Victim of Financial Fraud? Call Now

Broker Misconduct Red Flags

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

Certain types of broker fraud are especially common and come with predictable warning signs. Fraudsters are also predictable when choosing their targets: They are more likely to target the elderly as well as less experienced investors. Vigilance is your greatest ally against broker 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 the joint account will make it easier for the broker to quickly make advantageous trades. In certain cases, brokers have used these accounts as an easy way 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 exercise undue influence over a customer’s financial decisions, especially in the case of 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 places similar limitations on brokers serving as an executor or power of attorney for a customer.

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 their 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 comes with a transaction fee, and trading becomes excessive once the 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 come with a fee that is generally a set percentage of the assets under management. “Reverse churning” occurs when a financial advisor collects the fee but does not execute 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 their investor for investments outside the firm, they may be attempting to circumvent the firm’s supervision in order to sell their client high-risk, high-commission investments that are not approved by their brokerage firm. This is a type of fraud called “selling away.”

Mutual Fund Breakpoint Fraud

If an investor owns shares of a mutual fund, he or she may be entitled to a discount if they buy more shares from that same fund. This is called a “breakpoint” discount. Brokers are required by FINRA rules to disclose if their client is entitled to a discount. FINRA Rule 2342 requires brokers to tell their investors about breakpoint discounts they may be entitled to. Failure to do so is a type of mutual fund fraud.

UIT Rollovers

Unit Investment Trusts (UITs) are portfolios of investments offered by a company. 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

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!” should be a red flag.
  • 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 draw scrutiny from a regulator.
  • 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 to be trusted.
  • Guaranteed returns. Returns are never guaranteed, even for low-risk investments. If a broker is guaranteeing an especially 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 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 or (877) 600-0098 to speak with an investment fraud attorney.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.