Investment Fraud/Mismanagement

While stockbrokers are often motivated by commissions in recommending investments or investment strategies, sometimes investor losses are simply due to a broker acting negligently instead of fraudulently. Negligence or malpractice of an investment advisor, financial planner, financial advisor or stockbroker is when the actions or inactions of your advisor or broker fell below the required standard of care for investment professionals.

Common Legal Actions Against Securities Professionals


Actions concerning the suitability of investments are some of the most common types of actions against securities professionals. Suitability cases can differ with the most common being violations of customer-specific suitability. A customer-specific suitability violation occurs when a securities professional recommends an investment that is inconsistent with the investors' objectives, tolerance for risk, or needs. For example, the recommendation of a non-traded real estate investment trust, an investment that is commonly known to be speculative, to a person reliant upon their investments for income would be unsuitable. Likewise, the recommendation of an aggressive or speculative investment to an individual looking for conservative growth would be unsuitable. Securities professionals are commonly paid higher commissions for investments that carry higher risks, giving such professionals motivation to take unnecessary risks in their recommendations.

Customer-specific suitability also requires diversification of investments. Investment portfolios are not appropriately diversified if the securities professional recommends that the investor put all of their "eggs in one basket." Such concentration increases the risk in the portfolio and can be too aggressive for some investors by creating a level of risk that is inconsistent with the investor's tolerance for risk. The risk of a portfolio is also increased if invested too heavily in specific investment vehicles, such as REITs, gold, limited partnerships, stocks or bonds in light of the investors' objectives, risk tolerance, or age.

Additionally, an investment can be unsuitable if a customer lacks the sophistication to understand the investment. The Securities and Exchange Commission ("SEC") has made it clear that a stockbroker must not only be satisfied that an investment is consistent with other individual suitability requirements, the broker "must also be satisfied that the customer fully understands the risks involved and is not only able but willing to take those risks."

Failure of Due Diligence

An investment is also unsuitable if the investment firm dues not conduct sufficient due diligence concerning the investment. Investment firms have a duty to determine if a company whose investments it sells are what they purport to be and must have an understanding of the company's financials to know whether the investment is suitable for any investor. FINRA has set forth many factors that need to be determined to know whether such suitability exists. Failure to have sufficient justification or insufficient investigation into the investment renders the investment firm liable for losses in the investment.


Probably the most widely known violation, though not necessarily the most common is the act of excessive trading or "churning." Churning of securities accounts occurs when a broker induces transactions in the customer's accounts which are excessive in light of the character of the account. This is a form of fraud. While several factors can be looked at to determine churning, turnover in the account is the factor most commonly reviewed. Disciplinary actions in front of the SEC have determined that turnovers as low as between two and four are enough for a presumption of churning.

Unauthorized trading

Unless a stockbroker has authorization in writing from an investor to exercise discretion over an account, a stockbrokers is prohibited from exercising trades in that investor's account that are not authorized.

Fraud by misrepresentation or omission

Federal securities laws, and most states' laws, provide a cause of action against any person who employed a scheme to defraud in connection with the sale of a security. Such laws provide recovery if in the purchase or sale of a security for the making of an untrue statement of a material fact; or omission to state a material fact necessary in order to make the statements not misleading; or engaged in any act, practice or course of business which would operate as a fraud or deceit upon any person.