Schemes by Financial Advisors
A recent comment from a reader in the United Kingdom to my last post on recovering funds from fraud asked if dealing with an Independent Financial Advisor would be of any help in recovering funds.
My response is that dealing with someone who is licensed certainly increases the chances that this person is reputable, but is not a guarantee. I have investigated hundreds of cases in the USA involving a registered securities professional defrauding his or her clients. And I have copied below a previous post from this blog describing a few of these schemes.
If you believe you have been defrauded by a registered financial professional, your first consideration should be a complaint to the agency that licenses this individual. In the US it would be the Financial Industry Regulation Authority or the state securities licensing authority. In the UK it would be the Financial Services Authority or the Financial Ombudsman Service.
Schemes by Licensed Professionals.
Unsuitable Recommendations- a broker/advisor recommends the client enter into a transaction that is not suitable for the client based on the client’s financial profile, age, income, tolerance for risk, and investment objectives. An example of this would be a broker convincing your elderly aunt to cash in her certificates of deposit to open an account for options trading.
Unauthorized Trades- a broker executes trades in a client’s account without the client’s authorization. There are a number of reasons a broker would do an unauthorized trade. He could be trying to make a sales quota to win a sales contest or save his job. And I’ve seen brokers execute unauthorized transactions in a large number of client accounts with the attitude that several clients, who either don’t read their monthly statements or don’t understand the statements, will never catch the trade. Or, if the client does bring the trade to the broker’s attention, he can convince them it was a mistake, “but look, you’ve made money because the stock went up” and talk them into either keeping the security or selling at a profit (and creating more commissions).
Churning- a broker will execute a large number of trades in a client’s account without any financial benefit to the client, usually resulting in large trading losses and commission costs to the client. I have seen clients lose hundreds of thousands of dollars in churning cases. The client is almost always an unsophisticated investor who relies solely upon the advice of the broker. There is often a “discretionary trading” agreement signed by the client giving the broker full power to execute trades in the account at the broker’s discretion, and without notice to the client.
Mutual Fund Switching- switching a client from one fund to another without a financial benefit to the client and generating large commission costs to the client. Load funds generally pay generous commissions to brokers, so it is an incentive to them to move clients into the funds that pay the highest commissions. And some funds will sponsor contests offering free trips and other luxury prizes for the highest sales volume.
Conversion- this is converting client funds to the personal use of the broker, i.e. stealing money from the account. The conversion cases commonly happen in two ways. The first way is for the broker to change the address on the client account to an address where he will receive the mail. The broker then liquidates securities out of the client account, checks are sent to the bogus address and the broker forges the client name on the check and cashes it. The second way is for the broker to sell securities or withdraw cash out of the client account without the client’s knowledge, and then instruct the cashier to give the check to him for personal delivery to the client. The broker will then forge the check and cash it.
Market Manipulation- a firm’s insiders will use the firm salespeople to aggressively promote a thinly traded stock to public customers using misrepresentations and omissions. The price of the stock will increase as the sales volume increases. The insiders sell shares they own at the inflated prices. Once the insider shares are sold, the firm will stop promoting the stock and the price will fall to its previous level. This has been a favorite scheme of broker/dealers with alleged organized crime connections. These firms are nothing more than boiler rooms with securities licenses.
Selling Away- a broker will sell an investment to a client that is not approved by the broker’s firm. These schemes are almost always fraudulent ponzi-type schemes where there is never a legitimate investment product.
With the proper internal controls and compliance oversight, these schemes should be detected by the firms that employ these brokers right away. But investment firms are sales driven organizations. Internal controls and compliance take a back seat when it comes to staffing, funding, and technology.
So the public needs to be aware of the bad things that can happen in the broker-client relationship and protect themselves. Sadly, in my experience, a majority of the victims of these types of schemes are elderly people who lack investment knowledge and sophistication. And many of the schemes are not even detected until after the account is depleted of all funds, or the client has passed away and the executor discovers the scheme. If you have an elderly friend or relative with assets, encourage them to review the monthly statements from their broker and to seek advice if there is anything they do not understand.
