The past few years have brought unprecedented returns to investors in the stock market. Unfortunately, these good times have also had the effect of investors falling prey to dishonest or reckless stockbrokers or investment advisors.
The majority of stock brokerage firms attempt to uphold their commitment to professionally advise clients and only a small percentage of stockbrokers are dishonest. Unfortunately all it takes is one dishonest stockbroker or brokerage firm to wipe a lifetime of savings and hard work.
Every week in our law practice in Atlanta, we see people who have been separated from their retirement savings by an unscrupulous brokerage firm or stockbroker. Many times, these people are beyond their peak earnings years and have to rely on arbitration as their only hope to recover financially from the fraud that has victimized them.
The National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and other self regulatory agencies run very effective arbitration programs where aggrieved investors can seek redress of wrongs committed by their stockbrokers.
However, the investor’s best line of defense is to protect himself or herself from becoming a victim in the first place. Alternatively, following these tips (see menu at left) can help you recover losses should you be a victim of fraud.
The majority of stock brokerage firms attempt to uphold their commitment to professionally advise clients and only a small percentage of stockbrokers are dishonest. Unfortunately all it takes is one dishonest stockbroker or brokerage firm to wipe a lifetime of savings and hard work.
Every week in our law practice in Atlanta, we see people who have been separated from their retirement savings by an unscrupulous brokerage firm or stockbroker. Many times, these people are beyond their peak earnings years and have to rely on arbitration as their only hope to recover financially from the fraud that has victimized them.
However, the investor’s best line of defense is to protect himself or herself from becoming a victim in the first place. Alternatively, following these tips (see menu at left) can help you recover losses should you be a victim of fraud.
- Stick with a name you know or a trusted professional.
In the investment field there are two types of firms. On one level you have firms that have earned the respect of professionals and clients. On another level you have firms which do not respect their clients and who wither under the scrutiny of professionals.
Go with a firm that has been in business for over ten years that is known throughout the investment community. Look for a firm whose analysts get quoted in financial publications or appear on the financial news channels.
Of course there are small firms which are honest, but if choosing one make sure you have first hand knowledge of the professionalism of the broker and the firm.
Of course, even reputable firms have dishonest stockbrokers, but chances are they will ultimately fire the dishonest brokers and assuming you have documented your complaint, they may compensate you for wrong-doing.
- Check into the backgrounds of the broker and brokerage firm.
Before you send money to a broker who solicits your business, do some background research.
The NASD is the licensing agency which maintains records on all licensed brokers and firms. The NASD Public Disclosure Program allows investors to learn about their broker’s employment history, prior customer complaints alleging sales practice violations, regulatory proceedings, and other questionable acts and practices. The Public Disclosure Program can be accessed by telephone at 1-800-289-9999 or via the Internet at http://www.nasdr.com.
In addition, every state has a state securities agency which can be a valuable source of information about brokers and brokerage firms. These sources can also tell you how long your broker has been licensed to sell securities in your state.
Keep in mind that the NASD and state securities divisions may be able to flag some dishonest brokers, but many complaints somehow never make it into these databases and they are only a reflection of past practices.
- Beware of the broker who tells you that he only makes money when you make money.
Our clients often complain that their stock brokers have told them they aren’t charging any commission and will only get paid when the customer makes money. This is not only a lie but it is also a violation of securities laws.
Brokerage firms sometimes may appear to not be charging commissions on transactions in securities in which the broker is a market maker. Instead, they make money through mark-ups or mark-downs from the transaction price. Thus, a mark-up of 1/4 point ($0.25) on 1,000 shares equals a $250 charge.
On thinly traded securities, it is also possible that the broker is covertly increasing the price the customer pays by controlling the “spread” (the difference between the price which the broker will pay to buy the security and the price at which it will sell).
The point is that brokers seldom, if ever, work for free, and if one tells you he is working for free, he is probably lying to you.
- Be wary of a broker who wants to liquidate your blue chip holdings or steers clear of blue chip stocks in order to invest in lesser-known securities.
No reputable broker would recommend that a customer liquidate much or all of his existing portfolio of high-quality stocks, bonds, and mutual funds to buy lesser-known securities.
Likewise no reputable stockbroker would recommend that a client concentrate his investments in one stock or in a group of lesser-known securities. There is more investor and professional analyst interest in Lucent Corporation than in XYZ Corporation even if XYZ really does have the exciting, new product that the broker is telling you about.
The more investor and analyst interest there is in a security, the less the risk that that security is being manipulated or the less risk that the stock price has been run up to allow insiders to dump shares.
Be particularly wary if the stockbroker is trying to sell you lesser-known securities in which his firm makes a market.
- Never do business with a broker who offers to sell you a position in a hot initial public offering (IPO) but only on condition that you agree to purchase shares in aftermarket trading.
It is a common practice for unscrupulous stockbrokers to offer customers an allocation of IPO shares on condition that the customer agrees to show his good faith by also purchasing additional shares in the aftermarket trading which begin at the conclusion of the IPO.
