Most claims by investors against their stockbrokers, investment advisors, and financial planners fall into certain well recognized categories. The six most common claims that we have seen are

• unsuitable recommendations or investments
• misrepresentations and omissions
• excessive trading (called "churning")
• unauthorized investments
• failure to follow instructions
• misappropriation

"Misrepresentation" is legalese for "lie". Often, these cases arise in the context of boiler room operations, from which teams of brokers make a large volume of cold calls using high pressure sales tactics. Such boiler room brokers often falsely claim that they know what price a stock is going to go to, that their firm controls the price of the stock, that they have inside information from the company, that profits are certain, or that they are selling you stock from a hot public offering. Misleading omissions can be just as actionable as affirmative lies as, for example, when a telephone broker tells you that a company has billions of barrels of proven oil reserves without telling you that those reserves cannot be recovered economically.

Excessive trading, or "churning" occurs when a broker who has discretionary authority or practical (called "de facto") control over an account engages in excessive trading in order to generate large commissions. This practice will provide a basis for claims for state and federal securities fraud, common law fraud, negligence, breach of contract, and breach of fiduciary duty.

Another common experience involves a broker who makes unauthorized trades on behalf of a client. The broker may simply fail to consult a client before making trades in a nondiscretionary account. Sometimes the broker buys stock on margin without authority or ignores specific instructions by a client with respect to a discretionary account. Unauthorized trading can result in claims for rescission, breach of contract, or fraud, depending on the facts.

Sometimes, a broker will fail to follow a client's instructions. This is another behavior that often occurs in the context of boiler room operations. When the investor wants to sell the stock that the boiler room is touting, the broker often tries to convince the investor to hold on to the investment or simply fails to follow his instructions to sell. This can result in large losses when the price of a manipulated stock collapses.

Finally, a broker may simply misappropriate an investor's funds. This often occurs in situations where the broker is not reporting a particular transaction to his employer. This practice is known as "selling away." In connection with selling away, it is important to remember that, even if the firm employing the broker is unaware of the transaction in question, or even of the existence of a particular customer, the investor often recovers from the firm on a theory of respondeat superior, controlling person liability under both the state and federal securities laws, or negligent supervision.

DISCLAIMER: Vincent DiCarlo, who authored and maintained this site, has entered government service and, as of September 1, 2008, is no longer engaged in the private practice of law.  Therefore, this site is no longer being maintained,  may not be accurate, and should not be relied upon.  It is not now and was not ever intended as legal advice.  It is being provided for historical purposes, and for the benefit of those lawyers who are capable of independently verifying the information and judging the opinions in it, and then reaching their own conclusions.  You are strongly advised to consult qualified legal counsel before adopting any of the ideas or suggestions in this material, which may or may not be applicable in your jurisdiction or to your specific situation, and may no longer be accurate or prudent in any case.  The opinions and statements at this site were solely those of the author.  They were not and are not those of, nor were they nor are they made on behalf of, any agency of government or anyone else.

Copyright © 1998-2008 Vincent DiCarlo