About Stock Broker Fraud Law

Experienced Fairfield County Stock Broker Fraud Law Attorney

The law firm of Edward W. Vioni, Attorney at Law, LLC, is dedicated to helping investors in claims of misrepresentation and misconduct against brokers, brokerage firms and investment advisors. Lawyer Edward Vioni worked as a financial consultant at Merrill Lynch and Paine Webber and served as an institutional sales trader and later as compliance officer and general counsel for Nutmeg Securities Limited in Westport.

He has also been a lawyer for 30 years, and he now represents investors who have lost money due to the shady tactics of their brokers. Mr. Vioni has tremendous insight into the tactics of brokers and has a thorough understanding of stock broker fraud law.

Common Mistakes and Misdealing Affecting Investors

Our firm provides representation for all types of stock broker fraud claims, including cases involving:

Churning

Churning is excessive trading in a customer's account by a broker. Many investors, no matter how experienced, still seek the help of an experienced stock broker fraud lawyer to help define what "excessive trading" is, in their own special case.

There's no one single test to tell if an account has been "churned." This is why you need to consult with a lawyer if the following warning signs are present: first, excessive trading, and second, control of the account by the Registered Representative, and third, the intent to defraud the customer. The intent to churn can be difficult to prove. Acting sooner, rather than later, will help you gather evidence and protect your investments.

Failure to Diversify/Over-Concentration

Stock fraud happens in many ways, including when a broker fails to properly diversify a client's portfolio. In order to protect an investor's assets, the broker should vary the types of stock purchased.

Most experts agree that diversification of investment holdings is often the first or even the most important shield against risks. Consulting with a stock broker fraud lawyer, if you feel your account has been mishandled, will help explain whether a lack of diversification occurred in your case.

When an investment portfolio or account is over-concentrated in just one security, the risks of losses usually increase. The broker may also have failed to disclose a personal interest in the investment strategy. In these cases, a broker is legally required to disclose both the increased risks and to recommend solutions to fix the problem.

These are red flags, in two very common instances, when accounts show signs of being over-concentrated:

  • The accounts hold only common stocks (e.g., mutual funds invested in common stocks) rather than a mix of stocks and bonds;
  • Investments limited to single sectors or industry

A broker needs to develop and explain strategies about how to diversify your client portfolio. Failing to do that can result in negligence or even malpractice liability.

Failure to Hedge

In especially risky investment situations, a broker may be liable for failing to advise or help an investor to hedge their portfolio. "Failing to hedge" usually happens when a customer has a portfolio concentrated in few companies or few industries. This "eggs in one basket" approach often leaves the investor open to devastating losses if those companies or sectors fail in a spectacular way. Liability for a failure to hedge is also based on proving a broker's duty to make suitable recommendations. Suitability, in a nutshell, means a broker will use sound financial planning, including diversification.

In some situations, it would be unsuitable for a client to diversify a large holding in one or more securities. Even these distinctions, however, won't necessarily end a broker's duty to make suitable recommendations, including sound recommendations to hedge your portfolio.

Speaking with an experienced stock broker fraud lawyer will help explain the need to hedge and potentially protect your assets if you question your broker's motives or competence.

Failure to Supervise

The failure to supervise is a violation of FINRA rules. Breaking these rules about supervision may not cause a lawsuit directly, but are often part of a broader pattern — often, cases of fraud. In practice, a failure to supervise case that gives rise to a lawsuit usually means two things:

  • That there's been a fraud (e.g., by an unsupervised broker); and
  • That under SEC Rule 10b-5 there was also an "omission" by a supervisor or brokerage house in failing to disclose to an injured investor that the broker was unsupervised

The longer an investor waits to consult with an experienced stockbroker fraud lawyer, the more chance of losing a recovery of their investment. The investor's security fraud attorney has to show that the brokerage house either had knowledge, or should have known, about the wrongful actions. The last step is to show the brokerage house didn't use an actual ability to control or influence the wrongful actions of the controlled agent.

Breach of Fiduciary Duty

Breach of fiduciary duty is one of the most common claims made by investors in securities litigation and arbitration. Under the law, a securities broker is considered a fiduciary with respect to all matters within the scope of the agency.

Securities fraud and breach of fiduciary duty are often complicated since they are separate legal claims that often overlap. For example, the same facts usually apply. Perhaps the most common situation of breach of trust happens when a broker sells an unsuitable investment. This is both a fraudulent act and a breach of fiduciary duty by the broker.

