Avoiding Investment Fraud
Katherine, 85, met with us because she had lost a substantial amount of money
in her securities account. She was first introduced to her stockbroker when he telephoned her.
She told him she wanted to invest in stocks that would generate dividends. The stockbroker
instead placed her in risky securities. We sued him and his brokerage firm in an NASD arbitration
in order to recover Katherine's money. The brokerage firm ultimately settled the case prior
to the arbitration hearing.
Once investors have lost money due to fraud, there are two ways to help them
recover their monies. One is a civil law suit or an arbitration. The other is criminal prosecution.
There are several federal statutes available to fraud victims, depending on the type of fraud
perpetrated. These federal statutes provide for restitution from the defendant to the victim as
part of the criminal prosecution process.
Since many individuals invest their lump sum insurance, divorce, or other settlements
or monies in the stock market, the following points may be helpful regarding a potential relationship
with an investment firm.
Potential investors must pay attention to the new account form
Brokerage firms require that a customer sign a new account form when opening an
account. New account forms must be read carefully before they are signed; the investor should not
rely on any verbal representations made by the broker regarding these forms. The forms impose many
terms and restrictions on the investor. Notably, they contain an arbitration clause.
This arbitration clause requires that you bring any dispute with the brokerage firm before an
arbitration panel, usually either the National Association of Securities Dealers or the New York
Stock Exchange. A dispute cannot be brought before a jury or court because the investor has waived
that right by signing the form containing the arbitration clause.
Potential investors must know their investment objectives
Part of the new account form requests information about investment objectives.
The investment objectives determine how much risk the investor is willing to take. The representative
categories include "income," "growth," "capital appreciation," "speculation," and "trading." The investor
should make sure that the investment objectives checked on the new account form match the type and
degree of risk he or she wishes to take. Again, the investor should not rely on any verbal
representations made by the broker.
Potential investors need to understand what margin trading entails
Margin trading allows investors to purchase additional stock by having the brokerage
firm lend them some of the money necessary to buy that stock. When margin trading, in order to break
even, the return on stock investment must be greater than the combined cost of the commissions plus
the margin interest charged. Generally, senior citizens on a fixed income looking for income-producing
or equity types of investments should not be trading in a margin account.
Be careful in choosing a stock broker or other investment advisor
Avoid cold calls
Many victims of investment fraud were solicited on the telephone by stockbrokers
who obtained their names from mailing lists, death notices, telephone books, and other sources.
This is known as "cold calling," and while these victims would never have considered going to a
doctor, lawyer, or other professional who contacted them in this way, they did make the mistake
of choosing a stockbroker in this fashion.
Obtain and review references
The vast majority of stockbrokers are hardworking professionals who want to assist
their clients in planning for the future. In choosing a stockbroker, one may obtain references from
family and friends. Several stockbrokers should be interviewed to see who the investor feels most
comfortable with. Inquire as to their educational and professional background, investment experience,
investment philosophy, and areas of expertise. Consider asking them for additional references, as
well as whether they have been named in any disciplinary actions.
Obtain a free disciplinary report
Bad apples in the brokerage industry are an embarrassment and liability,
as they give the entire industry a bad name and weaken investor confidence. Obtain a free report
about the disciplinary history of brokerage firms and stockbrokers by contacting the NASD at (800) 289-9999.
Be aware of stock broker incentives
Remember, for the most part, stockbrokers are paid by how often they buy and sell
investments. Moreover, a stockbroker may be receiving a bonus for selling certain investments.
Obtain a copy of the commission schedule
Note that, even with low commissions, overall costs may be higher if purchase
or sell orders are not rapidly processed. Delay may result in sub-optimal buy or sell prices.
Other fraud tips
Never send a check to an address other than the one listed on the confirmation
or the monthly statement. The check should be made only to the brokerage firm. Never make a
check payable to the stockbroker.
Remember that investments always entail some degree of risk
Our extensive experience in enforcement with the NASD prosecuting stockbrokers
for investment fraud and our current work representing victims of fraud has demonstrated that,
if an investment opportunity looks too good to be true, avoid it or have an unbiased professional
review the potential investment.
If you or someone you know is a victim of investment fraud
Victims of investment fraud should contact an attorney who handles investment
fraud matters. A complaint can also be forwarded to the NASD for investigation
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