Most investor complaints against brokers, brokerage firms, investment advisers and their representatives, fall into several well recognized categories.
SUITABILITY
All securities brokers and firms have a duty to "know their customer." They may only make recommendations which are suitable for a customer considering the customer's investment objectives and risk tolerance. This often requires an analysis of the customer's investment background and experience, tax status, age, overall objectives, ability to assume and withstand varying degrees of risk and the liquidity of the investment.
MISREPRESENTATIONS, OMISSIONS AND FRAUD
It is against industry regulations for a broker or other securities professional to knowingly induce a client to buy or sell a security based on false or misleading information, or to use any scheme, device or artifice to defraud the investor. This often occurs in the context of a broker who has not done "due diligence" before making recommendations to clients or who gives a false impression regarding the potential success of a proposed investment. Any and all pertinent and material information that a reasonable and prudent investor would need to know before making an investment decision must be disclosed to the customer. Material facts may neither be misrepresented nor omitted. Statements that a stock is a "sure thing," will definitely go up, that the client will always be able to get his money out or is guaranteed against a loss all violate industry standards and may be actionable. In addition, such statements may also support claims for breach of contract, negligence, breach of fiduciary duty or actionable fraud.
CHURNING
This occurs when a broker with written discretionary authority over a customer account engages in excessive trading solely for the purpose of generating commissions. This can often be detected by doing a cost/equity analysis which involves comparing fees and commissions to the average equity of the account, measured over some defined time period. If an investor would need to earn a disproportionately high rate of return simply to cover expenses, it is possible that churning has occurred.
UNAUTHORIZED TRADING/FAILURE TO FOLLOW INSTRUCTIONS
A broker may only effect securities transactions that you have authorized. This means they may not place orders unless you have instructed them to do so and then they must act in accordance with your specific instructions. If you have given them written discretionary authority over an account, they must act within the bounds of that authority, whether it is limited or general, and always in your best interests. If you have given someone else written trading authority (i.e. power of attorney), then the broker must exercise similar care in dealing with the instructions of that individual.
OVERCONCENTRATION
Often a broker will make recommendations for individuals that involve putting a disproportionate amount of assets into a single stock, investment or industry. When that happens, the investor may be exposed to unreasonable risk of loss. This is often analyzed in the context of the investor's available assets, background, objectives and age.
MISAPPROPRIATION OF FUNDS
This involves the fraudulent misappropriation of a customer's funds or assets. It is a breach of fiduciary duty and may support a claim for punitive damages.
ONLINE TRADING EXECUTION PROBLEMS
In the last several years, many investors have begun to execute their own trades through on line trading systems and platforms. Frequently, these systems break down or they are slow to transmit and execute orders. This may result in improperly executed market and/or limit orders or cancel orders which are not timely transmitted. All of these problems can cause or contribute to significant investor losses.
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