Stock fraud occurs when a broker manipulates customers into trading stocks without regard for the customer’s interests. Stock fraud can be orchestrated at the company level, or can be committed by a single employee; stock fraud can also range in size financially from multi-million dollar deals to penny stocks, but stock fraud consistently involves intentional disregard for the financial situation of customers and obsession with personal gain.
Stock fraud is comprised of a few basic categories, with enormous variations on each. Some examples of broker-related stock fraud:
- Misrepresentation/Omission: this form of stock fraud occurs when the broker intentionally misleads the customer about material facts regarding the stock. Stock fraud involving misrepresentation or omission often disguises risk factors associated with that particular stock.
- Unsuitability: stock frauds involving unsuitability occur when the broker recommends stocks that are outside the client’s risk tolerance. Stock frauds committed through unsuitable matches allow the broker to push undesirable stocks; this stock fraud frequently results in losses much higher than the client can bear.
- Overconcentration: failure to diversify a client’s portfolio can be a form of stock fraud. In order to protect a client’s assets, the broker should vary the types of stock purchased, stock fraud through overconcentration strips the client of the protection diversification can afford.
- Churning: In order to create additional broker’s fees, a form of stock fraud called “churning” is used. Churning requires a large numbers of transactions; often this form of stock fraud consists of selling stocks with small gains in order to show a profit.
More elaborate forms of stock fraud may occur at the executive level, and in some cases, investigators have found that stock fraud is essentially company policy, with many employees taking part in committing or concealing illegal practices. Stock fraud on the larger levels can destroy entire companies by manipulating their stock values, but some stock fraud schemes are actually designed to keep failing businesses funded, using the same tactics. Many stock fraud investigations in recent years have found an enormous amount of insider trading: brokerages committing stock fraud by selling IPO stocks before the release date to favored clients and friends; corporations construct stock fraud schemes designed attract and retain customers and investors.
All forms of stock fraud are designed to violate the investor/broker trust. The key principle of stock fraud is that the investor’s interests are secondary to the financial gain the broker can make. Stock fraud can destroy individuals and business simply by manipulating the stock market. If you suspect that stock fraud caused you to lose investments, you may wish to contact an attorney familiar with stock fraud law. A good attorney can help you determine if you have a potential stock Fraud Claim that would enable you to recover financial losses.
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