Too many investors ignore monthly account statements or trade confirmation statements. It is all too easy to tell yourself you will look at them later and forget.
One of the best ways to save for retirement or a rainy day is to invest. But if you are like most people, you do not have the time to learn the ins and outs of the stock market or choose individual investments. The better option is to work with an experienced stockbroker and brokerage firm to guide you in the right direction.
While most stockbrokers and firms are ethical, hardworking professionals, there is the occasional bad apple. Investment fraud by a stockbroker is possible.
It is up to you, as the investor, to know who you are working with and pay attention to their trades and purchases. By doing so, you can reduce the risk of becoming a victim of investment fraud.
What Is Investment Fraud?
Investment fraud happens when your stockbroker violates laws and regulations, resulting in you losing money. A broker can commit fraud in various ways, which is why it can be hard to catch. It can involve stealing your money outright, though this is rare.
More often than not, investment fraud involves:
- Unauthorized trading,
- Excessive trading/churning,
- Lack of diversification/over-concentration,
- Misrepresenting or omitting important facts,
- Inappropriate investment recommendations,
- Failing to disclose a conflict of interest,
- Front running,
- Failure to timely execute a trade,
- Missing breakpoint discounts,
- Using false accounts or information, or
- Trading while unlicensed/unregistered.
You can think of fraud as illegal conduct that enables the stockbroker to earn more money while causing you to suffer avoidable losses. These are not ordinary losses you could experience while investing reasonably and ethically. Fraud is a violation of laws and ethical standards.
Tips to Avoid Investment Fraud
You may be new to working with a stockbroker and want to know what to do. Or you may be an experienced investor brushing up on best practices. Either way, follow these 15 tips.
1. Confirm Your Stockbroker’s License
Are your potential broker and brokerage firm licensed and registered to offer investment advice and sell securities? Working with licensed and registered professionals and firms is the first step in avoiding fraud. Federal law requires investment professionals to be qualified and registered to perform specific tasks. You can use FINRA.org to review Individuals barred by FINRA.
2. Investigate Your Stockbroker’s History
You can find out if anyone filed a complaint against a broker or firm, whether a broker or firm has been fined or suspended, and whether they paid to resolve complaints through the FINRA BrokerCheck. This website gives you a quick review of a broker’s license information, employment history, complaints, arbitrations, and regulatory actions.
Another way to learn more about a professional is through the SEC Action Lookup. This tool tells you if someone has been a defendant in an SEC administrative proceeding or federal court case.
If you want to be very thorough, look up your state regulator and see what information you can find with them. In Florida, where investment fraud lawyer Robert Pearce practices, you can inquire with the Florida Office of Financial Regulation.
3. Do Not Rely on Your Broker’s Personality
Brokers know to be polite and charming. But you cannot rely on personality when deciding whether to trust someone with your hard-earned money. No matter how much you might like someone after meeting them, do your due diligence and look into their license and background.
4. Be Skeptical of Cold Calls
If you receive a call about an investment opportunity without warning, do not automatically say yes and hand over your financial information to an unknown broker. Get the broker’s name and information about the investment opportunity. Investigate the broker and the investment thoroughly before making a financial decision based on an unsolicited call.
5. Be Wary of Big Promises
If something sounds too good to be true, it probably is. There is no such thing as a risk-free investment. If a broker promises you a high return with minimal risk, double-check everything you know about that broker, firm, and investment opportunity.
6. Provide Accurate Financial Information
You are required to fill out paperwork when you open a brokerage account. You will provide information on your income, net worth, risk tolerance, and objectives. You need this information to be accurate. If you believe you have been the victim of fraud, this documentation serves as evidence of what would or would not be appropriate investing by your broker.
Never allow your broker to fill out these forms for you or sign blank documents. You should provide the information and confirm the forms’ accuracy before signing.
7. Learn the Fees
Investing through a brokerage firm costs money—that is how the firm and broker earn a living. Learn the firm’s fees at the beginning of the relationship to avoid uncomfortable surprises. Also, by learning the fee schedule, you can notice when something is wrong.
8. Question High-Pressure Sales Tactics
If your broker is telling you that you must act now, without having time to think or consult anyone else, be wary. Another red flag is a broker saying, “Everyone is buying it.” High-pressure sales tactics are signs of a scam.
9. Ask for a Prospectus
If a broker approaches you about an investment opportunity, ask for the prospectus or offering circular. This documentation should give you more information. Asking for it also gives you more time to do your research and consider the investment.
If a broker tells you a prospectus or offering circular is unnecessary, walk away. A lack of documentation is a sign something is not right about the situation.
10. Never Write a Check to Your Broker
If your broker asks you to make a check out to them personally, say no and report the incident to the firm’s manager or compliance department right away.
11. Review Your Account Statements
Too many investors ignore monthly account statements or trade confirmation statements. It is all too easy to tell yourself you will look at them later and forget. But the best way to spot excessive or unauthorized trading is to review all statements you receive thoroughly.
12. Verify Investments Are Registered
Most investment products must be registered with the SEC. There are exceptions, such as securities issued by municipal, state, or federal governments. You can start by asking your broker if an investment is registered. If the answer is no, ask why.
You can check for an investment’s registration with the SEC’s EDGAR Company Search or by contacting your state securities regulator. FINRA.org offers more information on investment product registration.
13. Take a “Happiness Letter” Seriously
If you receive a letter from your brokerage firm reminding you to reach out if you have any questions or concerns, this is a red flag. The firm might not openly say there is a problem. But you are likely receiving the letter because of a broker’s questionable, if not outright fraudulent, behavior.
Take this type of letter as the warning it is. Go back and review your account and transaction statements. Contact the branch manager, and ask them if any account activity is inconsistent with your objectives and risk profile.
14. Do Not Be Afraid to Question Activity
Your broker is a fiduciary and has an ethical and legal responsibility to act in your best interest. This gives you the right to question the broker’s conduct. If you notice anything questionable in your account statements, contact your broker and the branch manager immediately.
15. Do Not Be Afraid to Take Your Business Somewhere Else
Just because you open a brokerage account with a firm does not mean you have to stay there. If you are unhappy with your broker’s conduct or believe they are guilty of misconduct, do not hesitate to close your account.
Steps to Take If You Suspect Investment Fraud
If you suspect you have been the victim of investment fraud by your stockbroker, there are several steps you should take:
- Gather evidence, including all documents you believe support your claim of fraud. Write down the dates and names of people you spoke with about the investments, your risk tolerance, and your investment objectives.
- Consult an investment fraud lawyer as soon as possible. An experienced attorney will better understand how to review your investment records for signs of fraud.
- Report the misconduct to the firm’s branch manager or compliance department.
- Report your suspicions to any state and federal regulators that apply to the situation, including the SEC and FINRA.
- Report your suspicions to federal and local law enforcement, such as the FBI, the district attorney, and the attorney general. Most state AG’s offices have a consumer protection unit that handles fraud.
- Ask your lawyer about your options to recover compensation, such as an administrative claim or filing a lawsuit.
It is best to work with an attorney experienced in helping victims of investment fraud by stockbrokers. These are often complex situations that take time and care to prove. Your lawyer can represent you in arbitration or mediation, which is often faster and less costly than going to court.
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