This practice violates the anti-fraud provisions of Federal securities laws and is illegal. Don’t do business with a firm which willingly violates Federal securities laws.
- Do not allow your broker to hold you in a stock when you want to sell.
Many unscrupulous brokerage firms have what is know as a “no net selling” policy. What this means is that if a broker has a customer who wants to sell one of the firm’s house stocks, the broker must find a buyer for the stock before he is allowed to execute the sale.
This is an unethical practice which should not be tolerated. If you feel your broker is going to unreasonable lengths to keep you from selling a security you want to sell, put your sell order in writing, and talk to a manager.
- Hang up on any broker who wants you to buy or sell a security based on inside or private information.
A common scenario we hear about often involves a situation where a broker solicits his customer to buy a stock because the company’s earnings report will be coming out the next day, and that the earnings reported will be better than market expectations, thereby causing the stock’s price to rise.
One of two things is happening in this situation. Either the broker is passing on non-public information, which is illegal, or the broker doesn’t have any special knowledge, which is dishonest. We have yet to run into a broker who cold calls strangers with insider information, either way, you don’t want to do business with this broker.
- Do not overstate your income, net worth and objectives and ask for a copy of your new account information form.
Brokers have a legal obligation to collect information about their customers’ financial resources, investment objectives, and risk tolerance. Every brokerage firm has a form (usually called a New Account Form) on which this information is recorded.
Stockbrokers sometimes make up this information. Sometimes stockbrokers will get clients to overstate their income, net worth and risk tolerance, often with statements like “he’ll look like a bigger fish and get better access to the hot deals.”
Your best protection, especially at a reputable brokerage firm is to conservatively tell them what you are worth, with and without your home, and remember to deduct loans. Be conservative in stating your income and your objectives.
Investors should always ask for a copy of the new account form which contains this information and make sure it contains accurate information. If your resources are overstated or your investment objective is shown as “speculation” when you have told the broker you are a conservative investor, there is cause for concern. If there was a misunderstanding, an honest broker will be happy for the opportunity to correct it.
- It is very easy to lose money on small-cap or bulletin board stocks.
First, let’s define these terms. Most stocks which trade on NASDAQ (Microsoft, Dell Computer, etc.) are a part of the National Market System. Smaller stocks with less following amongst brokerage firms and investors trade on either the NASDAQ Small-Cap market or the Bulletin Board market. Investors can identify these lower-tier stocks by the fact that you will be unable to find price quotes for them in most local newspapers.
Small-Cap and Bulletin Board stocks tend to be unproven, start-up companies, which means that they are speculative, high-risk investments. Investors should only invest money that they can afford to lose in these types of stock. Likewise buying options is very risky as is concentrating more than 20 percent of your portfolio in a single stock.
- Be wary of the brokerage firm manager who promises special treatment to make up for losses you have suffered at the hands of one of the firm’s brokers.
Frequently, our clients who are victimized by unscrupulous brokers are further victimized by the benevolent “manager.” We place the word in quotes because the person may not be a manager at all. Dishonest brokers often work in pairs, and when one has lost the customer’s trust and confidence, the other comes in to further squeeze the customer financially. The “manager” will be sympathetic to the customer’s plight, often agreeing that the first broker was young and perhaps too aggressive.
The customer will be told that the manager will make back the customer’s losses by allocating to the customer the special opportunities that the firm saves for its best clients. The customer must only agree to send in some more money so that the “manager” will have something to “work with.” Don’t fall for this scam. If you send additional money, it will likely disappear in the same manner as the money you have already invested.
- Put it in writing, keep notes and act promptly.
Put it in writing, keep notes and act promptly. Often the tendency is to avoid conflict. Unfortunately dealing with stockbrokers is largely done via the telephone not in a written format.
However keeping contemporaneous notes not only helps you keep track of the honesty of your broker (and for that matter your memory) but it can provide a valuable tool in securing recovery for misconduct by your broker.
Likewise, writing your concerns to the brokerage firm makes it impossible for them to ignore or misrepresent.
- Write checks only to the brokerage firm.
When depositing funds into your investment account, never send cash, use your checks. Make sure your check is payable to the brokerage firm or the clearing firm if there is one.
Some smaller firms use clearing firms to handle and maintain the investments and cash review of your monthly statement or new account documents should indicate who your checks should go if there is a clearing firm and who checks should be made payable to.
If a broker asks for a check made payable to himself or a third party, contact his manager and determine in writing why it is necessary.
Actual examples of “sales scripts” used by unscrupulous stockbrokers.
Sometimes in the course of preparing our cases we have been able to obtain “sales scripts” which
stockbrokers have used to push worthless stock on unsuspecting investors. “sales scripts” are written by individual stockbrokers, a stock promoter or management and given to stockbrokers to help them open accounts and sell stock. These sales scripts were used at a brokerage firm that has since gone out of business in part due to regulatory pressures and law suits from investors who were defrauded by the firm’s fraudulent practices and illegal manipulation of small stocks.
If you ever receive a call from someone like this hang up the phone or contact your state securities commissioner (note typos and other mistakes have not been corrected from the original scripts).
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