What is Stockbroker Fraud? And Why Should Investors Care?

We’ve all seen the news stories. Stock market fraudsters get caught running a scheme where people lose millions.

The most recent of these was Bernard Madoff in 2008. He tricked investors out of 50 billion dollars.

Most people have no idea they’ve been tricked until it’s too late. This doesn’t have to be you.

An investor doesn’t have to be committing large-scale broker fraud for it to affect you. We are going to help you know what to look for.

Being an informed investor is the best way to avoid becoming a victim of stockbroker fraud. For those who have already fallen victim, we are going to help you know what you can do about it.

Keep on reading to learn more!

Normal Loss vs. Stock Market Fraud

Before we get started, it is essential to know the difference between a loss and actual fraud. Investing in the stock market is a risk, and you can lose money.

Your investor is human, so another possibility is an honest mistake. If this is the case, the issue should be easy to correct upon discovery.

Types of Broker Fraud

There are 11 types of fraud you will find in the investment world. Most of them you can catch by monitoring your investment account activity.

Inappropriate Investments

Your stock broker should learn about your risk tolerance and investing goals. They should then tailor an investment plan to fit your situation.

It is inappropriate to pressure a retiree to put their entire portfolio into high-risk stocks. Do not let your investor pressure you into an investment you are uncomfortable with.

Misrepresenting and Omitting Facts

A stockbroker should give you all of the material information. Omitting facts is fraudulent.

An investor can also commit fraud by misleading you with the facts. This is where they may tell you the facts, but in such a way to get you to act in a certain way.

Over Concentrated

Diversification is preached throughout the investment world. But did you know that it could be fraud if your broker doesn’t diversify?

Putting your entire portfolio into one security or market is bad investing practice. This results in you losing big if the one security performs badly.

Unauthorized Trades

Your broker should not make any trade without your prior approval. There are only two times when this is not the case.

First, you’ve granted discretionary authority. Second, you gave express and detailed permission. Any action outside of these two exceptions is fraud.


Churning is when your broker will do an excessive amount of trading. The ploy is to increase gain by buying and selling a stock many times.

This sounds good except if your broker gets paid on commission. Then they have the incentive to create many transactions.


Your broker cannot refuse your orders. If your broker refuses or delays your order, this is fraud.

Inappropriate Sales

You should be suspicious if your broker switches mutual funds more than necessary. Or if they don’t have a valid reason for the excessive switching.

Another form of sales fraud is selling funds to investors that are not in their best interest. For example, the investor qualifies for Class A shares, which the broker doesn’t sell. Instead, they sell loaded funds or Class B shares.

Illegal Accounts

It is a red flag if your stockbroker wants you to use an address other than your home or business. It is fraud to place your client money in the stockbroker’s account.

Do not lie on your investment account application. Do not agree to help set up false accounts.


All brokers, investors, and advisors must register with the US Securities and Exchange Commission before they start selling securities. Every product they sell must also get registered and follow federal guidelines.

Fraudulent Activity

It is fraud if your money gets withdrawn from your investment account without your prior approval. It is fraud if your signature gets forged or you get sold securities that do not exist.

Institutional Brokerage Fraud

The fraud may be on a larger level than your broker. Several brokerage firms have faced prosecution for pushing undesirable stocks.

The brokerage firm will sell a less than desirable stock so they can receive backdoor payments. This is a conflict of interest for the brokerage firm.

Causes of Action Available

If you discover that your stockbroker has committed fraud you have several remedies. The best course of action is to consult a Stock Loss Attorney about your situation.


If your investor acts with complete disregard for standard trading practices, you may have a case for negligence. This could include the aggressive trading for the retiree we talked about earlier.

It can also include failing to diversify your portfolio. Both of these actions go against the basic principles of responsible trading.

Breach of Fiduciary Duty

Like lawyers, financial advisors owe their clients a fiduciary duty. This means they are supposed to look out for your best interests.

This gets violated when the broker does excessive transactions to make the commission. Another example is when the brokerage firm pushes an undesirable stock so they can bolster their own business relationships.

Misrepresentation and Omission

Your broker commits misrepresentation when they deliberately misrepresent the facts to you. It is also fraud when they conceal important information.


Recovering with a claim of misconduct covers the other fraudulent actions we discussed. This includes making unapproved trades, withdrawing unapproved funds, or mixing client and broker funds.

Stockbroker Fraud

Don’t let yourself become a victim of stockbroker fraud. Know the difference between normal loss and fraud loss.

If your broker pressures you or takes action without your approval, this can amount of fraud. You can recover if your broker delayed or refused your orders for trades.

Staying vigilant of the activity on your investment account will help protect you. Track where your money gets invested, how many trades get made, and where your account gets held.

Let us review your situation and discuss the possibility of you having a case today.

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