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What are the most common complaints against stock brokers and their firms and how to avoid them especially when useing investor leads.

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Common Complaints Against Stockbrokers

Trading without permission

Sometimes a customer may be surprised to discover certain trades made in his account which had not been previously discussed by the stockbroker. This constitutes unauthorized trading, which is prohibited. Sometimes a broker may call the customer after the fact and say that he has just placed a particular trade in the account. The mere fact that the broker informed the customer of the trade afterwards does not make that manner of trading acceptable. However, if the customer indicates his acceptance of the trade, that may be viewed as ratification of the broker's act.

"Guaranteed sure winner"

Another common complaint is that the stockbroker promised that the stock would go up and that the investment was a "guaranteed sure winner." Most experienced investors realize that there are no guarantees in the stock market and that brokers may be prone to a certain degree of exaggeration or puffery in their salesmanship. However, although there is no black and white line, when a stockbroker's overly aggressive sales tactics go too far and the customer relied upon his representations, then such statements may constitute unlawful misrepresentations.

Excessive trading

If a broker is constantly buying and selling in the account, this may be evidence of churning, which means engaging in excessive trading in order to generate commissions for the broker. Such activity constitutes another form of securities fraud. Even if the broker is constantly calling the customer prior to placing the trades, this activity is still improper where the broker is abusing the account for his own selfish purposes.

Insider information

Sometimes a broker may say that he has information from certain sources inside the company which is not available to the public. A broker may indicate that he is certain that the stock will be going up based upon such information and urge the customer to invest on what he may describe as a "hot tip." This may constitute trading on "insider information", which is prohibited by law. The line between permissible tips, research department analysis, and insider information may not be clear in all cases.

Ineptitude or malpractice?

Occasionally it may seem that a particular broker just does not know what he is doing. This may be in terms of executing trades, following instructions, or general performance of the portfolio. Brokers are held to certain standards of the securities industry and must pass various examinations in order to be licensed. Failure to maintain a certain level of competence in the management of an account may constitutenegligence or a form of broker malpractice. It may also reflect a failure of supervision of the broker by the brokerage firm. However, mere poor performance of a portfolio is not a legal cause of action on its own.

Risky investments and misrepresentations

Sometimes a customer will complain that the broker said that something was a very safe investment but the customer later discovered that in fact it was very risky. Customers rely upon the recommendations of stockbrokers, and failure to properly disclose the risk is a misrepresentation or material omission. Unfortunately, many investors do not discover the truth in such cases until after they have incurred substantial losses and then realize that the investment was not so safe in the first place. But this should be distinguished from the situation of an experienced, wealthy investor who wants to speculate with a portion of his portfolio, understands the risk, is willing to take the risk, and is able to afford the risk. There is nothing wrong with risky investments in such circumstances.

Sold too soon

Sometimes one will hear the complaint that a broker recommended that the customer sell a particular investment after it had just gone up a little and that after the stock was sold it doubled in price. "Just look at how much more I would have made if I had held onto that stock," is a common lament. Although the broker's advice may look bad in retrospect, the fact that the customer did not make as much profit on the trade as he might have absent the broker's advice may just be sour grapes. Certainly this is so if the customer has sufficient expertise on his own to evaluate the investment and make the decision as to when to sell which the broker did not force upon him in any event. One can imagine the reaction of such a customer if the broker had not advised him to sell at that point and then the stock went down. A claim may not be based purely on hindsight.

Margin problems

Many complaints arise from problems which occur when a portfolio is on margin, i.e. trading with money borrowed from the brokerage firm. A customer may complain that the broker put the account on margin without his prior authorization. More frequently however, the problem is not that the account was put on margin without any prior authorization, but rather that the broker put the account on margin without explaining the risks and problems associated with margin trading. Since a margin account involves trading with borrowed funds, there are special risks associated with margin that must be explained to a customer at the outset. When a customer receives "margin calls" which he does not understand or is shocked to discover that positions in his account are being liquidated due to margin maintenance requirements, it may reflect the fact that he never understood margin properly from the outset, and therefore he did not knowingly consent to the use of margin in his account.

Limited partnerships

A common complaint with limited partnership investments relates to the value of the investment. Frequently such investments are not listed on any public exchange and are intended as long-term investments. Some brokers may continue to reassure customers each year as to the value of such limited partnership investments, but after many years the customer suddenly discovers that the investment is worthless or has declined greatly in value. This situation raises complex problems of statutes of limitationsand eligibility relating to the timeliness with which securities claims must be filed. In general, one should act quickly upon discovering a problem before the clock runs out and before any legal action may be barred.

Complaints to supervisor

After repeated, fruitless complaints to the broker about certain improper activity, customers sometimes finally complain to the broker's supervisor or the branch office manager. Occasionally this will resolve the problem, but sometimes those complaints will also be ignored, to the frustration of the unhappy customer. But even more maddening is the "comfort letter" which customers may receive from a brokerage firm even after making a complaint. A letter sent by a brokerage firm to a customer to confirm that the customer is satisfied with the trading in the account should not be ignored. Such a letter may later be used as evidence against the customer to show that he was satisfied with the manner in which the account was being handled and that he did not put the firm on notice as to any problems.



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