Stockbroker Forgery: More Common Than You May Think
Forged investor signatures can play a key role in stockbroker fraud. By forging a client’s signature, stockbrokers could sign a withdrawal slip or authorize fraudulent trades. More ambitious fraudsters might forge documents to create the illusion of a successful investment with healthy returns for shareholders. Stockbroker forgery is a persistent problem in the securities industry and is yet another reason for investors to thoroughly review their account statements.
If you believe your stockbroker forged your signature, one of the securities lawyers at Kurta Law can guide you through the next steps to recover your money. Stockbrokers who forge client signatures may have to personally repay any lost funds, and brokerage firms may be ordered to pay punitive damages for failing to supervise their representatives.
FINRA Rule 4530 and Stockbroker Forgery
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have implemented rules designed to stop brokers from forging investor signatures. Criminal convictions involving forgery result in a “statutory disqualification.” Section 3(a)(39) of the Exchange Act states that certain misdemeanors and felonies disqualify an individual from working as a stockbroker for 10 years from the date of conviction. Those “certain misdemeanors” include forgery. FINRA Rule 4530 states that a broker must promptly report to FINRA if they are “the subject of any written customer complaint involving allegations of theft…or of forgery.”
FINRA fined LPL Financial $6.5 million following allegations that the firm had allowed a broker to remain associated with the firm even though he was found to be in possession of a forged instrument, resulting in a criminal misdemeanor conviction.
Stockbroker forgery also violates the following FINRA rules:
- FINRA Rule 2010 states that brokers must observe “high standards of commercial honor and just and equitable principles of trade.”
- By submitting documents with forged investor signatures, brokers break FINRA Rule 4511, which requires each firm to make and preserve accurate books and records.
Why would a Broker Forge an Investor Signature?
1. Time. Brokers might forge their investor’s signature to save time. FINRA investigations have uncovered instances of brokers keeping their investor’s signature on file and affixing it to authorization forms. In these cases, the investor might not lose money, and the investor may have even authorized the transactions. Even so, firms might fire a broker for violating firm policies, and the broker could face a FINRA fine and suspension.
2. Commissions. Stockbrokers might forge a document to earn a more significant commission. Forgery allegations often involve insurance products. Variable annuities often come with huge commissions, often as high as 6% to 7%. Investors recently alleged that a broker submitted four unauthorized annuity applications on their behalf, electronically forging their signatures using DocuSign. Two of the contracts were for variable annuities. This fraud allegedly generated $68,000 in commissions for the broker.
3. Misappropriation of funds. Forged documents make it possible for fraudulent advisors to steal money. In 2019, the SEC revoked the license of an advisory firm called International Investment Group (IIG) following allegations of forgery.
According to the SEC, IIG operated as a Ponzi scheme, hid their losses, and sold investors $60 million in fake loan assets. IIG allegedly used the money from those sales to pay for redemption requests from earlier investors. To support the myth of these loans, IIG produced a forged credit agreement and other loan documentation. In one instance, an employee created a promissory note and credit agreement for a loan that allegedly did not exist. The employee allegedly created the forged documents by electronically copying signature blocks from older documents for legitimate loans. The SEC revoked the firm’s license and ordered the return of $35 million to their defrauded customers.
4. Unauthorized withdrawals. Brokers have used forgery to aid in the misappropriation of funds. In 2020, a broker consented to a FINRA bar following allegations that he forged withdrawal slips for the accounts of three customers, two of which were over 90 years old. (Forged withdrawal slips often tie in with allegations of elder financial abuse.) FINRA alleged that the unauthorized withdrawals coupled with unauthorized transfers allowed the broker to misappropriate $144,000 for his personal use.
5. Covering up mistakes. Plenty of brokers would prefer to forge their customers’ signatures than reveal they made a mistake. In one case, a broker forged an investor’s signature rather than admit they had mistakenly rolled over a customer to an IRA rather than a Roth IRA. Instead of delivering new paperwork for his customer to sign, the broker simply forged corrected documents.
6. Unauthorized transactions. The motive for forging customer signatures for an unauthorized securities transaction is not always clear but is a persistent problem, nevertheless.
According to one FINRA Acceptance, Waiver, and Consent agreement, a broker forged documents to avoid clarifying information with a customer. The broker allegedly recommended a five-year fixed annuity to their investor that supposedly came with a 3.15% interest rate. The investor signed papers authorizing the purchase of a fixed annuity with this interest rate, but the fixed annuity in question only came with an interest rate of 2.85%. Instead of informing the investor and requesting that they sign new documents, the broker simply forged the investor’s signature on the annuity application with the lower rate. The same broker engaged in similar misconduct with another investor, recommending a five-year annuity and then forging the investor’s signature approving the purchase of a seven-year annuity.
How Can I Detect Forgery?
Investors should review their account statements and ensure that each transaction has been authorized. If the investor has a non-discretionary account, every transaction must be authorized by the investor. FINRA Rule 4514 requires that brokers maintain signed, written authorization forms from their investors regarding any withdrawal of money from a securities account. Investors can review authorization forms to look for forged signatures and should contact a securities attorney if they suspect their broker may have forged a withdrawal slip or other documents related to their securities account.
If you suspect your stockbroker may have forged your signature, contact a securities attorney right away. Call 877-600-0098 or email email@example.com.