The phrase "financial adviser" usually appears on broker business cards (instead of the more accurate terms of "account representative" or "stockbroker"). Many investors have the mistaken idea "their" broker is only working for their interests. It's even a message brokers promote in advertising. Unfortunately, if large losses occur, and dissatisfied customers try to hold brokers to the fiduciary duty standard, brokers then try to defend their judgment by saying they are not fiduciaries.

In fact, the securities industry often believes that securities brokers are not bound by the legal fiduciary standard of care. In truth, brokers don't have to register as investment advisors, even if they are giving investment advice or managing investments. Consult with an experienced stock broker fraud lawyer if you have the slightest worry your broker is not meeting the highest ethical standards. As Supreme Court Judge Benjamin Cardozo once said of brokers: "Something stricter than the morals of the marketplace, not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

Improper Use of Margin

Buying securities on margin might dramatically increase your profits or losses. Especially in today's market, many investors frequently trade on margin because they are led on by promises of high profits. There's also a chance a broker has lured the investor with completely false promises. Improper use of margin can also happen if the investor acts without a full understanding of the possible downsides of margin. In order to use margin correctly, in your account, a broker is legally obliged to be sure you understand and accept these facts of life, and risks.

When you operate on margin, your stockbroker is basically 'lending' money to trade. For this service, you will be charged interest. In such cases, your stockbroker has in fact become your banker. The obvious conflict of interest that often arises has caused many investors to lose faith, and money, in their broker. An unscrupulous stockbroker has an incentive to recommend using margin, without warning you of its risks.

Whether an investor should trade on margin or not also has a lot to do with suitability. This topic is discussed in more detail later in this website. The basic rule of suitability, however, is that a broker must not only follow these margin rules, but must also consider whether your investing profile is "suitable" for buying securities on margin.

If your stockbroker hasn't adequately cautioned you properly about the risks of using margin, contact an experienced margins security lawyer.

Misrepresentation or Fraud

Most securities fraud cases have involved Section 10b and Rule 10b-5 of the 1934 Securities Exchange Act. New rules and regulations, following the crisis of 2008, are good reason to consult with a knowledgeable stock broker fraud attorney about your investments. New rules on misrepresentation and fraud are also going to help identify dishonest brokers as investors learn what those new rules are.

Section 10b prohibits any person from using fraud in connection with the purchase or sale of any security. Rule 10b-5 specifically prohibits making any false statements or (just as importantly, but harder to prove) omissions, by a broker in connection with security sales or purchases.

A "false statement" is legally defined as any material statement which misleads or even creates a false impression. To be a legal breach under Rule 10b-5, the false statement or omission must be material. Talk with a stock broker fraud attorney as soon as possible after discovering or questioning a statement by a broker that turned out to be apparently false.

The law says a statement is "material" if it would be important to a typically reasonable investor before making an investment decision. Additionally, the statement or omission must be made with the intent to deceive. Brokers often argue as a defense that their "reasonable" mistakes of fact, made without a malicious intent, aren't even legally wrong, under Rule 10b-5. An experienced stock broker fraud lawyer will help unravel whether or not the mistake was "reasonable."

As recent history has shown, broker misrepresentations have occurred after stockbrokers or financial advisors misled investors, all to manipulate the financial market. Misrepresentations have also been made by corporations, with the same intent to distort their financial information. Examples include misstating corporate assets and liabilities. These active misrepresentations have often cheated investors into thinking that the corporation is much more profitable than it really is.

These material and meaningful misrepresentations of basic financial data by corporations is properly classified as accounting fraud. As a result of many high-profile accounting scandals in the past 20 years, Congress enacted the Sarbanes-Oxley Act (2002), which imposes a number of securities law reforms aimed at increasing financial disclosures and discouraging corporate fraud.

Selling Away

Selling away can happen if brokers engage in private-securities transactions and other business dealings, out of sight and away from broker-dealer firm supervision.

Brokers must have written preapproval from their firms for such transactions. Many firms allow outside activities, including securities transactions, to accommodate brokers involved in other businesses, such as tax planning or advisory work. These wrinkles are a good reason to quickly seek the advice of a stock broker fraud lawyer, if your broker seems to be selling away.

Statistics show that the number of private-securities cases has again been growing, according to recent reviews by the Financial Industry Regulatory Authority (FINRA).

Disciplinary Actions

In 2008, FINRA took action against 45 individuals in selling away cases. Last year, that number rose to 56. The potential fines have also been going up: FINRA fined The Bear Stearns Cos. $500,000, for the sale of private-hedge-fund offerings. FINRA also fined MetLife Securities Inc. for $1.2 million. The lion's share of these fines included penalties for failure in the oversight of private securities deals. FINRA's executive director of enforcement said he expects to see many more selling away cases.

