As a retail investor or retirement saver, you are told to expect your portfolio’s value to fluctuate over time. Stock prices go up and down, and the goal is to benefit from an overall upward trend over the long term.

But, while some stock losses are to be expected, others are not.

When you invest through a stockbroker, you should expect the value of your portfolio to fluctuate in line with market forces. With a well-diversified portfolio, no single stock should lead to devastating losses; and, while a dip in the market can be scary, you can be reasonably confident that your portfolio’s value will continue its overall upward trend if you wait it out. But, if you experience substantial losses that are not in line with market forces, or if investments in a single stock or industry drain your portfolio, this could be a very different scenario.

Stockbroker Fraud Can Take Many Different Forms

Unfortunately, stockbroker fraud is a very real concern. Stockbroker fraud can take many forms and can lead to sudden, unexpected losses that investors have virtually no hope of recovering through good days on the Nasdaq or the Dow.

While stockbroker fraud can involve intentional efforts to take advantage of having access to an investor’s portfolio, negligence is classified as a form of stockbroker fraud as well. With this in mind, some of the most common forms of stockbroker fraud include:

Overconcentration (Failure to Diversify)

Stockbrokers have a duty to ensure they do not overconcentrate their clients’ portfolios, as failure to diversify can lead to disproportionate losses. When making investment recommendations or exercising discretion, brokers must be careful to avoid overconcentration in individual stocks or industries.

Unsuitability

Stockbrokers also have a duty to provide suitable investment advice to their clients. This goes beyond avoiding overconcentration. Brokers must also ensure that their investment recommendations and trades reflect each client’s unique portfolio and risk profile.

Excessive Trading

Excessive trading (commonly referred to as “churning”) involves executing a large volume of trades in order to generate fees or commissions. When a stockbroker churns a client’s portfolio for his or her own benefit, this is a clear form of fraud that will warrant legal action in most cases.

Excessive Use of Margin

Excessive use of margin can be extremely risky for retail investors and retirement savers. While using margin to maximize investors’ buying power can generate significant returns, it can also lead to significant losses and “margin calls” that investors may or may not be able to afford.

Undisclosed Fees and Commissions

Undisclosed fees and commissions can turn otherwise profitable investments into sources of investor losses. If a stockbroker’s undisclosed fees or commissions lead to net losses for a client (or if they further contribute to a client’s losses), this can provide clear grounds for a stockbroker fraud claim as well.   

Other Misrepresentations and Omissions

Along with undisclosed fees and commissions, other misrepresentations and omissions can also amount to fraud in the investment context. If a stockbroker fails to accurately disclose information that a client needs to make sound investment decisions (whether the failure is intentional or not), the broker could be legally responsible for any ensuing losses.

Conflicts of Interest

Under Regulation Best Interest (Reg BI), stockbrokers have a legal duty to put their clients’ interests first. This goes beyond avoiding overconcentration and unsuitable investment recommendations—and it even goes beyond avoiding churning and undisclosed fees. If a broker fails to exercise the care and diligence required to provide sound investment advice, the broker can (and should) be held duly accountable.

Investors May Be Able to Recover Fraudulent Losses Through FINRA Arbitration

When investors suffer losses due to these (and other) forms of fraud, seeking to recover their losses typically involves filing a claim with FINRA arbitration. Stockbrokers are subject to the oversight of the Financial Industry Regulatory Authority (FINRA), and, as a condition of registering with FINRA, they must consent to arbitration to resolve investor disputes.

For investors who need to pursue arbitration against their stockbrokers, hiring an experienced FINRA lawyer is the first step.

In FINRA arbitration, investors can pursue fraud claims against their brokers and brokerage firms. While brokers can be held directly liable for all forms of fraud, their brokerage firms can also be held vicariously liable under the employer-employee relationship. Brokerage firms can also face direct liability for violations such as failure to implement necessary safeguards and failure to supervise. When investors have fraud claims against their brokers and brokerage firms, they are entitled to seek compensation not only for their losses resulting from fraud, but also for the gains they would have realized with a well-managed portfolio. Depending on the circumstances, they may be entitled to additional damages.

Stockbrokers and brokerage firms are entitled to defense counsel in FINRA arbitration, and they will typically have high-powered defense law firms representing them. As a result, investors need to level the playing field. A lawyer with extensive experience representing defrauded investors should be able to provide effective legal representation, and investors can generally hire such a lawyer to represent them in FINRA arbitration on a contingency-fee basis.

Investors initiate the arbitration process by filing a Statement of Claim and Submission Agreement. From here, the major steps in the process roughly align with those involved in litigating a civil dispute in court. However, the FINRA arbitration process is much more streamlined, and successful claims often settle well before the parties’ hearing date.

For investors concerned about fraud, it is important to know that legal options are available. Defrauded investors should promptly explore their legal options and, when it makes sense to pursue FINRA arbitration, begin the process without delay. Unnecessary delays can prove costly, and by taking appropriate legal action promptly, defrauded investors can give themselves the best chance of recovering their losses as quickly as possible.