7 Types Of Stock Broker Fraud And How To Recognize Them

“My broker stole my money” has sadly become a common phrase. While we would all like to feel that our money is in good hands, the frequency of stock broker complaints paints a grim picture: stockbroker misconduct is very real. In fact, some of the biggest financial frauds in history have resulted from stock broker cheating.

The sad result of stock broker fraud is the fact that more and more people are getting discouraged from hiring stock brokers, and thus missing out on a lot of potential gains. Can a broker steal your money? Sadly, the answer is a definite “yes,” but there are feedback systems in place to make such malpractice difficult and very costly for the unethical broker.

FINRA exists for one, as do stock broker fraud lawyers, who specialize in such cases. If you’ve been wronged by your stock broker (say, if your broker sold stock without permission), you should never hesitate to contact a stock broker fraud attorney. Stock broker fraud attorneys know the ins and out of the game, and will work hard to ensure your vindication.

If, on the other hand, you only suspect that your stock broker may be swindling you, then you’ve come to the right place. Even though a stock broker fraud blog is no replacement for hiring an actual lawyer, it can be a great way to get informed before planning your next step. So, without further ado, here are 7 types of stock broker fraud and how to recognize them.

1. Conversion of Funds

Simply put, a conversion of funds is when your stockbroker abuses the trust you placed in them and takes money directly from your trading account. They don’t use it for anything on your behalf; they simply take it. As far as stock broker fraud goes, this kind is the most blatant and most similar to direct theft.

Luckily, it is also the easiest to see coming. Whoever tries to pull it off is no Bernie Madoff. The most common victims of conversion of funds are the elderly, the disabled, and the uneducated. If you can read and understand an account statement, you will be able to recognize a conversion of funds.

2. Misrepresentation or Omission of Facts

Your stockbroker has the obligation of being entirely transparent to you. That means that they are forbidden from lying, whether directly or by omission. Their council exists to help you make good financial decisions. If they misrepresent an investment opportunity or omit important facts on purpose, then they are trying to con you.

Of course, you may only learn that you’ve been conned months or years after the fact, but that shouldn’t stop you from reaching out to a stock broker fraud lawyer. You have the right to vindication, just like everyone else in a similar situation.

3. Unauthorized Trading

Unauthorized trading has led to some famous penny stock frauds. When your stockbroker uses your funds to make an investment without asking you first, they are committing unauthorized trading. You should generally not allow that to happen. The broker may use your excessive trust to further their own ends in a breach of stock broker ethics.

Unless you’ve known your stockbroker personally for many years, you should always have a non-discretionary brokerage account. What that means is that your stockbroker will be unable to make transactions without your approval.

4. Over-concentration

The saying “don’t put all your eggs into one basket” is especially true when trading in stock. If your stockbroker advises you to concentrate your funds into a single or a small number of investments, then something is almost certainly wrong. As a professional, your stockbroker should know the value of a balanced portfolio. If they are giving you wrong advice on purpose, then they likely have an ulterior motive.

5. Excessive Trading

Given that you often pay them on commission, a common method of stock broker cheating is to simply advise you to buy and sell more often. By making you hire (and pay them) more often, they will make more money. You, in turn, will make much less money, because you won’t be buying and selling at the right moment.

If you suspect that your stockbroker is pushing you toward excessive trading, you should, of course, contact a lawyer.

6. Unsuitable Investment Recommendation

This umbrella term can encompass a lot of different kinds of malpractice, including some famous stock broker frauds. Simply put, when a stockbroker suggests a deal that is too risky for you, they are doing this.

Perhaps they are not taking into account the rest of your portfolio. Possibly they own a share of the company in question, leading to a conflict of interest. Maybe they are simply making a bad decision. Regardless, you should not stand for it. You have the right to competent representation.

7. Outright Negligence

Sometimes your stockbroker is not actually trying to con you but is simply not interested in your account. They may have a more lucrative client at the moment—or many. That is, of course, no excuse, and you shouldn’t allow it.

Your deal with your broker binds them to do everything in their power in service to your portfolio. If they fail to deliver on their end, then they have wronged you.

Conclusion: Don’t Hesitate to Call a Lawyer

You shouldn’t trust anyone blindly, least of all your broker. If they ring any of the above-mentioned bells, you should definitely bring in an investment lawyer. In the worst-case scenario, it has all been a misunderstanding.

There’s no reason for you to be a victim of stock broker fraud. And if you already are a victim, go ahead and pursue legal compensation. You deserve it.

, IPS, Wire, English


Hafiz Sarmad