My response is that dealing with someone who is licensed certainly increases the chances that this person is reputable, but is not a guarantee. I have investigated hundreds of cases in the USA involving a registered securities professional defrauding his or her clients. And I have copied below a previous post from this blog describing a few of these schemes.
If you believe you have been defrauded by a registered financial professional, your first consideration should be a complaint to the agency that licenses this individual. In the US it would be the Financial Industry Regulation Authority or the state securities licensing authority. In the UK it would be the Financial Services Authority or the Financial Ombudsman Service.
Schemes by Licensed Professionals.
Unsuitable Recommendations- a broker/advisor recommends the client enter into a transaction that is not suitable for the client based on the client’s financial profile, age, income, tolerance for risk, and investment objectives. An example of this would be a broker convincing your elderly aunt to cash in her certificates of deposit to open an account for options trading.
Unauthorized Trades- a broker executes trades in a client’s account without the client’s authorization. There are a number of reasons a broker would do an unauthorized trade. He could be trying to make a sales quota to win a sales contest or save his job. And I’ve seen brokers execute unauthorized transactions in a large number of client accounts with the attitude that several clients, who either don’t read their monthly statements or don’t understand the statements, will never catch the trade. Or, if the client does bring the trade to the broker’s attention, he can convince them it was a mistake, “but look, you’ve made money because the stock went up” and talk them into either keeping the security or selling at a profit (and creating more commissions).
Churning- a broker will execute a large number of trades in a client’s account without any financial benefit to the client, usually resulting in large trading losses and commission costs to the client. I have seen clients lose hundreds of thousands of dollars in churning cases. The client is almost always an unsophisticated investor who relies solely upon the advice of the broker. There is often a “discretionary trading” agreement signed by the client giving the broker full power to execute trades in the account at the broker’s discretion, and without notice to the client.
Mutual Fund Switching- switching a client from one fund to another without a financial benefit to the client and generating large commission costs to the client. Load funds generally pay generous commissions to brokers, so it is an incentive to them to move clients into the funds that pay the highest commissions. And some funds will sponsor contests offering free trips and other luxury prizes for the highest sales volume.
Conversion- this is converting client funds to the personal use of the broker, i.e. stealing money from the account. The conversion cases commonly happen in two ways. The first way is for the broker to change the address on the client account to an address where he will receive the mail. The broker then liquidates securities out of the client account, checks are sent to the bogus address and the broker forges the client name on the check and cashes it. The second way is for the broker to sell securities or withdraw cash out of the client account without the client’s knowledge, and then instruct the cashier to give the check to him for personal delivery to the client. The broker will then forge the check and cash it.
Market Manipulation- a firm’s insiders will use the firm salespeople to aggressively promote a thinly traded stock to public customers using misrepresentations and omissions. The price of the stock will increase as the sales volume increases. The insiders sell shares they own at the inflated prices. Once the insider shares are sold, the firm will stop promoting the stock and the price will fall to its previous level. This has been a favorite scheme of broker/dealers with alleged organized crime connections. These firms are nothing more than boiler rooms with securities licenses.
Selling Away- a broker will sell an investment to a client that is not approved by the broker’s firm. These schemes are almost always fraudulent ponzi-type schemes where there is never a legitimate investment product.
With the proper internal controls and compliance oversight, these schemes should be detected by the firms that employ these brokers right away. But investment firms are sales driven organizations. Internal controls and compliance take a back seat when it comes to staffing, funding, and technology.
So the public needs to be aware of the bad things that can happen in the broker-client relationship and protect themselves. Sadly, in my experience, a majority of the victims of these types of schemes are elderly people who lack investment knowledge and sophistication. And many of the schemes are not even detected until after the account is depleted of all funds, or the client has passed away and the executor discovers the scheme. If you have an elderly friend or relative with assets, encourage them to review the monthly statements from their broker and to seek advice if there is anything they do not understand.
posted by Larry at 3:45 PM
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