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Stockbroker fraud occurs when a person involved in the sale or purchase of stocks misleads a party for the purpose of some type of gain. This type of fraud may involve providing advice that is inaccurate or incomplete or giving biased information. Stockbrokers and advisors may commit this type of fraud, and brokerage firms, rather than just a single employee, may be deemed guilty of it as well. The amount of money involved does not influence whether a person or company is deemed guilty of stockbroker fraud. What matters is the intent to mislead the investor.
In most jurisdictions, stock brokers, advisors, and brokerage firms have a duty to provide a certain level of service to the investors they serve. This usually includes providing advice that is sound and in the best interest of the investor. In the event that a broker, advisor, or firm fails to do this, he may be guilty of committing stockbroker fraud.
There are various ways a broker, advisor, or firm may commit stock broker fraud. For example, a broker may fail to disclose the risks of an investment or omit important details. A person may also be guilty of stockbroker fraud if he encourages an investor to make a purchase even though he knows the stocks are undesirable. Sometimes this type of fraud involves something called over-concentration; it occurs when all or most of an investor's investments are in one area as the result of a broker's, advisor's, or firm's advice. This prevents the investor from having the measure of investment safety that diversification provides.
In some cases, stockbroker fraud also involves a situation called churning. Churning happens when a broker engages in excessive trading for his own gain rather than the investor's. In such a case, his goal is usually to obtain the commissions that go with additional trades.
Some of the other types of stockbroker fraud include those in which trading takes place without the investor’s permission. Such a transaction is referred to as an unauthorized trade. A person may also be guilty of fraud if he uses high-pressure sales tactics on investors. Likewise, a broker can be accused of stockbroker fraud if he fails to place an order as directed by his client.
Most jurisdictions have penalties for committing stockbroker fraud, which often include fines and jail time. A person or company that has been a victim of fraud may take his own steps to deal with the problem as well. For example, he may choose to sue the broker or company. The filing of such a lawsuit does not usually prevent a person from having to face the criminal penalties the courts in his jurisdiction may apply.
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