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Investment Fraud

Investment fraud most often happens when a savvy investment manager takes advantage of his or her clients by finding loopholes through which to make bad investments or trades that do not benefit the client, but bring in money for the banker or the firm. Because the average investor is not up to speed on the financial markets from day to day and often does not have the expertise to understand the inner workings of trades and stocks, a fraudulent account manager can really do some damage if he or she has full financial control to act on the client’s behalf.

Even without financial know-how, investors need to be aware of certain losses that could be red flags for fraud. Fortunately, a California stockbroker fraud attorney can help you understand the laws and rules that control the investment business and provide checks and balances for brokers. If you feel that your broker is not adequately answering your questions or if he or she is making large amounts of trades and purchases on your behalf with little returns, it is probably time to call a California securities fraud lawyer and discuss the possibility of investment fraud.

Unsuitable Recommendations or Inappropriate or Fraudulent Investment Advice 

Not all securities are appropriate for all people. Every investor has different financial circumstances, is trying to achieve different financial goals, and will need to engage in different strategies to meet those goals. This is particularly true for seniors. FINRA imposes a duty upon financial professionals to (a) recommend suitable transactions for their customers (FINRA Rule 2111) and (b) know their customers (FINRA Rule 2090). 

FINRA Rule 2111: Suitability imposes the following duty on financial professionals: 

A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes…the customer’s age.

In other words, stockbrokers may not recommend just any financial product to their customers. Instead, they must have some basis for believing that the recommendation will be suitable for the customer. This generally prohibits “one-size-fits-all” investment recommendations, which can result in unsuitable investments that can cause serious financial harm, especially for seniors. 

Similarly, FINRA Rule 2090: Know Your Customer, imposes the following duty: 

Every member shall use reasonable diligence regarding the opening and maintenance of every account to know (and retain) the essential facts concerning every customer and the authority of each person acting on behalf of such customer.

Rule 2090 thus imposes a duty upon financial professionals to undertake reasonable efforts to ascertain the relevant facts about their customers that will allow them to make suitable recommendations. Generally, “essential” facts in this context are those that are required to service the customer’s account, act in accordance with the customer’s instructions, and comply with relevant laws, regulations, and rules. 

FINRA rules also prohibit fraudulent investment advice through Rule 2020: Use of Manipulative, Deceptive, or Other Fraudulent Devices

No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance.

Such fraud could occur, for example, where a stockbroker induces his or her customer to purchase a fictitious security or coerces the customer into buying a security the customer does not want to buy. If you have been harmed by any of these practices, please contact a California investment fraud lawyer

Churning or Over-Trading 

Churning and over-trading occur when a stockbroker makes an excessive and unnecessary number of transactions on a customer’s account to generate commissions and fees for himself or herself. Referred to as “excessive trading” in FINRA regulations, churning is considered a type of unsuitable transaction under Rule 2111: Suitability. It is also contrary to the fiduciary duties stockbrokers owe to their clients. In many cases, churning can result in the purchase of securities that are unsuitable for the customer’s needs, causing significant financial harm. 

Misrepresentations and/or Omissions

Misrepresentation (and misrepresentation by omission) occurs when a stockbroker willfully misrepresents or omits material information about an investment product. Information is generally considered to be “material” if it is the type of information that an investor would consider important in making a decision to purchase or not purchase a security. This type of investment fraud is prohibited under FINRA 2210: Communications with the Public, which requires all communications to be fair, balanced, and complete. 

Failure to Diversity and Over-Concentration 

Prudent stockbrokers advise their clients not to put all their eggs in one basket; spreading out an investment portfolio across various investment products is wise because it prevents a catastrophic loss when one segment or class of investments crashes. Failure to diversity a customer’s portfolio can cause serious economic harm. While over-concentration does not always constitute fraud, it can rise to the level of fraud if a stockbroker who is entrusted with a client’s portfolio fails to diversity it. 

Financial Abuse of Elders through Unsuitable Investment Products

Unsuitable recommendations and inappropriate advice can be a form of financial elder abuse that is particularly damaging. This is because many seniors rely on a “nest egg” for the vast majority of their living expenses; if they entrust that nest egg to an unscrupulous stockbroker, they could face financial ruination. One of the most common forms of financial elder abuse in the investment context is through the recommendation of annuities. These are long-term investments that typically prohibit or preclude withdrawals for at least 10-20 years, which makes them an unsuitable investment product for most seniors. Fraud occurs when a stockbroker recommends an annuity to a senior whom he or she knows will not be able to access the funds until well past the senior’s life expectancy. If you are aware of annuity fraud being perpetrated on a senior, you should consider seeking a California investment fraud lawyer for help. 

