Broker Misconduct Red Flags

Certain types of broker fraud are especially common and come with predictable warning signs. Fraudsters are also predictable in their target selection: they are more likely to target the elderly and less-experienced investors. Vigilance is your greatest ally against securities fraud. And when you have suspicions, do not hesitate to share them with an experienced securities attorney.

Promissory Notes

Promissory notes are IOUs that promise to repay a loan. They typically come with interest rates and specify when the IOU can be redeemed.  The SEC warns that while these securities may be legitimate investments, they are only suitable for wealthy, or “accredited” investors who can take on considerable risk. They should not, for example, be sold to elderly investors who rely on their investment portfolios for retirement income.

In a promissory note fraud, fraudsters may persuade an independent life insurance agent to sell promissory notes. When an agent sells one of these high-risk notes, they receive a large commission. To secure this hefty commission, a fraudulent broker may emphasize the chance of high returns to the unsuspecting investor.

Joint Accounts

Brokers who intend to defraud their clients may suggest a joint account, perhaps under the pretense that it will make it easier for the broker to execute advantageous trades quickly. In some cases, brokers have used these accounts to misappropriate investor funds. This is a tactic sometimes seen in cases of elderly financial exploitation. Even if you trust your broker, be wary of their attempts to open a joint account with you.

Accepting a Position as an Executor or a Beneficiary

FINRA acknowledges that brokers are often in a position to exert undue influence on a customer’s financial decisions, particularly with elderly investors. In some cases, family members have not discovered a broker’s scheme to take over their loved one’s finances until it is too late. FINRA Rule 3241 prohibits brokers from serving as their customer’s beneficiary unless they are a member of the customer’s immediate family, or unless the broker seeks the approval of their brokerage firm. The rule imposes similar limitations on brokers who serve as executors or agents under a customer’s power of attorney.

Trustees who suspect a broker of taking advantage of their customer may be able to recover their losses by filing a complaint with FINRA and consulting with a securities attorney.

Unauthorized Transactions

Investors should regularly review their account statements to look for unauthorized transactions. Unless the investor’s account is approved for discretionary trading by both the investor and the firm, – the investor should approve every trade before the broker executes it.

Commission Abuse or “Churning”

Look out for an excessive number of trades in your account. Each transaction incurs a fee, and trading becomes excessive when fees make it impossible or unlikely for the portfolio to generate a return. This type of commission abuse, also known as “churning,” is rampant in the securities industry.

Reverse Churning

In a managed account, you should see evidence of your financial advisor executing trades on your behalf. Managed accounts incur a fee typically set as a percentage of assets under management. “Reverse churning” occurs when a financial advisor collects a fee without executing any transactions. Even if you trust your broker, it’s worth checking in on your managed accounts.

Communications via Private Phone Numbers or Emails

Investors should be suspicious of communication via personal cell phones or email addresses. Firms require brokers to communicate with their customers using official channels to ensure that their recommendations and solicitations comply with securities laws and suitability requirements.

If a broker solicits an investor for investments outside the firm, they may be attempting to circumvent the firm’s supervision to sell their client high-risk, high-commission investments not approved by the brokerage firm. This type of broker fraud is called “selling away.”

Mutual Fund Breakpoint Broker Fraud

If an investor owns shares of a mutual fund, they may be eligible for a discount when buying additional shares from the same fund. This is a “breakpoint” discount. FINRA rules require that brokers disclose discounts their clients qualify for. FINRA Rule 2342 requires brokers to inform their investors of any breakpoint discounts. Failure to do so is a type of mutual fund fraud.

UIT Rollovers

Unit Investment Trusts (UITs) are portfolios of investments that a company offers. They are not actively managed and have maturity dates. If an investor wants to “roll over” their investment into a different UIT, they risk incurring unnecessary fees. These early rollovers come with significant commissions for the brokers, making them tempting instruments for fraud.

Other Red Flags That May Indicate Broker Fraud

Certain sales techniques are tell-tale signs of broker fraud:

• Promises of especially high returns – anything that sounds too good to be true. High returns also come with high risks. We all want to beat the market, but very few of us can afford the (likely) losses. Overly risky investments often violate FINRA’s suitability rule.
• High-pressure sales tactics. Investors should always have time to carefully consider an investment. Any pressure to “Act now!”  is a red flag that may indicate broker fraud.
• Exclusive offers. Brokers may attempt to sell a high-risk security by giving it an air of exclusivity. If the investment is not available to the general public, it may be because the issuer does not want to attract regulatory scrutiny.
• Unregistered financial professionals. You should be able to find a broker or investment adviser by looking up their CRD number on BrokerCheck. Unregistered brokers are not trustworthy.
• Guaranteed returns. Returns are never guaranteed, even for low-risk investments. If a broker guarantees an exceptionally high return, beware.
• Assurances that an investment comes with “zero risk.” FINRA Rule 2150 prohibits brokers from guaranteeing against losses. Even with a low-risk investment, there is always a risk that the investor will suffer losses.

What Can I Do if I Suspect Broker Fraud or Misconduct?

Contact a securities attorney if you have spotted any signs of broker misconduct. Even if you are not sure you have a case, there is no fee for a case evaluation.

Contact info@kurtalawfirm.com or (877) 600-0098 to speak with a broker fraud attorney.