| Investment Fraud
Investment promoters and salesmen who make recommendations
to customers must provide prospective investors with
balanced, complete sales presentations that fairly present
the major risk factors along with the positive aspects
and potential rewards. Securities salesmen must disclose
to the investor "all material information necessary
to make the representations made not misleading."
Therefore, investors can recover for the non-disclosure
of information, where disclosure is necessary to make
the sales presentation balanced and complete. Misrepresentations
and omissions in the sale of securities may give rise
to claims for violation of federal and state securities
statutes and claims arising under common law theories.
Unsuitable Investments
Under the rules of the NASD and the major stock exchanges,
a broker may not make an investment recommendation unless
he has reasonable grounds to believe that his recommendation
is suitable for the customer in light of the customer's
other securities holdings, financial situation and investment
objectives. This is commonly referred to as the "Suitability
Rule." An equally important rule is the "Know
Your Customer Rule," which requires the broker
to make reasonable efforts to obtain information about
the customer in order to determine what investments
to recommend. These rules are the foundation of the
broker-customer relationship. "Caveat Emptor"
simply does not apply when brokers recommend securities.
Churning
Churning occurs when a securities broker engages in
excessive trading in disregard of a customer's investment
objectives for the purpose of generating excessive commissions.
Proof of a churning claim requires evidence that: (1)
the broker controlled trading in the account, (2) trading
was excessive in light of the customer's investment
objectives, and (3) the trading was done in reckless
disregard of the customer's best interests for the purpose
of generating excessive commissions. Signs of excessive
trading include frequent short term trading, repeated
turnover of the portfolio and excessive commissions.
Improper Execution of Trades
Unless the customer has given his broker discretionary
trading authority, which typically is done in writing,
a broker must obtain his customer's advance permission
before executing any purchase or sale of investments.
A broker must always follow the customer's instructions
concerning the buying and selling of securities, and
must provide the customer with timely trade execution
at the best available prices.
Pricing Violations
Federal and state laws prohibit market manipulation,
excessive mark-ups or mark-downs of securities, and
the quoting of fictitious prices. Pricing violations
sometimes occur when small, "boiler room"
brokerage firms attempt to make a killing by selling
thinly-traded, over-the-counter securities at highly
inflated prices.
Bad Investment Advice
While an investment promoter or salesman cannot be sued
simply because his or her enthusiasm for a particular
stock turned out to have been misplaced, the broker
must exercise reasonable diligence to investigate a
security so that he can determine whether it is suitable
for the customer. Claims for "bad investment advice"
typically involve negligence, unsuitability or misrepresentation.
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