Failure to Give Appropriate Advice Regarding Employee Stock Options

Many employers provide their employees with stock options — agreements that allow an employee to buy stock in his or her employer at a fixed time and for a certain price. However, even when an employee exercises his or her stock options, the company’s stock might not always be a safe bet. The employee may be better served by diversifying his or her investment portfolio. In many cases, however, financial advisers cause financial harm to their clients by failing to properly advise them of the risks of maintaining their stock position in their employer or former employer. 

Mismanagement, Negligence, and Malpractice 

Stockbrokers, financial advisers, and other financial professionals owe a fiduciary duty to their clients. This generally means that stockbrokers must (a) recommend only suitable investments, (b) put their clients’ interests ahead of their own, and (c) disclose all material facts. Failure to abide by this duty, such as through self-dealing, is a breach of the duty and may constitute fraud. Please note, however, that not all bad investment decisions necessarily are the result of mismanagement, negligence, or malpractice. However, investment losses may be considered fraud if they are caused by a stockbroker’s failure to act in accordance with the appropriate standard of care. For more information about a stockbroker’s fiduciary duty to his or her clients, please contact a California investment fraud lawyer.

Recognize Investment Losses

The SEC and FINRA have regulations regarding the purchase of securities that are identical to those you would take a loss on for tax reasons, and when an investor fails to follow those rules, you could see the negative effect in your annual taxes. Investors should be up-to-date on the latest rules regarding any investment purchases and act accordingly with your funds.

Additionally, any investment made on your behalf should be one that fits in with your overall financial goals and does not exceed the amount of risk you are willing to take. Your broker has a responsibility to act for you and in your best interests, so whenever he or she fails in that duty—whether intentionally or by accident—you suffer and you have legal grounds to take action.


Misrepresentation and omission are two of the biggest ways a broker can convince you to invest in a fraudulent product or trick you into placing faith in an unsecured or unprofitable stock. In such cases, the investment manager will rely on your dependence on him or her for help in the world of investing and will use your lack of knowledge against you.

The SEC mandates that all stockbrokers, financial advisors and securities firms provide their clients with accurate information and up-front, appropriate guidance in making stock and securities investment decisions. This means that when a broker is presenting you with a new stock option to invest in, he or she has to give you all the necessary information about the investment and its potential for return or loss.

Any misrepresentation or omission on the broker’s part can be considered misconduct, especially if the broker does not disclose the risks involved, the losses that could be incurred as a result and the financial repercussions of a failed investment. Misconduct or breach of duty on the part of an investment agent or firm gives the affected client the right to bring legal action against the guilty party to recover financial losses.

Avoiding Stockbroker Fraud

As an investor, there are certain signs you can look for to help you identify a suspicious situation. Below is a list of some popular tell-tale signs that illegal practices may be occurring.

  • Receiving letters or emails with spelling errors and without official letterhead
  • A promise of an instant return on your investment
  • Sharing personal or insider information
  • Pressure to submit paperwork quickly
  • Encouragement to take money from other accounts in order to afford this investment.

It is also good practice to ask for written information, like an annual report. At Evans Law Firm, Inc. we have never heard of a successful get rich quick promise. In general, a good motto is “if it is too good to be true, it probably is.”

Yet, even the most aware investors fall prey to stockbroker fraud. If you believe your financial advisor is illegally handling your investment call Evans Law Firm, Inc. We offer a free, no-obligation consultation. A California stockbroker fraud lawyer at our firm will listen to your situation and help you evaluate what to do next.

If You Are a Victim Contact a California stockbroker fraud lawyer

Most of our clients are not expert investors. They don’t have a financial background. That is why they trusted their financial advisor to handle their money in a skilled and professional way.  If your stockbroker committed fraud by managing your money in an illegal way you must take action against the individual or the firm.

They are violating their fiduciary duty and need to be stopped so they cannot continue their illegal practices. Contact a California stockbroker fraud lawyer at Evans Law Firm, Inc. Together we can determine if you need to file an individual arbitration claim with FINRA.

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