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Explain the more common types of investment advisor or broker misconduct.


Explain the more common types of investment advisor or broker misconduct.

Frequently Asked Questions

There are many types of investment fraud:


Misrepresentations and Omissions


Misrepresentation involves a breach by the broker of his duty of good faith not to misrepresent any “material” fact to the investor in the sale or recommendation of an investment. Material facts include facts that address the nature or quality of the investment and the degree of risk involved. An “omission” is similar, but in that situation, a broker has failed altogether to disclose a fact material to the investor’s decision-making process. (Sometimes brokers will disclose only the benefits of owning an investment but will fail to explain the investment’s downside risks. It is the investment advisor’s job to do BOTH.)




An investment advisor’s first responsibility is to know his customer – to acquire necessary information about the investor’s financial situation, investment goals and objectives, future needs, and risk tolerance in order to recommend suitable investments for that individual. Also, the broker must know the history and facts of the recommended investment to ensure a good match between the investor’s goals and the investment’s features, benefits, and downside risks. Indeed a broker will have a duty to refrain from taking orders from a customer if such orders are unsuitable for the investor. Investment advisors are to continuously reevaluate the needs of their investor clients to maintain suitability of recommended investments.


Overconcentration and Failure to Properly Diversify


One of the most important rules of investing is diversification of an investor’s portfolio to provide protection against a decline in value of one particular investment. (An investor should never place all his investment eggs in the same basket.) If an investment advisor concentrates an investor’s funds in any individual investment or type of investment – only high-risk stocks, for instance – then the risk associated with the portfolio is dramatically increased.


Breach of Fiduciary Duty


It is very common for investors to put their complete trust and confidence with a broker based on the broker’s stated expertise and superiority of knowledge in the area of investments and money management. Investment advisors and their brokerage firms always have a duty to deal in the utmost good faith with investor clients. Most courts hold that brokers owe their securities customers a heightened duty known as a “fiduciary duty.” Brokers and their firms can be held responsible for abusing the investor’s trust and confidence and breaching these special fiduciary duties.


Unauthorized Trading


A broker who buys or sells securities in an investor’s account without first getting the approval of the investor has engaged in unauthorized trading. Investors must consent to a purchase or sale of a security in their account, unless they have given the broker written discretionary authority (which is rare) to make transactions on their behalf. Even in the case of discretionary accounts, a broker cannot misuse or exceed that authority and make a commission on trades he or she was not authorized to make. Unidentifiable debits or credits on monthly statements may be an indication that a broker has traded securities without proper authorization.


Fraud or Theft


Believe it or not, we have handled a number of cases where the investment advisor has stolen their clients’ funds. (It happens more frequently than one would think.) An example of theft is where the broker instructs an investor to write a check payable to the broker personally or to a company other than the brokerage firm, and the money never reaches the investor’s account. Another common example is where the broker systematically makes withdrawals from the customer’s account without the investor’s knowledge. Investors should be careful when seeking the assistance of an investment advisor including checking the broker’s and the brokerage firm’s background and credentials.




Churning occurs when a broker buys and sells securities in an investor’s account with excessive frequency for the purpose of generating commissions. In short the broker is motivated for his own personal wealth rather than helping his customer. If you believe you have been taken advantage of, contact us right away. We can help you know if you have a legitimate securities fraud case.

Securities Fraud

by Scott Starr, Partner

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