Investment Losses & Broker Misconduct

Broker misconduct can occur in various forms and often results in a financial loss for investors. Why there any many forms of broker misconduct the five most common forms are as follows:

(1) Unsuitable Investments: Financial advisors and Stockbrokers have an obligation and duty not to push unsuitable investments on clients. Financial recommendations must be suitable and appropriate for each customer individually taking into account their specific goals and needs. Investment recommendations should take into account a customers:

• Age
• Portfolio holding
• Financial status and experience
• Investment objectives
• Risk tolerance
• Understanding of investments

FINRA Rule 2111: Suitability “(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. (b) A member or associated person fulfills the customer-specific suitability obligation for an institutional account, as defined in Rule 4512(c), if (1) the member or associated person has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the member’s or associated person’s recommendations. Where an institutional customer has delegated decisionmaking authority to an agent, such as an investment adviser or a bank trust department, these factors shall be applied to the agent.”

An example of an unsuitable investment: a broker may recommend that a person over the age of 55 buy a variable annuity. That’s an unsuitable product as there are huge surrender charges if you ever try to get out of it. You’re paying for the most expensive life insurance product that’s wrapped into this variable annuity that you could ever pay. That’s an unsuitable recommendation; this is broker misconduct.

(2) Churning or Excessive Trading: Making frequent trades is generally a poor strategy and brokers are ultimately eating at an investor’s returns and profits by unnecessarily increasing investor’s costs and fees. When trading or advising as to a new financial opportunity a broker must be aware of the impact of commissions and fees.

(3) Lack of Proper Diversification or Overconcentration. Stockbrokers whom have directed too much of an investor’s portfolio into one investment product or certain sector, leaves an investor exposed to unnecessary risk. Stockbrokers have a professional obligation to ensure that they are not over-concentrating an investor’s portfolio. If an investor incurs a significant financial loss due to a lack of diversification, they may be victim to broker misconduct

(4) Misrepresentation or Omission of Material Facts: Stockbrokers have an obligation to disclose all material information to investors so that they may make a sound and informed decision. A broker engages in such conduct when they omit materially relevant information or attempt to market a risky financial product without informing an investor of the potential risks involved. When an investor is lured into making an improper investment decision based on inaccurate information or materially deficient representations by a stockbroker, this constitutes broker misconduct.

(5) Breach of Fiduciary Duty: Stockbrokers have an obligation to put their customer’s interests first. A fiduciary duty requires a broker to utilize adequate professional skills, avoid conflicts of interest and to operate fairly with investors.

Investment Advisers Act of 1940: “This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996 and 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission.”

Other forms of broker misconduct can include:

(6) Stockbroker Negligence: Failing to utilize adequate skill or attention when managing a customer’s portfolio
(7) Stockbroker Fraud: Conversion or theft of customer funds, forging documents etc…
(8) Selling Away: Stockbroker lures a customer into purchasing or selling securities not held by the brokerage firm, exposing customers to serious risks. These are unnecessarily risky investments because they are not “approved products” and have not undergone due diligence screenings.
(9) Unauthorized Trading: Stockbroker makes transactions without proper authorization
(10) Breach of Contract


Have you lost a significant amount of money while working with a broker or other investment professional? Our experienced investment attorneys are here to help recoup your losses. Adjadj Legal Group is a firm specializing in investment-related cases. We have the experience handling claims against brokers, brokerage firms, and investment advisors. Our goal is to preserve and protect your rights as an investor.

Experienced San Diego Financial Investment Attorney

When you’re dealing with broker fraud and misconduct, you want a lawyer who has the knowledge and experience to handle your case properly. As financial investment attorneys with a background and experience in the investment world, we have real-world experience and legal knowledge to help you fight when you’ve been injured or defrauded by a stockbroker or other financial professional. If you’ve suffered investment losses, it is important that you speak to an attorney who is familiar with pursuing cases against unscrupulous brokers and investment advisors, as well as the firms who employ them. It also is imperative that your attorney be familiar with the complex and ever-evolving array of complex securities and investment products being offered to the public.

What Does a San Diego Investor Rights Attorney Do?

An investment rights lawyer can handle many cases relating to investment fraud. In almost all cases, there is a direct or indirect mishap of your broker or advisor to perform the duties of their job, which could potentially result in a financial loss for you. There are ways to protect yourself in choosing a broker who is ethical, honest, and worthy of the trust that you will place in them. The FINRA Central Registration Depository (CRD) maintains valuable background information such as histories of broker misconduct, settlements, personal qualifications, employment records, and other disclosures on more than half-a-million registered securities dealers and brokers in the United States.

If you have fallen victim to broker misconduct and/or suffered a wrongful investment loss, we invite you to reach out to our offices today. Our experienced FINRA attorneys are ready to help with your pending disputes or arbitration matters. Please complete our online form or call today for a free consultation at 619-432-5145.

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