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Fraud comes in many forms, one of them being stockbroker, or broker fraud. Fraud occurs when someone uses a deceptive practice or act for personal or financial gain. In the case of broker fraud, it often entails a stockbroker giving an investor false or deceptive information which convinces the investor to invest his or her money. Insider trading, or using non-public information regarding a security, is another form of broker fraud.
A stockbroker is a professional who buys and sells stocks and securities on behalf of his or her clients. Stockbrokers must have a license to act as a broker. In theory, a broker is a neutral party who is used by investors to facilitate the purchase or sale of stocks or securities.
When a stockbroker uses false or deceptive information to induce an investor to either buy or sell stocks or commodities, then he or she is guilty of broker fraud. Sometimes, altered or inaccurate financial information regarding the company's financial health is offered to the investor to prompt him or her to invest in the sock. All companies that trade on the stock market must submit annual financial reports so that potential investors have an idea how financially secure the company is before they decide to invest. If the financial reports have been altered by the broker, or if the broker has knowledge that they have been altered by the company, then he or she is committing fraud.
Insider trading is another potential type of broker fraud. Only public information is allowed to be used or disseminated for the purpose of making stock trading decisions. If a broker becomes privy to non-public information which he or she then uses to buy or sell stocks for his or her own personal gain, that is considered broker fraud as well.
A stockbroker who is found to have committed broker fraud may face a number of potential penalties. First, he or she may lose his or her securities license. In the United States, the Securities and Exchange Commission (SEC) regulates and enforces securities law within the United States. If a broker is found in violation of the securities laws, he or she will lose the right to continue to trade.
In addition to losing his or her license to trade, a stockbroker may also face a civil lawsuit and/or criminal charges. Fraud may be handled as a civil lawsuit by filing a complaint against the broker for monetary damages suffered as a result of the acts of fraud. A broker who commits fraud may also face a criminal prosecution as fraud is also considered a crime in most jurisdictions.
Good introductory article. Material omissions and misrepresentations in connection with the purchase and sale of securities are actionable as securities fraud, both in litigation, and against registered brokers, broker dealers, and financial advisors in FINRA arbitration.
It is difficult to know what a broker should have disclosed, or what rules they should have followed, without close analysis of the broker-dealer's due diligence and approval process for the investment. --Daniel B., Securities Fraud Attorney