Brokers are sometimes tempted by current low-interest rates, so as to look at "outside" offers, trying for quicker and higher yields such as through promissory notes. Concerns about outside work ballooned into a crisis of confidence after the Madoff fraud and the Stanford Financial case.

FINRA has publicly announced their intent to more closely enforce and scrutinize the potential numbers of sell away schemes. Experts also expect to see an increase in these types of cases by SEC investigations and civil claims. Even higher fines, however, may not be the best line of defense for you as an investor. Consulting with an experienced stock broker fraud attorney may separate early recovery from delayed losses in what turns into a Ponzi scheme.

Suitability

"Suitability" may be a solid way to test an investment's soundness, but it's also an important legal safeguard. Unfortunately, it's also often misunderstood. To most, it means that brokers are required to ensure that their customers invest only in securities that are "suitable" for them. Brokers who took advantage of an investor, however, often claim that suitability is a sort of 20/20 hindsight.

In reality, the suitability doctrine doesn't usually involve after-the-fact decisions. By consulting with a lawyer, an investor can find out whether the doctrine in his or her case required that a broker have a reasonable basis for recommending a security or investment strategy. There's no constant litmus test to be applied to any specific case. No litmus test is really needed because the suitability doctrine only requires brokers to conduct themselves in a fair and equitable manner with their customers.

More specifically, this means a broker should be able to explain their reasonable basis for recommending a particular securities strategy to a particular customer. But that's still not quite enough. That particular customer needs to understand the strategy and the risks of the investment.

Theft

CBS reported in February 2011 that a former Connecticut securities broker, Gregory Buchholz of Bridgewater, was found guilty of stealing more than $1.35 million from his clients. He pleaded guilty to wire fraud. Prosecutors proved that Buchholz liquidated clients' annuities and mutual funds, and stole their proceeds, all the while working at Raymond James Financial Services. As a result, Buchholz was sentenced to four years in federal prison.

The case established that Buchholz had forged his clients' names and even claimed he was "reinvesting" their money. Eventually, his lies caught up to him, as they became suspicious and several contacted their own securities lawyers for advice. Buchholz's lawyer said the disgraced broker "deeply regrets" his actions. Prosecutors did report that Raymond James was not implicated, and the company had immediately fired Buchholz. Because of the prompt investigation, Raymond James is reimbursing investors.

This is just one example of a theft crime by a broker. If you or a family member feel you have or may become a victim of stock and securities theft or misrepresentation, experienced securities arbitration lawyer Edward Vioni can help you.

Unauthorized Trading

"Unauthorized trading" can happen if your broker secretly (or deceptively) buys or sells a security in your account. This usually happens without express prior approval. Trading should only happen after you have signed a formal agreement, which specifies what a broker's discretion is. This means having the advice of a securities fraud attorney can be used to help plan, open and then safeguard your accounts.

Though the specific steps may vary, if you have any questions (or not irregularities) consider seeking the advice of a securities fraud attorney immediately. Warning signs often include not following simple procedures. Rules require a broker to make a contemporaneous note of a trade on an order ticket. This data is read back to you before actually placing an order. After your order is really executed, the broker is to call you and confirm all of the information. This is to include the actual price(s) at which the securities were bought or sold. On the next business day, a broker is supposed to match details on the order ticket with the details of an actual trade. The firm is then required to send you a confirmation within five days, once the trade "settles."

Keep careful records, examine your statements and confirm the details of any transactions. Confirmations are supposed to be legally received within five days of the trade. But no matter how well you understand the rules, there's a chance a broker may create false data or reports.

Some broker misconduct is blatant and easily spotted, such as forging a signature on a document or stealing money from an account. Other misconduct is less obvious, such as the failure to advise a client on stock received as part of a compensation package or unsuitable recommendations to buy or sell stock based upon risk and investor goals.

Our firm can help you understand the difference between bad luck and broker misconduct, and we will pursue the compensation you deserve if you have been financially harmed.

FINRA Broker Check — Review Your Broker's Background

FINRA maintains a database containing the employment history, educational history, licensing history, regulatory issues and customer complaints for every licensed broker and brokerage firm in the country. Investors would be wise to review the record of their current or potential new broker. These public records may be accessed on the FINRA BrokerCheck website.

Discuss Your Case With a Lawyer

For more information regarding stockbroker misrepresentation, contact the Norwalk law firm of Edward W. Vioni, Attorney at Law, LLC. Call us today to schedule a free consultation.