Deceptive Broker Practices
Deceptive broker practices create liability on the dealer/broker house for their internal fraudulent acts. When a stock brokerage house, or wire house, misleads its individual financial advisors and that information is conveyed to an investor, the deceptive brokerage practice creates a liability directly for the brokerage house. For example, if I maintain a stock account with a major stock brokerage firm with offices in Boca Raton, Miami, or West Palm Beach, I will deal with an individual financial advisor. That financial advisor is an investment professional. But because he's working for a wire house he/she is often told to produce sales for certain products. Those products originate from their main office, usually in Wall Street, New York. If the stockbroker mis- informs the investor because he is misled by his office, the deceptive brokerage practice creates a liability directly between you, the individual investor and the firm. For example when major Wall Street houses were packaging high risk mortgages into derivatives and selling them to investors they may well have acted deceptively in mischaracterizing the risk. Stockbroker fraud is a deceptive practice designed to benefit the broker, or the brokerage house, at the expense of the individual investor client.
Often these types of deceptive practices entail the making of false statements about financial products. Often the stockbroker intentionally withheld material information about investments, or mischaracterized and fundamentally misrepresented the risk and the suitability for that individual investor. Annuities sold to retirees in South Florida, Miami, and Boca Raton, are often major investments gone bad. Annuities, basically insurance product, are sold as long-term investments with predictable yields and constant payments. If an investor buys and sells annuities at the behest of their financial advisor it raises very real questions of its suitability. Annuities carry a very high fee for the selling broker. These sales costs are a major part of the payments made by the annuitant for the first almost seven years. Rule 10b-5 is a good place to start. The rule states that it is unlawful for any person directly or indirectly, by the use of any means or instrumentality of interstate commerce to: employ any device scheme or artifice to defraud. The rule goes on to state that any untrue statements of a material fact, or the act of committing a material fact, are part of a scheme to defraud. Any practice or course of business which has effect of operating as a fraud or deceit upon an investor is a violation of this rule.
Deceptive broker practices usually concern the following major frauds: excessive activity or churning of an account, misrepresentations as to the risk or extent of a margin account fraud, unauthorized trading, material omissions and representations about securities, the sale of unregistered securities, the failure to execute a trade or the failure to close a trade after instructions as to loss limiting or maximum exposures.