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Common Types of Claims
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Most claims by investors against their brokers, brokerage houses, fund managers, retirement plan sponsors, investment advisors, or financial planners arise from the broker’s breach of fiduciary responsibilities to the investor. Brokers have fiduciary responsibilities to their investors because they occupy a position of trust and confidence. They owe a high degree of loyalty and fidelity to investors.

Eight of the common claims are as follows:

1. Churning (excessive trading of) an account
2. Failure to execute or follow instructions
3. Margin complaints
4. Misappropriation
5. Misrepresentations and omissions
6. Negligence
7. Unauthorized trading of investments
8. Unsuitability of recommendations or investments

An overview of each is provided below:

1. Churning
   One of the most common complaints, churning is essentially excessive trading in a customer’s account for the purpose of generating commissions. An example is a broker with discretionary authority or practical ("de facto") control over an account engages in excessive trading in order to generate large commissions. This improper conduct gives rise to several claims under state and federal securities laws including fraud, negligence, breach of contract, and breach of fiduciary duty.
   
   A claim may be established by showing (1) the broker controlled the account; (2) the trading was excessive in light of the investor’s objectives; and (3) the broker acted with the intent to benefit himself through the generation of commissions and to the detriment of the investor. Churning cases usually turn on the question of control. If the broker can establish that the investor was making the decisions and the broker was merely following instructions, it is more difficult for the investor to prevail. On the other hand, if the broker is making most of the decisions and there is excessive, detrimental activity, the investor has a legitimate claim. The investor’s account statements and the background of the relationship between the investor and broker relationship should be carefully reviewed.
   
   
2. Failure to Execute
   A broker is required to follow the investor’s instructions to execute an order. If the broker ignores the instructions, or intentionally or negligently fails to execute the order, a claim may arise. A substantial increase or decrease in the price of the security at issue after the time the trade should have occurred may damage the investor because a gain was not realized or a loss suffered. A broker needs to have first agreed to act as an investor’s agent before he can be held accountable for failure to execute an order.
   
   Such conduct can occur in a brokerage firm, including the “boiler room” operations. When the investor wants to sell the stock that the boiler room is touting, the broker often tries to convince the investor to hold on to the investment or simply fails to follow his instructions to sell. This can result in losses when the price of a manipulated stock collapses.
   
   
3. Margin Complaints
   The margin is the amount an investor must deposit with the broker when borrowing from that broker to buy securities. If an investor has been approved to borrow money from the broker-dealer for the purchase of stocks, he or she has a margin account and pays interest on any funds borrowed to purchase securities.
   
   The NASD and NYSE require minimum maintenance of margin accounts; which have been requiring the investor to maintain at least 25% of the market value of the securities in the margin account. Several common complaints arise from when the broker liquidates securities in the account without giving the investor prior notice; when the broker specifies a deadline for the investor to deposit additional funds into the account to avoid liquidation (a margin call) but liquidates the funds prior to the deadline; and when the broker liquidates the investor’s securities after the investor fails to meet a margin call but fails to allow the investor to suggest which securities should be liquidated. The investor’s agreement with the broker may help determine exactly what the rights of the broker were regarding the liquidation of claims.
   
   
4. Misappropriations
   A broker may misappropriate an investor's funds. An example is when the broker is not reporting a transaction to his employer. This practice is known as "selling away." Sometimes the brokerage firm employing the broker is unaware of the transaction in question, or even of the existence of a particular customer, the investor often recovers from the firm on a theory of respondeat superior, controlling person liability under both the state and federal securities laws, or negligent supervision.
   
   
5. Misrepresentations or Omissions
   A claim for misrepresentations or omissions can arise when a broker intentionally or recklessly misleads an investor or fails to disclose material facts about an investment. A consideration in this type of claim, as in others, is the credibility of the investor and the broker, and the documentation. The sophistication of the investor may be considered in determining whether an investor was misled.
   
   An example of this type of case occurs in a volume “boiler room operation” in which a group of unprofessional brokers make a large number of “cold calls” using high-pressure sales tactics. These brokers may falsely claim that they know what a stock price is going to be, their firm controls the price of the stock, they have inside information from the company, profits are certain, or they are selling a stock from a hot public offering. Misleading omissions can be just as actionable as affirmative misrepresentations. An example is when a broker advises that a company has certain attributes, but fails to state that these attributes cannot be used.
   
   
6. Negligence
   A broker must use reasonable diligence in processing an investor’s account and to act as a reasonable and prudent broker would act. Malicious or intentional is not necessarily required. In any event, negligence claims are usually joined with another type of claim.
   
   
7. Unauthorized Trading
   A broker making unauthorized trades in an investor’s account is fairly common. In a non-discretionary account, the investor’s knowledge or approval is necessary for the broker to make a transaction. If the investor has not given his permission to make a trade, either orally or in writing, and loses money as a result of the trade, it is considered unauthorized and may be actionable. Such a claim may exist even if the broker simply fails to consult a client before making trades. Other dishonest brokers may buy stock on margin without authority or ignores specific instructions by a client with respect to a discretionary account. Unauthorized trading claims may include rescission, breach of contract, or fraud.
   
   One factor to consider is the date of the transaction. An investor should complain in writing about an unauthorized trade as soon it is discovered to better protect his/her rights to make a claim. If it has been many months or years since the trade took place and the investor is raising the issue for the first time, the claim can be difficult to pursue, unless there has been an effort by the broker to deceive.
   
   
8. Unsuitability
   The NASD requires that a broker “recommend a purchase or sale only after determining that the recommendation is suitable for the customer.” The NYSE requires that a broker “know his customer before recommending securities.” Both rules are designed to ensure that investors have the financial resources to bear the risk of recommended investments and to ensure that brokers communicate with their customers. If an investor loses money after his broker recommends investments that were unsuitable in light of his financial situation and objectives, this is a claim that can be pursued. The investor’s level of experience in the market as well as his/her financial strength should be considered.

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