Securities Fraud

Securities fraud is an increasingly widespread problem as volatile market fluctuations expose brokers who have placed their interest above those of their clients and engaged in securities fraud. Individual investors and shareholders are too often the most severely affected victims of financial mismanagement and manipulation by corporate executives and the professionals who assist them.

The most common types of securities fraud cases involve:

  • Churning,
  • Unsuitability,
  • Overconcentration,
  • Misrepresentations and Omissions and
  • Unauthorized Trading


Churning occurs when a broker engages in excessive trading in an account. A broker churns an account in an attempt to generate commissions. Many times he will sell the winners to show a small profit, and keep the losers.
To establish that your broker has churned your account, we will demonstrate that the pattern of trading activity in your account was excessive. This can be done in a number of ways including calculations to determine the annualized rate of return that would be necessary to cover the commissions charged in your account; the number of times the equity in your account is turned over to purchase securities; and the purchase and sale trading activity that occurs in your account.

When brokers buy and sell securities in an account to generate commissions, they usually convince their clients of reasons the clients should quick profits. While these reasons seem valid, these are often simply excuses for the broker to charge excess commissions. In such cases it is often possible to demonstrate the account was actually being churned.


In making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer’s risk tolerance, needs and investment objectives. A broker has a duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor’s financial needs or if the customer did not know or understand risks associated with certain investments.
A broker has a duty to gather essential information in order to understand the risk tolerance of an investor, the tax considerations for the client, the client’s prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client’s circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker may be liable to that client.

The issue is not whether a broker picked the right stock, anyone can make a mistake, but whether the broker pick the right type of investment. Example: bonds and lower risk stocks for a retirement account rather than high risk stocks only.

A broker must also have a “reasonable basis for the recommendation”. The broker’s basis for the recommendation can be the firm’s research, in which case the firm must have a reasonable basis for its own recommendation.


One of the most important rules of investing is diversification. If a broker concentrates your portfolio in any individual investment or type of investment, then the risk of losses with that portfolio is dramatically increased. Its the old adage that it is unwise to place all of your “investment” eggs in one basket. A broker who does not diversify his client’s portfolio is potentially liable if that investment declines in value.

Misrepresentation and Omissions

A brokerage firm or broker can be held liable if that firm or broker misrepresents material facts or omits to disclose material facts to the investor regarding an investment, and that client subsequently loses money on that investment. Often the misrepresentations or omissions disguise the risk associated with a particular investment. A broker has a duty to fairly disclose all of the risks associated with an investment.

Unauthorized Trading

Unauthorized trading involves the purchase or sale of a security by a broker without the prior consent of the customer, in a non-discretionary account. Unauthorized trading allegations are common in securities arbitrations, and usually turn on the timing of the customer’s complaint to the brokerage firm. Customers who first raise an unauthorized trade allegation months, or years after the trade has occurred usually do not fair well in arbitrations, particularly where the customer has been receiving confirmation slips and monthly account statements. Unauthorized trading allegations also bring into play a number of SRO regulations, including NYSE Rule 408 and Article III, Section 15 of the NASD Rules of Fair Practice, both of which require brokers to have discretionary authority in writing from the customer. Trading without the customer’s prior consent, is viewed as using discretion, and thus, a broker who engages in unauthorized activity violates Rule 408 and Section 15.

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