Common Securities Abuses

Churning

Also known as excessive trading. Churning occurs when a broker, exercising control over an account, abuses a customer’s confidence for personal gain by initiating transactions that are excessive in view of the character of the account. See, Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir.1980). Typical examples of churning include in and out trading of the same stock, or the frequent use of proceeds trades which occurs when the broker recommends the use of proceeds from a sale to immediately buy a new security. If you suspect that the trading in your account is excessive and/or that your broker is buying and selling securities for purposes of generating commissions then you may be the victim of churning.

This typically occurs when a broker sells a security which was neither offered nor otherwise approved by the broker’s employer. The underlying investment sold by the broker usually turns out to be either non- existent or an unregistered security sold via fraudulent means. Investors falling victim to this type of scheme should be aware that brokerage firms have an affirmative obligation to reasonably supervise the sales activities of their brokers. Brokerage firms which fail to adequately supervise their brokers can and often are found liable to investors who have lost money by purchasing investments sold by brokers in selling away situations.

Suitability claims involve investment recommendations which are inconsistent with a customer’s risk tolerance, needs and investment objectives. All brokers have a duty to know their customer and to further limit investment recommendations to those which are suitable based upon the customer’s financial status, tax status, investment objectives and any other reasonable factors. Most suitability claims involve high risk and/or illiquid investments and/or a concentration of assets into a single type of security or group of securities.

Brokers and brokerage firms have been disciplined by securities regulators for engaging in abusive variable annuity sales. Annuities are like mutual funds wrapped up in an insurance policy. Usually the big selling point for the Investor is the “guaranteed death benefit” related to the amount of money paid in by the investor. Often variable annuities are sold as a guaranteed or insured “can’t lose” investment. Money is thereafter often invested into various “sub-accounts” which are often aggressively invested in high risk vehicles and/or industries which often result in significant losses.

Unauthorized trading occurs when your broker runs trades in your account without your permission. Unless you have given your broker a Power of Attorney, ALL trades must be made with your permission.

Fraud occurs when one makes a misrepresentation of fact which is relied upon by the one hearing the misrepresentation and who then reasonably relies upon such to their financial detriment. Brokers and brokerage firms typically engage in fraud when they fail to disclose all facts which a reasonable investor would deem important prior to making an investment decision. Your broker has a duty to disclose all material facts necessary for the investor to make an informed investment decision.

A Ponzi scheme is a fraudulent investment program whereby the funds raised from new investors are used to pay older investors. Also known as pyramid schemes, investors are typically enticed with high return low risk investments involving purportedly legitimate vehicles such as cd’s, annuities, bonds, stock, debentures etc. As more and more funds are stolen by the perpetrators and as more and more investors begin demanding repayment of their funds, the ponzi scheme eventually falls apart. Although victims of these types of schemes can usually recover a portion of their funds through either receivership or bankruptcy proceedings involving the underlying fraudulent entity, investors seeking a meaningful recovery must usually look to deep pocket third parties such as the banks and/or brokerage firms who may also be liable to investors for their losses.

According to the Elder Financial Abuse Task Team Report to the California Commission on Aging, more than 200,000 Californians are victims of financial abuse every year. This statistic is both tragic and outrageous. Financial exploitation of the elderly is all too common. If you have reason to believe that you, your parent or someone you love has suffered serious financial losses due to securities or other financial fraud, it is important that you speak to a lawyer immediately.
Under California law, anyone who engages or assists in engaging in the financial abuse of an elderly person (which is defined as any California resident 65 or older), shall be liable for all compensatory damages incurred as well as attorneys’ fees and costs. See, CA Wel. & Inst. Code § 15657.5. Further, any such award may be in an amount up to three times greater than that authorized by statute. See, Cal.Civ.Code § 3345. These laws which are construed broadly, apply to everyone including stockbrokers, brokerage firms and any other individual and/or entity who engages in financial abuse of the elderly.