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These Are The 5 Most Prevalent Types of Stock Broker Misconduct

Investment in the stock market carries an inherent level of risk in exchange for the possibility of a better rate of return than with safer investments. However, sometimes losses are not caused by market forces, but by stock brokers behaving unethically or illegally.

If your previously healthy portfolio starts underperforming and you cannot figure out why, it may be wise to get in touch with a stock broker misconduct law firm. It is possible that your broker may have been acting in his or her self-interest rather than yours. Here are the 5 most common types of stock broker misconduct, listed alphabetically.

Breach of Fiduciary Duty

Fiduciary duty flows from the broker to the client. By hanging out a shingle as a brokerage, a firm declares that it will act in the best interest of clients. According to the Eleventh Circuit Court of Appeals, fiduciary responsibilities include:

  • Duty to make only informed recommendations on buying stock
  • Duty to carry out customer orders promptly
  • Duty to inform customers of risks involved with buying or selling a security
  • Duty to abstain from self-dealing
  • Duty to represent material facts truthfully
  • Duty to make transactions only after receiving the customer’s authorization

Brokerage Liability

NASDAQ and the New York Stock Exchange require brokerages to supervise broker account handling. When a brokerage fails to properly oversee its stock brokers, it may be held liable for certain acts of its brokers. Most states also impose liability on firms that fail to adequately supervise stock broker actions. Inadequate supervision of brokers is considered not acting in good faith with respect to customers. If you believe your brokerage has acted in bad faith, contact a business lawyer with experience representing brokerage clients.


When a broker manages a customer’s account in such a way as to generate more or higher commissions, and without regard of the customer’s interests, he or she may be guilty of stock churning. To determine whether churning has taken place, courts look for the following indications:

  • A broker exercising control over a customer’s account trading
  • Excessive trading in consideration of the customer’s investment goals
  • The broker acting with reckless disregard for the customer’s interests or with intent to defraud the customer

An experienced stock broker misconduct law firm knows what to look for and how to determine if you have been the victim of churning.

Misrepresentation or Material Omission

If a broker tells a customer that he or she thinks a certain stock is a good stock, but in reality thinks it’s a bad stock, that broker has committed fraud. When a broker either lies outright or fails to honestly represent facts about an investment, he or she may be held liable. Common instances of misrepresentation or material omission include

  • Representing a company as sound when it is actually going bankrupt
  • Implying that he or she has inside knowledge about a security’s prospect
  • Saying that an investment is safe or government-backed when it isn’t
  • Recommending a stock without disclosing that he or she (or the Firm) is receiving undisclosed payments from the stock’s issuer

A business lawyer with familiarity of the Securities Act of 1933, the 1934 Securities Exchange Act or state securities law can help you determine if misrepresentation or material omission has occurred.

Unauthorized Trading

If you do not give your broker formal written discretion permission, he or she is not allowed to trade in your account without your permission. Furthermore, accounts with discretionary permission are subject to scrutiny by a firm’s management. Speak with a securities lawyer right away if your broker has made trades on your account without your permission.

July 15, 2013 , by Walter Mathews

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