Broker Fraud & Unauthorized Trading
Broker Fraud – Unauthorized Trading
An investment broker must obtain a client’s permission before engaging in a stock transaction. If a broker fails to obtain permission before buying or selling stock, or acts against a client’s express instructions, a broker will be guilty of unauthorized trading.
Prior to placing an order to buy or sell securities for an investor a broker or advisor must obtain the express permission of that investor. If not, the transaction is unauthorized.
A broker or advisor can obtain a “trading authorization” to buy and sell securities in a client’s account client which allows trades to be placed without contacting the client. Legally, this is a limited power or attorney, limited only to placing trades in the client’s account. Investment advisory firms usually obtain signed forms which allow them to trade for their clients, but brokerage firms do not regularly allow brokers to have “discretion” over accounts.
Experienced investors know that, unless there is written authorization, a broker or advisor can not simply place trades for a client without first discussing each order. However, millions of inexperienced investors have been solicited to open accounts in the past decade, including those with little or no background in investing who have “rolled over” sizeable retirement accounts. These new investors do not know the “rules of the road” at investment firms including those concerning discretionary accounts.
If the client did not give the advisor or broker permission to place a transaction, and there was no understanding a trade would be placed, the trade is unauthorized.
Unauthorized trading can occur for any number of reasons. It occurs often in firms where there is a large incentive for the broker to meet commission goals, or quotas. Some firms, for example, have contests in which they give away trips or other perks to the broker who brings in the most commissions for the year. In other instances, the broker may be experiencing personal financial difficulties and is unable to resist the temptation to generate extra income without the investor’s permission. Whatever the reason, it is just another form of theft, plain and simple.
As an investor, the first line of defense against unauthorized trading is to examine the monthly statements and all of the confirmations carefully. If the investor thinks there are too many confirmations to have the time to look at each one, that is a sign that unauthorized transactions are occurring and that the account is being “churned,” or excessively traded (see related topic). Confirmations should be received within three days of the trade, and should have the details the investor agreed to — the name of the security, whether the investor bought or sold, the date, and the price at which the investor bought or sold. If anything seems wrong, call the broker to discuss. Do not accept any explanation such as “It was a typographical error,” or “We will correct it on the statement,” or even “I’ll make it up to you by giving you a free commission on the next trade.” If the broker is engaging in unauthorized trading in an account, the broker is probably doing it regularly.
An investor does not have to accept a trade that the investor thinks was placed based upon a misunderstanding. It is the broker’s responsibility to obtain unequivocal permission to make the trade, and any doubt must be resolved in the investor’s favor. If the investor is convinced the broker made an honest mistake, the investor should allow it to be corrected, but should receive a corrected confirmation or confirmation of the rescinded transaction. An investor should check monthly statements to make sure the appropriate transactions and corrected transactions appear there. If this kind of “honest mistake” happens more than once, the investor should fire their broker and consult with an attorney experienced in securities arbitration.
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