Examples of Broker Misconduct Leading to Investment Loss

By- Kevin Sumalinog

There are examples of criminal and civil cases filed against brokers who perpetrate investment misconduct, leading to significant losses in their clients' accounts. When this happens, you need an attorney to help you recover your investment losses. It is a poor choice for brokers as they walk a criminal line while ruining their client's financial records and reputations. Without legal representation, millions of dollars are lost by the investors. Examples of misconduct include:

• Incorrectly accounting trades;
• Failure to perform due diligence;
• Overconcentration of a client's account in a single security;
• The top three versions of misconduct.

Incorrectly Accounting Trades

When a broker causes an investor to lose money by not correctly accounting for the purchase or sale of securities, the actions are known as incorrectly accounting trades. Incorrectly accounting trades can occur in several different ways, but all result in the same thing: lost investments.

Let's say that an investor has $100,000 to invest and purchase shares. When he buys shares of stock XYZ at $10 per share with his money, that is correct accounting for this purchase. However, let's say that after he purchases stock XYZ, his broker then sells off half of those shares right away without informing the investor. So now our investor owns 500 shares worth $5 each instead of 1,000 worth $10 each. This is a case of incorrectly accounting trades because the broker did not correctly account for the sale of stock XYZ. Not only has this investor lost money from selling off shares too soon without his knowledge, but he has also lost additional money by having to re-buy back half the amount he had initially been owned. Assuming that this brokerage firm does not have the policy to properly track and correct this type of error, they will likely charge the investor the cost of buying back (re-purchasing) the shares at $10 each.

Another way that incorrectly accounting trades can occur is when an investor makes a purchase and then is not given credit for it in their trading statement. For example, this same investor buys 1,000 shares of stock XYZ at $10 per share. He then receives his statement and notices that they have only given him credit for 500 shares at the price of $5 each instead of the total amount he had purchased with the money he had invested in their brokerage account. In this case, your broker messed up when recording your purchase for a second time by not accounting for the full amount you had initially spent on acquiring those shares. Because of this error, they will likely charge you for purchasing back (re-purchasing) the other 500 shares if they are not already included in your trading account due to a separate error on their part or yours. If our example investor was unaware that he owned these extra 500 shares because his brokerage firm never informed him of their mistake, then he would be out the money spent to re-purchase those 500 shares at a normal price.

In addition to these two common types of incorrectly accounting trades, there are several other ways that a broker can mishandle an investor's purchase or sale order and cause them to lose their investments. Some brokers that go rogue by making up their own rules and disregarding either the Securities and Exchange Commission (SEC) rules or FINRA may allow some traders to cancel orders moments after being sent. This is a severe violation of SEC rules and could result in being banned from the industry. Other brokers may only compensate their clients for a fraction of what they initially lost due to an error on their part. If your trading statement does not include enough information that you need, this could also be why you are losing money or having other problems with your broker.

To avoid any costly mistakes from your broker, ask yourself if you trust them with your investments? Are they competent? Are they properly licensed by the SEC so that you know precisely whom you are dealing with?

Incorrectly accounting trades can occur is when an investor makes a purchase and then is not given credit for it in their trading statement.Unsplash

Failure to Perform Due Diligence

Due diligence is a legal term that means: "the care that an individual owes to another in conducting their affairs and business." (Legal Dictionary, n.d.) The term can be applied in many different situations, but it seems to be most relevant when dealing with investment transactions between two parties. When brokers are responsible for facilitating these securities exchanges, they must conduct due diligence on both sides of the trade. If the broker neglects his duty, then he may be guilty of misconduct leading to loss.

A series of high-profile court cases have brought widespread attention to some very serious problems with brokerage practices used by investors' financial institutions during security trades. One of the most common forms of misconduct revealed by these cases is known as "failure to perform due diligence." These cases also suggest that securities brokers are becoming less trustworthy as trusted sources for handling financial transactions.

Overconcentration of a Client's Account in a Single Security

This is a type of broker negligence that results in a loss of investments. If you have ever asked yourself, "How to tell if my financial advisor is charging me too much," this article should help to give you an idea as to how the commission might be affecting the investment choices your financial advisor makes for you.

To understand why an overconcentration of a client's account in single security is considered broker misconduct, it is essential to know what concentration risk is and why most managers at various firms regard it as lousy business.

Concentration risk is associated with focusing on a particular client or group of clients and allowing their other clients' accounts to fall through the cracks; it represents management.

When a client has their account overconcentrated on a single security, the majority of the client's portfolio is dedicated to this security. This leaves the rest of the account vulnerable to volatility, less upside potential, and lower returns than if these investments are diversified.

When an investment has reached its overconcentration threshold (e.g., 50%), it can indicate that your financial advisor might not be looking out for your best interest, since they are more focused on maximizing their commissions rather than giving you the best return possible over time.

Types of Misconduct Leading to Investment Loss

Several different types of behavior may fall under the category of "due diligence" and therefore could be considered a form of negligence. The three primary examples include:

Failure to Identify Counterparty Risk

Investment brokers traditionally conduct themselves as trustworthy business people. Still, in recent years, some customers have begun to question those ethics after experiencing harmful side effects from what were believed to be normal investment trades. In many cases, investigations reveal that brokers failed to identify counterparty risk before conducting transactions with their clients' money. If proven guilty, they may be held liable for losses resulting from such misconduct.

Failure to Perform Appropriate Screening Procedures

Many investment brokerages have difficulty keeping up with the multitude of trading regulations that govern them because it is an industry that is constantly changing and innovating, making it extremely hard to keep up with all the new rules governing specific transactions. In one recent class-action lawsuit against a brokerage firm, several employees were accused of engaging in "wire stripping" or removing vital information from specific securities trades before submitting them to regulators so they could be processed more quickly. The plaintiffs alleged this was done without their knowledge and not to do so despite their explicit instructions. In addition, the defendants were also accused of failing to perform appropriate screening procedures on cash deposits made into their bank accounts, leading to several cases of money laundering.

Failure to Conduct Appropriate Risk Disclosure

One of the essential duties that brokers owe their clients is to disclose any potential financial risks before taking them on. Although it's hard enough for some professionals to assess risk for themselves accurately, this task becomes even more complicated when talking about others' assets because subjective elements are often involved. One form of "failure to perform due diligence" may involve not disclosing all known information related to investment risk factors so investors can make informed decisions about whether or not they wish to conduct transactions with these people.

There are many other ways in which broker misconduct may lead to loss than what has been mentioned here, but the above three plaintiffs are among the most common. The cases cited in this article suggest a general lack of trust in brokerage practices. Often, brokers fail to investigate both parties before conducting transactions properly. Brokers could be considered liable for any losses suffered by clients if they can be shown to have acted outside of protocol when trading securities.

Suspecting Broker Misconduct

If you are a victim of investment loss due to your broker's misconduct, seek legal advice. Listen to the attorney and they will guide you and hopefully get your money back.

Disclaimer: (This article is sponsored and includes some commercial links)