After working 28 years for Colgate-Palmolive, a then 73-year-old woman had acquired more than $15 million worth of company stock. When she hired a broker to handle her investments, she specifically forbade him from trading or selling that specific stock. She was surprised, and understandably very angry, to learn that her broker had sold virtually all that stock she had acquired over those years. While her broker earned a $375,000 commission, she lost out on distributed dividends.
When you hire a financial advisor or wealth manager, you expect honesty and integrity from them in their dealings, and most of the time, you receive it. Unfortunately, there are many cases of broker misconduct filed each year.
When hired, your broker will most likely explain the scope of what they can and cannot do on your behalf. The broker will likely suggest certain transactions or strategies that would potentially benefit you, but the broker cannot execute transactions without your permission or authority in most circumstances. Some investors prefer to leave all investment decisions to the broker. Others like to be more aware of the day-to-day status of their portfolio, conducting their own research before the broker makes any transactions. There are more than a few instances in which the broker, without express authorization, made trades without informing the client. These types of unsanctioned transactions are better known as unauthorized trading.
To protect against such trades, the federal government established the Financial Industry Regulatory Authority (FINRA), a not-for-profit organization that oversees broker-dealers in the United States. In total, FINRA oversees more than 634,000 brokers across the country, and by using innovative AI technology, they analyze billions of daily market events to lend support to investors, policymakers, and regulators.
Among other things, FINRA is responsible for writing, enacting, and enforcing rules and regulations that govern the broker-dealer industry to ensure fairness and integrity in the marketplace. Several of these rules explicitly prohibit unauthorized trading. For example, FINRA Rule 2010 that brokers “observe high standards for commercial honor and just and equitable principles of trade.” Essentially, this “catch-all” ethics rule authorizes FINRA to punish and deter unethical broker behavior. More explicitly, FINRA Rule 3260 states that brokers are not allowed to make transactions from discretionary accounts without the expressed authorization of the client in writing.
In some circumstances, unauthorized trading can also be considered securities fraud under federal law. Certain SEC rules prohibit engaging in fraudulent schemes, misrepresentations or omissions, and deceitful practices in connection with the sale or purchase of a security. These unauthorized dealings may even allow investors to file suit for malpractice or negligence against their broker who many be liable for damages due to breaches of their fiduciary duty or duty of suitability.
One of the many responsibilities and duties that your broker has is to provide you with an explanation of any questionable transactions. If that explanation isn’t helpful, there are several ways to resolve the matter. Depending on the facts of the case, investors can pursue an arbitration claim or file a lawsuit in court. In either case, actual damages can be sought. These damages are likely to be out-of-pocket losses caused by the broker’s unauthorized dealings. If those losses occurred during an upward-trending market, the investor may even be able to seek market gains he or she would have otherwise experienced had it not been for the unauthorized trading.
If you suspect unauthorized trading or any other misconduct by your broker, you may want to consider speaking with an attorney. Our attorneys at Levine Lyon & Eisberner LLC may be able to help. Call us now for a free consultation at 1-888-367-8198.