Stock fraud is a hot topic these days. With interest rates at all time lows, investors are demanding higher returns. Financial professionals such as stockbrokers and investment advisers have limited options. Although there are some high yield alternative investments available, most are too risky for the average investor. Good brokers are honest with their clients and don’t make promises they can’t keep, dishonest brokers engage in “selling away”.
Brokerage firms must approve alternative investments before they are offered or recommended by a broker to a client. Good firms conduct due diligence reviews to make sure their agents are only selling safe and well vetted products. Some brokers, however, look to sell other riskier investments without the knowledge of their employer. This is called “selling away.”
Brokers like these investments because they pay higher commissions and allow them to offer greater returns than their colleagues and competitors. Brokerage firms hate them because they contribute to stock fraud and because the firm can be held responsible for losses even if they didn’t know that they were being offered by their employees and agents.
To combat selling away, the Financial Industry Regulatory Authority – FINRA for short – requires broker dealers to know about all outside business activities of their agents. FINRA Rule 3270 says that registered personnel must disclose all their outside business activities.
Unfortunately, we find that some dishonest brokers ignore the rule or simply play lip service to it. Brokers caught selling away or not reporting their outside business activities can be barred or suspended from the industry. While an unemployed broker may present a collectibility problem for customers, the firms that employed these dishonest brokers may still be responsible for customer stock fraud losses.
Holding a brokerage firm responsible for stock fraud losses can be difficult. Generally, if the loss is related to financial investments and the customer had no reason to know the broker was selling away, the losses are recoverable.
To better explain this, a few examples are helpful. Let’s say your investment adviser sells you his “mint condition” 1963 Corvette. Turns out it is a lemon and had extensive body work Is it an investment? Probably but used cars are not the typical investments sold by brokerage firms. Can you sue the broker dealer? No. If your broker sold you a bogus mutual fund or tenants-in-common (TIC) investment, you might be able to collect as these are financial investments.
The real difficult cases occur when a broker asks you to contact him through his private email or asks you to pay him directly for your investment. Those are red flags; recovery is possible but more difficult.
As an investor, make sure that your broker or adviser is recommending products already vetted by his or her firm. Sometimes reps will try and tell you that their best investments are reserved for their best clients. Everyone wants to think they are getting something special but often its a stock fraud scam.
Of course, any recovery is only as good as the firm standing behind the broker dealer. We have seen many broker dealers go under as the result on thinly traded REITs, TIC scams and other stock fraud schemes.
If you lost $100,000 or more because of a stockbroker, investment adviser or other financial professional, give us a call. The stock fraud lawyers at Mahany & Ertl have helped many investors get back their hard earned money. We also take cases involving other frauds including legal and accounting malpractice. 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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Post by Brian Mahany, Esq.