It is an unfortunate fact that securities fraud is rampant in the financial services industry exposing unsuspecting investors to major losses. If you are involved in a securities arbitration proceeding or if you feel you are the victim of securities fraud, speak with an experienced securities fraud attorney to explore your options. Below are four of the most common violations by securities brokers:

     1. Broker Recommended Unsuitable Products in Violation of the Suitability Standard

Under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, brokers may recommend only those securities and investment strategies that are suitable for their customers. See 15 U.S.C. 78j(b), and 17 C.F.R. 240.10b-5. For a recommendation to be considered suitable, a broker dealer must, consider a client’s investment objectives, carefully study the proposed investments, and clearly explain the risks associated with the proposed investment to the client.  See FINRA Rule 2310. Brokers or advisers will often market financial products as safe investments when the products are in fact very risky with a real risk of loss. Such risky products are often not in line with a client’s allocation objectives. Furthermore, brokers and advisers often do not carefully study the proposed investments prior to recommending them to clients. These and other such failures strongly support a finding that unsuitable products were recommended to the client in violation of the suitability standard.

      2.  Broker Engaged in Misrepresentations, Omissions and Common Law Fraud

            Similarly, under section 10(b) of the Securities Exchange Act and Rule 10b-5, a broker may not misrepresent or fail to disclose material facts in the sale or recommendation of an investment. The common law fraud doctrine provides a similar protection for investors under state law and generally provides that a broker dealer must not knowingly make misrepresentations or omissions of a material fact upon which an investor relied to the investor’s detriment. All too often, senior managers will instruct their brokers to convince clients to purchase and hold risky funds without the proper disclosure to clients. Such actions point to fraud, misrepresentation or omission in violation of Rule 10b-5 and the common law fraud doctrine.

      3.  Broker Engaged in Excessive and Unnecessary Trading (“Churning”)

            It is well settled that brokers may not engage in transactions that are excessive in view of the nature of the customer account in order to gain additional commissions. In order to prove that such churning has occurred, a claimant must show that the respondent had control of the account in question, that excessive trading did in fact occur and that the respondent had the intent to deceive, manipulate or defraud. See generally Carras v. Burns, 516 F.2d 251, 258 (4^th Cir. 1973). The intent element can be shown by evidence of a high turnover ratio which is inconsistent the customer’s stated interests. See generally Mihara v. Dean Witter & Co., 619 F.2d 814, 820 (9^th Cir. 1980).  With non-discretionary accounts, the control element can be met where the client routinely follows the recommendations of the broker. Id. A red flag is where one finds a number of “in-and-out” trades in seemingly comparable equity securities resulting in a turnover ratio which is unusual for a typical client account.

      4.  Broker Breached their Fiduciary Duty

            Generally speaking, brokers have a duty to act with the highest degree of honesty and loyalty and in the best interest of their clients as to matters within the scope of the broker-dealer relationship. See for example Leib v. Merrill Lynch, Pierce Fenner and Smith, 461 F. Supp. 951, 953 (1978). These duties include recommending securities only after careful study of risks, adequately informing the client as to risks involved with each transaction, and refraining from misrepresenting or omitting any fact material to the recommended transaction. Id. A fiduciary duty to provide ongoing review, analysis and support with respect to investment recommendations may also arise in instances where there is more than an arms-length relationship between the registered rep and the client. Id.

Contact The Badaki Law Firm today at (443) 857-7740 or email badakilawfirm@gmail.com. You may also visit our website at www.badakilawfirm.com or www.mdconsumerlawyer.net.   

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