Can a Stockbroker Steal from Me?
Broker theft is all too common in the securities industry, and FINRA arbitration panels have reviewed many cases of stockbroker conversion. Theft by conversion occurs when a person converts the lawfully obtained funds of another into funds for their own use without permission. Basically, the broker takes unlawful control over an investor’s funds and ‘misappropriates’ the funds.
For legal reasons, FINRA typically does not label these cases as “theft” and does not refer to stockbrokers “stealing” money. “Misappropriation” and “conversion” are the preferred terms, but most investors would describe this type of misconduct as stealing.
Stockbroker Theft: FINRA Rule 2150
FINRA Rule 2150 states that “no member shall make improper use of a customer’s funds.”
This rule also states that brokers cannot have shared accounts with an investor unless they have both the firm’s and their investor’s written authorization. Investors may not share directly or indirectly the profits or losses in an investor’s account. (Firms might make exceptions to this rule if the investors are the broker’s immediate family members.)
Misappropriation Using a Shared Bank Account
In one case, a broker named Matthew Clason convinced their investor, an older woman, that she should open a joint bank account with him to more easily pay for small transactions for her. He ostensibly did this as a personal favor. According to the SEC, Matthew Clason misappropriated $300,000 using this joint account. He allegedly liquidated securities in his investor’s account and transferred the funds to their joint account so he could make withdrawals for his personal use. He did so in amounts of less than $10,000, which the SEC alleges he did to avoid closer scrutiny since banks must report withdrawals of $10,000 or more.
Broker conversion often comes up in elder financial abuse cases. Sadly, some predatory brokers specifically cultivate a close relationship with an elderly client for the express purpose of taking advantage of their trust.
Borrowing from Investors: FINRA Rule 2370
Under FINRA Rule 2370, brokers cannot borrow money from their clients, except under a few narrow circumstances, such as when the client is the broker’s immediate family member. This rule helps to limit the circumstances under which a broker could steal from their client.
Common Methods of Stockbroker Theft
- Investors should always be wary of investments that require them to make a check payable directly to the broker. In some cases, the broker diverts the money for their personal use rather than putting that money toward the client’s investments.
- Investors should keep an eye out for unapproved withdrawals from their accounts. Fraudulent brokers might also take steps to conceal the withdrawals, so each transaction requires scrutiny.
- Brokers might misappropriate investor funds for a Ponzi scheme, using the investor’s funds to pay off previous investors instead of using the money to generate a return for their customers.
Examples of Broker Conversion and Misappropriation
Broker theft is not always straightforward. The following investor disputes and regulatory actions illustrate the creative approaches that brokers sometimes take to misappropriate client funds.
Misappropriation: Refusal to Withdraw Funds and Failure to Maintain Possession of Securities
FINRA considers it misappropriation when a firm does not allow investors to withdraw their funds. On January 13, 2013, FINRA filed a cease-and-desist order against Westor Capital Group after alleging that they did not allow customers to withdraw account balances and misused investor securities. Westor also allegedly misused 65,000 shares of customers’ common stock to cover short sales by another customer, without the authority to do so. According to FINRA, Westor “failed to maintain physical possession or control of securities as required by the federal securities laws and rules.”
Conversion By Misrepresentation
Peter Fetherston recently became the subject of a FINRA investigation into possible conversion. He allegedly converted $89,000 from investors, which he had represented would go toward investments. FINRA alleges he forged a note stating he had borrowed money from investors for medical expenses but then refused to state what medical expenses needed covering.
Misappropriation and Elder Abuse
FINRA barred Sean Refsnider following allegations that he accessed an elderly investor’s funds using a debit card issued by the firm. He allegedly misappropriated $42,000 and used the debit card to make Amazon purchases. FINRA further alleges that Refsnider stopped paper mail delivery of his investor’s account statements, although he knew she could not access her account statements online, thus cutting off her access to important information about her funds.
Can I Sue My Stockbroker for Theft?
Investors typically agree to resolve their disputes through FINRA arbitration. Securities attorneys might argue that the firm had a duty to supervise their broker and should have caught the red flags of broker theft. In June 2021, FINRA fined Securities America $1.75 million following allegations that they failed to review outgoing wire requests of over $50,000 – an amount that should trigger a review. The regulator requires that investors look for red flags to prevent fraud. In this case, Securities America’s failure to review allegedly facilitated their broker’s Ponzi-like scheme.
Investors should remember that conversion is a form of embezzlement. Brokerage firms may be on the hook for failure to supervise the broker’s conduct and the customer’s account – even if the broker cannot pay the stolen money back themselves, their firm should be held liable for the damages. Securities lawyers at Kurta Law can provide a free case evaluation. Call 877-600-0098 or email email@example.com if you believe your broker misappropriated your funds.