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Home Insights & Advice How to spot stock broker fraud: Nine red flags to look out for

How to spot stock broker fraud: Nine red flags to look out for

by John Saunders
16th Sep 20 11:05 am

Can a stock broker steal your money? Sure they can — and they don’t have to be an expert to pull that off.

But what is stock broker fraud?

Also known as securities or investment fraud, stock broker fraud is the deceptive use of false or incomplete information to induce investors to make investment decisions that result in losses for them but enrich their stock broker.

Unfortunately, stock broker fraud happens a lot more often than you’d think, and it can wreak havoc on people’s finances and personal lives.

If you suspect you may be a victim of stockbroker misconduct, you should contact an international investment lawyer as soon as possible.

Here are nine common red flags of stock broker fraud to watch out for

1. Unauthorised trading

Stock brokers are legally bound to obtain your authorisation prior to carrying out any transaction on your behalf.

If you have a non-discretionary brokerage account, your broker needs your explicit approval to make any kind of transaction.

In contrast, if you have a discretionary trading investment account, your broker will be able to conduct certain types of transactions without asking for express authorisation each time. However, they must still adhere to your pre approved trading guidelines.

The takeaway? If it comes to your attention that your broker sold stock without permission, get in touch with a stockbroker fraud attorney right away.

2. Lack of diversification

Never put all your eggs in one basket, the old saying goes — and that is especially true when it comes to investing.

Your portfolio should have a large number of different types of investments. That helps keep risk to a minimum while at the same time maximises your prospects for high returns.

Are your investments over-concentrated or too similar? If so, you need to have your portfolio reviewed by an international investment lawyer.

3. Excessive trading 

Is your stock broker a little too enthusiastic? Isn’t that a good thing? After all, you are paying them to trade on your behalf.

It is somewhat counterintuitive, but trading too frequently is actually a terrible financial strategy.

Stock brokers are often paid on commission, which means the more they trade, the more money they make. This type of fee structure might tempt some brokers to engage in excessive trading or churning.

The problem is that if you trade too frequently, you could end up losing a lot of money overall — even if you land a great return on investment on every single transaction.

Brokers, of course, know that, which is why they are legally bound to only recommend transactions that are not only sensible but also in line with a broader investment strategy.

4. Failure to disclose a conflict of interest

Did your stock broker suggest an excellent investment opportunity only for you to find out later that they had a stake in that same company?

That is an obvious conflict of interest, and failing to disclose it is a blatant violation of stock broker ethics if ever there was one.

5. Misrepresentation or omission of key facts

The whole point of having a stock broker is so that you can benefit from their financial acumen and make informed investment decisions.

That’s why stock brokers are under a legal duty to give you an honest and full assessment of any potential transactions. What’s more, that duty goes beyond prohibiting outright lying and also covers any misrepresentation or omission of material facts — as any international investment lawyer will tell you.

6. Unsuitable recommendations

No two investors are alike: they all have their unique needs, goals, and resources. As a result, not all investment opportunities will be suitable for you and your portfolio. How can you tell which one would make a good fit?

Here is where your stock broker comes in. They have a professional duty to carefully assess your individual circumstances, build a comprehensive personal risk profile, and ensure that all their investment recommendations fit that profile.

Therefore, if you feel that your stock broker is pushing you toward investments that seem too risky or too complex for you, you may want to look into stock broker fraud attorneys.

7. Lack of license or registration 

All investment advisors, whether they are stock brokers or brokerage firms, must be registered to trade in securities. What’s more, every security they sell must be registered as per the applicable state and federal regulations. If your stock broker fails to present their license and registration, there is something seriously wrong going on.

8. Failure to execute orders in a timely manner

Your stock broker is required by law to execute all your orders in a timely manner. The failure to do so is a telltale sign of fraud or negligence. Don’t waste any time and call an international investment lawyer today to discuss your options.

9. Use of illegal accounts

Has your stock broker done any of the following:

  • Using an address other than that of your home or business?
  • Lying on account applications?
  • Placing your money in their personal investment account?
  • Setting up false accounts?

All of the above practices are illegal — as well as classic examples of fraud.

Stock broker fraud: Final thoughts

No investment is risk-free. However, there is a world of difference between the losses that come as a result of the fluctuations of the market and outright fraud. If you believe that your stock broker may be engaging in fraudulent practices, contact an international investment lawyer immediately.

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