Law Offices of

Kristin M. Cano

   Stock Broker Fraud     & FINRA Arbitration

Stock Broker Misconduct or Just Bad Luck?

Not every investment loss is the result of stock broker misconduct.  However, when investor loss results from stock broker misconduct, it is often worth pursuing a claim. Stock broker misconduct shows up in many forms but the most common are losses resulting from unsuitable recommendations, fraud, misrepresentation, excessive trading, unauthorized trades, failure to follow instructions, excessive use of margin, over concentration in one stock or industry, huge commissions, and, the sale of illiquid high risk private placement offerings.

The best way to determine if you have a claim for stock broker misconduct is to talk to an attorney who is experienced in representing investors with complaints against their brokers. Many individuals with good claims for broker misconduct fail to recover any of their lost money because they incorrectly decide, without qualified advice, that the losses were their own fault or that their claim will fail.

Kristin M. Cano has been representing investors in claims against their stock brokers and their brokerage firms since 1985.



In evaluating your potential case, Kristin M. Cano will be considering the following issues:



1. Was there some type of recognized Stock Broker misconduct?


2.  Did the Stock Broker's misconduct cause and economic loss?


3.  How much money can you hope to recover?


4.  How good is the proof of the Stock Broker's misconduct and your loss?


5.  Is there a choice between FINRA arbitration or court?


6.  How much will it cost to pursue a claim for Stock Broker misconduct?


7.  Is the pursuit of a claim cost effective?


8.  Is your claim barred by legal and statutory time limits?


9.  Will you be able to collect on any award or judgment that you may get?

The Most Common Investor Claims

Most claims by investors against their Stock Brokers and their Brokerage firms, investment advisers, and financial planners fall into certain well recognized  categories:



     Unsuitable Recommendations and Investments


     Misrepresentations and Omissions


          Excessive Trading with Excessive Commissions
          Unauthorized Trading or Investments
          Failure to Follow Instructions

Unsuitable Recommendations


When a Stock Broker, investment advisor, or financial planner recommends an investment, there must be a reasonable basis for believing that the investment is suitable for the client, inlight of the client's financial circumstances and investment objectives. Accordingly, a  Broker must learn about the financial status and investment goals of a client. Some Brokers will reccommend investments to their clients that are totally unsuitable for them.  Some characteristics of unsuitable investments are:


1.    Risk. Somtimes, a Stock Broker recommends that a client invest a substantal portion of their net worth in a risky investment where that investor can not tolerate such risk. An IRA or a  retiree should be directed to invest a significant portion of his or her savings in risky investments such as stock options, futures contracts, index options, start-up companies, thinly traded stock, speculative stock, penny stock,  limited partnerships,  and private placement offerings.


2.    Illiquidity.  In some cases, an investor will be directed to invest a substantial portion of their assets in illiquid investments for which there is no ready market to later sell the investment or one that has substantial penalties or fees for early redemption. Money that is needed forforseeable expenses such a living expenses, medical bills, and so on, should not be put into illiquid investments.


3.    Concentration.  Sometimes, an investor will be directed to invest a substantial portion of their assets into a single stock, or into a single limited partnership, or into several of these types of investments that are all sponsored by a single company.  With this type of investing, the investor may be exposing those assets to an unreasonable risk of loss.


4.    Tax Insensitive Investments.   On some occasions, a Stock Broker, without regard to the Investors need to minimize taxable income, will recommend investments such as certain actively traded mutual funds, that generate large and unnecessary tax liabilities.


5.    Double Tax Exemption. Sometimes a Stock Broker will recommend  that,  investor money, already free of taxation on economic gain, such as an IRA, be invested in tax free bonds or other tax free securities.  This is totally unsuitable because the money is already shielded from taxation on gain and such tax free investments generally do not yield as much as other types of investments.




Unsuitable Transactions or Investments.


Unsuitable transaction cases are much like unsuitable recommendation cases.  In both cases, the investment must be unsuitable based on the client's circumstances and investment objectives. All the indicia of unsuitability discussed above apply equally here.  In an unsuitable recommendation case, the broker only makes the recommendation and the client makes the investment decision.  In an unsuitable transaction case, the broker either has formal discretionary control over the account and makes the trades without consulting the client, or the broker has practical or de facto control over the client or the account, so that the Stock Broker can be held responsible for the trades, as if he made them without the client's consent and approval.




Misrepresentations or Omissions.


