Stockbroker Fraud and Investment Fraud: How Is It Discovered?

It should go without saying that it is rare that a stockbroker ever confesses to making unsuitable recommendations, illegally recommending private investments away from the firm, churning an account or switching annuities to generate commissions, pushing variable annuities, or telling the client that they didn’t have the authority to trade without first getting permission. Rare, indeed, it simply doesn’t happen, and with Wall Street refusing to adopt a fiduciary duty standard for its brokers, such confessions won’t happen anytime soon. So if it must be discovered by the client, how is it discovered?

In my experience stockbroker fraud and misconduct is usually noticed by someone other than the client: a CPA, a probate or estate planning attorney, a cynical friend not taken in by the broker’s charm and excuses, or even a new broker that recognizes the misconduct of the prior broker. Of course, the client probably has had suspicions, but acting on those suspicions calls into question why the client trusted the broker in the first place— not an easy self-analysis, and even harder to admit that your choice in brokers was wrong and you have been taken advantage of. Not to mention the fact that the broker is likely explaining that “everyone lost money”, “just hold on…it will come back”, making it even harder to face the problem. Hope springs eternal for many investors and if the markets rebound, thereby hiding the sins, everyone is OK, right? So many claims simply lay dormant while clients ignorantly go along their merry way. Isn’t that what Wall Street and the individual brokers secretly want? It certainly is to their advantage that valid claims go quietly unnoticed.

If more attorneys, CPAs and scrupulous brokers were aware of the way in which investors are often victimized, and how FINRA has established an arbitration system that can and sometimes will result in investor recovery of all losses and even attorneys’ fees, then the investing public becomes more savvy, and less likely to be a victim of Wall Street greed and hubris. CPAs will certainly see the amount of trading and any losses on the annual Form 1099s that each client receives, and in preparing the client’s Schedule D for their tax return. Estate planning attorneys often see investments that are non-performing, and even investments like oil & gas programs that are not held at a traditional brokerage firm. Bankruptcy attorneys and trustees may see assets in the estate that have significantly declined in value, and question why the debtor held such a risky investment in the first place. Finally, family members that begin to handle the finances of elderly or incapacitated loved ones may discover that their investments has lost significant value, and they should question why they were exposed to so much risk in the first place. Fortunately, there are honest brokers, CPAs, estate planning attorneys and other professionals that are willing to bring these potential problems to their client’s attention, and there are qualified attorneys that emphasize representing investors against their brokers and advisers.

The short story is to be vigilant about your money and investments. Ask questions and demand answers. There are best practices to follow as an investor which will help you avoid losses from unsuitable investments and being victimized by the unscrupulous broker. And when the problems are discovered, it is important to know that as an investor you have rights, and if your broker has violated rules in handling your money and investments, you can pursue recovery of those losses through FINRA arbitration.