities, shares, and cash can all be included in a well-balanced portfolio. Investing in a variety of investment options reduces uncertainty and allows for higher long-term returns.
Stockbrokers should consider which investments are better for short-term and long-term goals, which are high risk/high reward, which are likely to yield consistent profits, and which have underlying costs that negate positive returns. A well-diversified portfolio should meet the client's needs and take into account all of the risks and rewards that various product types and industry sectors can offer.
6. Breach of fiduciary responsibility
Brokers are legally obligated to make sound investment decisions. It is illegal to abdicate this obligation.
Since they lack the financial skills required to understand the securities industry, many investors put their confidence in brokers and brokerage firms. The highest level of treatment is a fiduciary obligation.
When this obligation happens, brokers must prioritize the client's needs over their own. That means a broker cannot recommend products to a client if the broker is aware that the products are not in the client's best interests. A fiduciary responsibility occurs when the relationship with the client entails a high level of trust, confidence, and dependence on the fiduciary to act in the client's best interests. The following is an example of an actionable violation of fiduciary duty:
- If the broker/advisor has a professional obligation to work on behalf of the client
- If this obligation is broken
- If the violation results in monetary losses
What are some examples of fiduciary duty in the brokerage industry?
The Securities and Exchange Commission (SEC) believes that a brokerage company owes its clients a fiduciary obligation. Fiduciary responsibilities are often specified in the rules of autonomous self-regulatory organizations like FINRA and laws enacted by other agencies. Among the well-known fiduciary responsibilities are:
- Good Faith and Fair Dealing is a legal obligation. At all times, advisors and brokers must have their clients' best interests in mind.
- Disclosure is a legal requirement. From the start, a broker must communicate all aspects of an investment, including risks, clearly and honestly. If the stockbroker fails to do so or omits critical details, the stockbroker will be held responsible for damages.
Brokers and companies are not permitted to use their positions of trust and confidence to further their own personal interests.
7. Account churning
While brokers may make a lot of money over time, there are times when their clients don't need their help as much, and the fees they charge for their time can dry up. Churning, or making regular, wasteful trades on a client's account, is a tactic used by certain unscrupulous investment professionals to collect commissions.
Brokers earn commissions when investors allow them to buy and sell trades on a regular basis. Occasionally, an investor will delegate investment authority to his or her broker without first reviewing each transaction with the client. Churning happens when brokers have this level of leverage over a client's investment account and make excessive transactions in order to increase commissions for the broker at the expense of the client. Churning is immoral and illegal, according to the Securities and Exchange Commission.
What are your options if a stockbroker is dishonest or negligent?
A variety of financial laws and obligations apply to stockbrokers, broker-dealers, and brokerage firms. The federal securities laws and state securities laws (known as Blue Sky laws) in each of the 50 states and Washington, D.C., govern the financial industry's responsibilities and requirements. Investors should be aware that losses are not necessarily caused by market forces. Wrongdoing in the sector happens on a daily basis. Brokers and the companies with which they work often have several marks on their records. You have the right to file a lawsuit against your broker and the company that supervises him or her if he or she violates the laws and regulations that regulate his or her behavior and responsibilities.
The following are some of the standard responsibilities that all brokers and financial investment firms have to their clients:
- Good faith and fair dealing are legal requirements.
- Disclosure Obligation
- Duty of Trading Authorization Duty of Requiring Appropriate Recommendations
- Special Situations Duty
- Responsibilities of supervision
If your stockbroker has failed to meet his or her obligations to you, and as a result, you have lost money, you may file a claim for compensation. You have a "Bill of Rights" as an investor that protects your interests and investments from acts of fraud or misconduct.
To put it another way, you have the right to:
- Inquire about your broker's or brokerage firm's history, as well as the types of interactions they've had with investors like you.
- You should be told the truth about the firm's or broker's history or experience.
- Be provided a detailed list of all fees, charges, commissions, expenses, and penalties that you will or can incur before, during, or after your investment.
- Before you spend any of your money, ask for and obtain information about the risks you face, the responsibilities you must fulfill, and any terms and conditions that may apply.
- Receive investment recommendations that are tailored to your specific needs and objectives, even if those objectives change over time.
- During and after your time with the company, you can receive any and all completed paperwork and correspondence related to your account, including account statements, completed forms, and agreements.
- Request and obtain access to your funds at any time, as well as prompt notification of any possible or real restrictions on that access.
- In the event of an issue, consult with a manager or a member of the enforcement team.
- Be treated with dignity, and have all of your questions answered promptly, honestly, and absolutely.
In general, real estate brokers can be held liable under contract or in tort. On a contractual basis, a broker is held responsible for failing to expressly comply with the specified contract's provisions. For breaking a statute or common law, the broker is held liable in tort. Fraud is one of the most difficult grounds to prove. Fraud may be deliberate or unintentional.
Financial instruments such as stocks, commodities, and currencies are controlled by both the state and federal governments. Regulatory bodies such as the Securities and Exchange Commission (SEC), the Franchise Tax Board (IRS), the Attorney General's Office, and other law enforcement agencies investigate suspected fraud extensively. It's not always easy to draw the line between criminal conduct and to become a competitive business player.
As a consequence, accusations of insider trading and other types of securities fraud are often the result of a miscommunication. We have extensive experience defending insider trading lawsuits, financial reporting breaches, accounting fraud, money laundering, and health-care fraud, as well as advising businesses about how to comply with current insider trading laws, rules, and department expectations.
Defining Fraud
The term "fraud" refers to a broker's dishonest conduct. This type of fraud may be true or constructive.