Misrepresentation is legal speak for "lie" and "Stock Broker fraud." These cases generally involve 'cold calling' and high pressure sales tactics. Such Stock Brokers often claim that they know what price a stock is going go to, that their firm controls the price of the stock, that they have inside information or at least, reliable information from the company, that profits are certain, or that you are getting in on the ground floor of a hot public offering.  Misleading omissions are just as actionable as affirmative mistatements.  As an example, the Stock Broker tells you that the company has billions of barrels of proven reserves but omits to mention that the oil cannot be recovered economically. Predictions or statements of opinion by a Stock Broker can constitute fraud by a Stock Broker when there is no reasonable basis for such statements. Misrepresentations and omissisions can be grounds for a claim if the investor reasonably relies on the Stock Broker's statements in making a losing investment decision.




Churning or Excessive Trading with Excessive Commissions.


Sometimes a Stock Broker or and Investment Adviser, who have discretionary authority over an account or de facto control, will engage in excessive trading for the sole purpose of generating large commissions.   This is know as churning and provides the basis for a legal claim under numerous legal theories, including fraud and breach of fiduciary duty. Churning usually involves a large number of trades, and account value turnover ratios are often considered to establish a case. Because, at the heart of churning is trading that is done to benefit the broker and not his client, even one trade may establish churning.  As an example, a Stock Broker moving from one family of mutual funds to another without a good reason for doing so, may be engaged in churning.   A churned account often  has frequent  in and out trading or "washed" transactions, where nearly simultaneous transactions nullify each other.  To prevail on a churning case the Stock Broker must have either discretionary control or de facto control.  De facto control can be established when the investor lacks the knowledge and sophistication to make their own investment decisions and therefore always follows the Stock Broker's recommendation.




Unauthorized Trading or Unauthorized Investments.      


Unless you have given legal discretionary control, meaning a power of attorney to your stock broker or investment advisor in writing, he is not permitted to make trades or purchase securities on your behalf without your prior consent and authorization of each transaction.  If you the client/investor lose money as a result of suh an unauthorized trade or securities transaction, you have a claim against your Stock Broker and his brokerage firm for this loss.


When you  tell your broker to purchase or sell securities on your behalf, and you tell him to exercise time and place discretion, he may decided, within certain paramters, when to execute your transaction, even a non-discretionary account, where no power of attorney has been given.    However, and most importantly, your Stock Broker may not decide what to buy or sell or how much without your prior instruction. It is not sufficient for him to advise you generally that he plans to increase your position in a stock or to buy a promising looking stock.


Even if you have a discretionary stock, with a formal power of attorney,  you Stock Broker is supposed to follow your instructions wiht respect to the exercise of that discretion.   If you have told hime that you don't want to buy anything risky, or on margin, or in a specifice industry or company, your Stock Broker has an obligation to follow your instructions.



Failure to Follow Instructions.


Whether your account is discretionary or non-discretionary, your Stock Broker or Investment Advisor has a duty to follow your instructions with respect to your account.   Failure to do so, may result in a claim for any losses that may result.  Problems usually arise in two common situations:  Instructions to sell securities that are being promoted by  the broker/brokerage firm and instructions not to use margin.


The first scenario is often seen where a brokerage firm induces its clients to buy a particular stock that that was being promoted by the brokerage firm.  This conduct has been seen in both "boiler room" operations and upstanding well known firms. Because the brokerage firm is holding an invetory, they are usually trying to pump up the price of the stock and move the inventory, they will stongly resist orders to sell and certainly not to buy.  Often, they will try to convince their investor that it is a bad time to sell or that the stock is about to rise again.  If convincing does not work, they have every incentive  to fail to follow the investor's instructions.  This can result in extreme loss when the price of the stock collapses. 


The second scenario is also very common.  Many Stock Brokers resist  the instruction to stop using margin because such instruction usually comes after a decline in the market.  If the Stock Broker is convinced that the decline is a temporary correction, he may not want the investor to lock in a substantial loss.  However, if the Stock Broker is wrong and the portfolio continues to decline, the result could be a total loss. 


Regardless of how it arises, the failure of the Stock Broker to follow the investor's instructions causes a loss, which may be actionable and worth pursuing.



Other Misconduct.


There are many other varieties of Stock Broker misconduct, such as, misappropriation of funds or securities, conflicts of interest and breach of fiduciary duty.


Generally, if an investor has formed a belief that there is a problem, it is worth speaking with an attorney with experience in investor matters to see if you have a claim.