Broker Misconduct Overview

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 15, 2021

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You’ve invested your hard earned money by relying on your broker’s advice and know how, but you lost money on your investment and wonder if your broker might be to blame. Brokers aren’t always right, but when does bad advice become misconduct and more importantly, what can you do about it?

Bad Advice vs. Broker Misconduct

According to securities fraud attorneys, broker misconduct can range from a broker stealing your money – which due to regulation doesn’t happen very often these days to a broker making an unsuitable recommendation to you. For instance, a broker may recommend that a person over the age of 55 buy a variable annuity. That’s an unsuitable product as there are huge surrender charges if you ever try to get out of it. You’re paying for the most expensive life insurance product that’s wrapped into this variable annuity that you could ever pay. That’s an unsuitable recommendation; that’s broker misconduct.

A broker who runs a hypothetical illustration and makes assumptions in that hypothetical illustration that are not reasonable, such as showing that your retirement monies are going to last you throughout your life – that’s broker misconduct. Putting an IRA account inside a variable annuity, that’s broker misconduct. In addition, broker misconduct would also be filling out forms in a fraudulent manner or saying that a retiree who’s most concerned about income stability is an aggressive growth investor. Broker misconduct comes in many, many forms. Unfortunately, stock fraud lawyers say that clients often don’t know about it until they’ve lost a great deal of money.

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Securities Fraud Litigation: Brokers vs. Brokerage Houses

Brokers work alone and for brokerage houses, but can a consumer bring a claim against either? The answer is really that it varies. Many times the individual broker is the one making decisions. However, what he does, the action he takes, is supposedly and allegedly supervised by the branch manager in those offices. Many times, claims involve failure of the branch managers to supervise what’s going on.

Sometimes, these branch managers and compliance managers get reports on their desk called exception reports that are telling them, ‘Mr. Smith is losing 50% of his money and no action has been taken.’ So, obviously there’s supervisory and compliance issues that are not being followed by these firms.

What Does it Mean to “Make a Market?”

You’ve known your broker for years and trust him. He would never have you invest in something that is questionable in order to grease his own pockets. Or would he? Consumers have to be careful. There is misconduct by the actual brokerage firm – something that we call making a marketin a stock. In other words, the financing part of brokerage is financing this stock and earning money. So, they’re promoting this stock, they’re encouraging their brokers to sell this stock to their clients so that they make money on it in every way that they can – not because it’s necessarily a good stock, not because it’s a suitable security or stock for that client, but because they can make money on every side of the deal. So sometimes the misconduct is at a higher level.

There are other instances. Edward Jones faced a class action settlement for taking kickbacks from mutual funds. When you walked into Edward Jones, there were eight mutual funds and every single client I’ve ever had has the same one of those eight mutual funds. Well, that’s because Edward Jones was getting kickbacks on them.

So, sometimes it’s at the high level where the brokerage firm is putting a ‘daily special list’ out there to the brokers and saying, ‘Here’s what’s on the list; sell it to your clients.’ Sometimes it’s at the mid management level where the supervisor isn’t doing his or her job. Other times, it’s at the individual broker level where they’re not acting in the best interest of the client, which is what they are ordered to do by the securities regulations.

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