What kinds of actions constitute securities negligence or stock broker frauds?

Conduct that is irresponsible can give rise to a civil cause of action. Brokers who fail to recommend investments that are suitable for their clients’ stated goals and needs can be sued for negligence. Negligence claims can be brought if the broker failed to conduct an adequate suitability analysis, failed to disclose penalties to the investor, or failed to diversify the investor’s portfolio. Negligence claims do not require proof of intent to cause harm. When there is a duty to act responsibly on behalf of the investor, and the broker or firm breaches that duty, a negligence claim should be pursued.

Some common duties that stockbrokers sometimes fail to perform that can provide grounds for a negligence claim are:

• Failure to diversify. Generally, stockbrokers and investment advisers should counsel their clients not to put all of their eggs in one basket. It is common practice and prudent to diversify the investments so that the risks are spread out. Diversification also means utilizing different types of investments such as equities, cash equivalents, and fixed income. It is negligent to fail to recommend a proper balance of investments in a portfolio.
• Breach of fiduciary duty. Stockbrokers and investment advisors often owe a fiduciary duty to investors to act in their best interests. When this duty is violated, and it leads to financial damages, investors can bring a negligence claim for breach of fiduciary duty.
• Failure to supervise. Investment firms have a duty to supervise their brokers’ work, to properly train them on all relevant compliance issues, to monitor misbehavior, and generally to see to it that the brokers are treating investors correctly. If a securities firm fails to properly supervise a broker, and the broker is negligent or commits acts of fraud, the firm can be liable for the broker’s wrongful conduct.
• Churning. Brokers have a duty to act on behalf of the investors and not themselves. Some brokers breach this duty by buying and selling securities for customers just to generate commissions for themselves. Our firm’s attorneys work with financial experts who can prove that unusual trading activity or excessive transactions are really a ruse to generate large commissions for the broker.
• Selling away. Brokers may try to avoid the investment firm’s compliance department or act without firm approval by selling securities that aren’t held or offered by the firm. This is inappropriate behavior, and the stockbroker and firm can be sued for securities fraud. The investment firm may also be liable for failing to supervise a broker that engages in selling away.
• Ponzi schemes. This type of securities fraud involves investors who are promised quick financial returns that are based not on earned profit, but on the capital paid by subsequent investors. Investors can lose substantial sums when the number of investors ultimately dries up.
• Suitability claims. These are, perhaps, the most common claims made by investors. In sum, a suitability claim is one that states the broker purchased securities that were unsuitable for the individual or entity, based on that individual or entity’s needs, risk tolerance, and goals.

Investors who have suffered or been devastated by brokers who took advantage of them deserve to be compensated through securities arbitration or in court.