TRUE FRAUD
Fraud can be classified into five categories:
1. INTENTIONAL MISTAKEN INFORMATION
If a broker intentionally misrepresents something, it is because he or she does not consider it to be real. To claim damages for this form of fraud, the plaintiff must prove that the defendant Broker INTENDED to INDUCE the plaintiff to alter a position that would be to plaintiff's disadvantage or risk. Since real estate transactions often involve large amounts of money, the incentive might be to mislead the principals, investor, or seller into committing to the deal by making claims that the broker does not believe are valid.
2. MISTAKEN REPRESENTATION DUE TO NEGLIGENCE
When a broker makes a positive argument based on the knowledge that the broker does not have, this is known as negligent misrepresentation. It's worth noting that negligent misrepresentation requires a constructive declaration rather than simply failing to report anything. For example, a broker may be held responsible for making affirmative claims about a property's exact square footage without conducting sufficient research. Furthermore, a broker may be held responsible for making an affirmative assertion about the property's structural condition while knowing there was an engineer's report claiming the property would not survive an earthquake.
3. FRAUDULENT PROMISSORY
A broker may be held accountable if he or she promises to do anything without intending to do so. For example, a broker may be held responsible for promising buyers that they would find them tenants when they purchased a house but never planned to do so.
4. NON-DISCLOSURE OR CONCEALMENT
The broker must provide the following for concealment or non-disclosure:
- hid a reality that had a material impact on the property's desirability in the eyes of the other party
- The other party was unaware of the fact
- Had a legal obligation to reveal certain information OR had mentioned other evidence that, if left out, would have deceived the other party
5. EXTRAS
This form of fraud is a catch-all term for deceptive behavior that doesn't fit into any of the other groups. For example, if a broker affirmatively claims to a prospective buyer that an easement would have no effect on the right of way and will not obstruct the buyer's pathway. However, the conditions of the easement prohibit the buyer from getting a driveway on that portion of the easement, and the buyer would be disappointed.
Statements in a contract absolving or exculpating brokers from deliberate misrepresentation or fraud are invalid as a matter of public policy.
CONSTRUCTIVE FRAUD
Constructive fraud can be a cause of action against a broker in which there was no real attempt to defraud, but the broker benefited.
It must be seen, among other things, that constructive fraud has occurred:
- The broker owed the complainant a fiduciary duty
- A violation of fiduciary duty occurred
- The broker made a profit as a result of the violation of fiduciary duty, despite not intending to do so fraudulently
For example, a broker may be held liable for constructive fraud if he or she claims that a particular property is exactly what the buyers want without ever researching what the buyers want while having no dishonest motive and only selling the property for a fee.
What Happens During a FINRA Arbitration?
Arbitration is used to settle the majority of investor fraud cases. Arbitration is usually less structured and less time-consuming than a courtroom trial. Instead of a judge, a jury of three arbitrators appointed by FINRA normally resolves an investor fraud event. These arbitrators will preside over proceedings in which both parties will be able to provide evidence to support their allegations or defenses.
After the final hearing, the arbitration tribunal typically issues its verdict within 30 days. The average FINRA arbitration takes 14 months to complete, which is significantly less time than the average court case.
In conflicts involving less than $50,000 in damages, FINRA also provides "simplified arbitration." Simplified arbitrations are conducted by a single arbitrator and are usually completed faster than standard arbitrations.
What Protects Investors in California?
- Consumers are covered by the Department of Business Oversight (DBO), which also offers services to companies involved in financial transactions. All securities sales and offers in California are controlled by the Department of Business Oversight. All securities purchased in California must be either excluded from California securities registration or qualified by the California Department of Business Oversight's Securities Commission. The DBO was created to assist in the investigation of investment fraud in San Diego, Los Angeles, Oakland, San Francisco, and throughout California.
- The Office of the Attorney General of the State of California is part of the Department of Justice of the State of California. The Attorney General of California is in charge of a variety of criminal cases, including those involving investor rights and securities fraud.
- California's securities anti-fraud statute is found in Section 25400 of the California Code. It is illegal for someone in California to engage in a fraudulent securities transaction, according to California securities fraud laws.
- Securities regulations are created and enforced by FINRA and the Securities and Exchange Commission (SEC). Securities lawyers make the majority of cases against broker-dealers in FINRA's securities dispute resolution court. Bringing cases to FINRA for securities fraud, churning, broker bribery, selling down, and pursuing claims related to failing to supervise brokers are what your business law attorney can do.
While these organizations and laws will help you learn more about securities fraud and how to stop it, only a firm that specializes in securities fraud civilly can assist you in attempting to recover your damages as a result of broker wrongdoing in California.
How a Stock Broker Fraud Lawyer May Assist You
If you have been the victim of civil stockbroker fraud, you can speak with an attorney right away. A skilled stock broker fraud attorney will file a lawsuit on your behalf to help you recover damages for your suffering and achieve the best possible result. It's difficult to deal with stockbroker fraud on your own. A lawyer will help you understand this complicated procedure.
A civil stockbroker fraud lawyer will help you:
- Explain the relevant state and federal laws in your case
- Determine the best legal course of action to take against the crooked stockbroker
- Offer their legal knowledge and expertise to help you navigate the legal system with ease
- Provide you with information on the various choices open to you
- Assist you in the legal process
- Serve as a liaison between you and the legal system
- Assist you in getting your finances in order
It can be painful to be a victim of civil stockbroker fraud. Attorneys who specialize in stockbroker fraud are well-versed in both state and federal rules. This allows the business law attorney to provide you with the guidance you need on which legal choices are best for you. It's terrifying and exhausting to be a victim of stockbroker or securities fraud.
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