Securities fraud costs investors billions of dollars annually. Sometimes the promoter is the fraudster (think Bernie Madoff) and other times it is the stockbroker trying to make a quick buck. This week the Financial Industry Regulatory Authority – FINRA – levied a whopping $7.5 million fine against LPL securities for email violations.
Email violations? Thats right! 3 other firms including ING, Securities America and Next Financial also settled similar charges earlier this year. Regulators want compliance managers to see outgoing emails to insure their advisers and agents are not engaging in securities fraud by making misleading statements, false claims or recommending investments they shouldn’t be selling.
In each of the cases this year, FINRA says that the brokerage firms didn’t have proper controls on emails.
Securities fraud can happen when a broker sells something not suitable to his or her client. (FINRA has Know Your Customer and suitability rules to insure that brokers understand their clients investment goals, experience, financial condition and risk tolerance.) For example, brokers shouldn’t be peddling thinly traded real estate investments to older customers who need access to their capital. That’s because many of these real estate deals can trap investors for years. By monitoring emails, FINRA hopes that compliance managers can better police their workforce and prevent problems before they occur.
Securities fraud also can occur when a broker sells something without the firm’s permission. That is called “selling away.” We have seen this happen many times with investment advisers who hawk tenants in common (TIC) investments or private placements. Some brokers do this because the commissions are much higher on these investments. Of course, there is nothing to prevent a savvy broker from simply creating another email address outside the company’s mail server. [Helpful Hint: If your broker solicits you from a non-company email address, be very concerned.]
By issuing large fines, FINRA hopes that broker dealers will do a better job of screening emails. The goal is to prevent problems before customers lose money or file complaints.
The increased scrutiny of emails is a good start but doesn’t prevent dishonest brokers from using personal email accounts nor does it address the problem of fly-by-night brokerage firms that often encourage securities fraud. In other words, the rules may help keep honest brokers honest but don’t reach the really bad apples in the business.
Proper email review and retention policies are a double edged sword. By saving emails, stockbrokers can mount a better defense when it is the customer engaging in securities fraud or making false accusations against the brokerage firm.
Before you invest with any broker dealer or investment advisor, make sure you do your own due diligence on both the investment and your adviser. Both FINRA and the SEC have free, on-line systems that allow anyone to look at the compliance and complaint history of stockbrokers. While anyone may have a complaint or two on their record, check to see if there was a finding of fault and look for patterns of bad behavior.
If you lost $100,000 or more because of a stockbroker, investment adviser or other financial professional, give us a call. The securities fraud lawyers at Mahany & Ertl have helped many victims of get back their hard earned money. We also take cases involving other frauds including legal and accounting malpractice and Ponzi schemes. Most cases can be handled on a contingent fee basis meaning no legal fees unless we recover money for you.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. Fraud recovery available in many jurisdictions.
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