Can My Broker or Financial Advisor Trade in My Account Without My Permission?
What to Do If You Suspect Your Broker Engaged in Unauthorized Trading
Under most circumstances, a broker or financial advisor cannot trade in your account without your permission. There are very limited exceptions to this rule. Unauthorized trading is a serious offense that can result in liability. In order to prove that your broker engaged in unauthorized trading, it is strongly recommended that you consult with an experienced attorney.
At Meyer Wilson, we represent clients who have suffered financial losses related to investment fraud and stockbroker misconduct. Our experienced attorneys will fight hard to hold brokerages and other financial institutions accountable for their wrongdoing while helping you recover your losses.
Did your broker or financial advisor trade in your account without your permission? Contact our office at (800) 738-1960 for a free consultation.
When a Broker Can Make Transactions Without Your Permission
In most cases, a broker or financial advisor will be prohibited from making any trades or transactions within your account without your permission. One of the few exceptions to this rule is if you have a discretionary account.
A discretionary account gives the broker or financial advisor the ability to use their “discretion” in making trades (buying or selling securities) without your prior authorization. Discretionary accounts are somewhat rare and are required to be in writing. The customer agreement you sign will expressly state that the broker has the authorization to make trades without obtaining your permission.
Discretionary vs. Non-Discretionary Account
Because a discretionary account allows a broker or financial advisor to make transactions in a customer’s account without their express authorization, the Financial Industry Regulatory Authority (FINRA) imposes special supervisory requirements.
Additional supervisory requirements include reviewing all discretionary accounts at “frequent intervals.” Discretionary accounts may be more prone to inappropriate trading since they do not require client approval for transactions. Even though an account may be marked “discretionary,” all trades that the broker makes in the account still must be in the client’s best interests.
In non-discretionary accounts, a broker or financial advisor must obtain a client’s permission before making any transactions. Any buying or selling of securities without a client’s authority is considered unauthorized trading and is a direct violation of FINRA Rule 2010.
The other exception to the rule is if the broker or financial advisor was executing a margin call. If you have a margin account where you have borrowed money from your broker to buy a stock, the broker may be able to sell your securities without first obtaining your permission. The account must have fallen below a firm’s maintenance requirement in order for this exception to apply.
Buying investments on margin is risky and may be unsuitable for the average investor. It is vital that you understand all of the potential downfalls and risks of loss before agreeing to trade any investments on margin. However, if you do not have a margin account or a discretionary account, any trading in your account without your permission may be considered investment fraud.
Suffered Losses Related to Unauthorized Trading? Contact Our Office.
If you have sustained losses related to unauthorized trading on your account, you might be entitled to compensation. Contact our office at (800) 738-1960 for a free, no-obligation consultation. We represent clients nationwide for investment and securities fraud claims. Call now to get started.
Did Indiana-Based Broker Seth Stewart Invest Your Money in Risky Securities?
Meyer Wilson is investigating allegations that Seth Stewart, an Indiana-based broker, engaged in the misrepresentation of unsuitable, illiquid, alternative investments. Stewart is no longer registered to sell securities, but he is still a licensed investment adviser representative, working at a firm called Brookstone Financial. He previously worked for the brokerage firm Center Street Securities, Inc.
Stewart has three customer disputes pending against him. All allege that Stewart sold them unsuitable, high risk, illiquid investments. FINRA rules require a broker to have a reasonable basis that the recommended investment strategy or transaction is in the best interest for the customer. Failure to do so may result in liability for recommending unsuitable investments.
If you were sold illiquid and high risk investments by Seth Stewart, the experienced investment misconduct attorneys at Meyer Wilson are interested in hearing from you. Contact us today for a no-cost consultation to discuss your legal options.
Meyer Wilson Investigating Potential Legal Claims Against Worden Capital Management Relating to Excessive and Unsuitable Trading by Stockbroker John Lopinto
On January 11, 2022, the Financial Industry Regulatory Authority announced sanctions against John Michael Lopinto (CRD#: 4563735). The sanctions stem from allegations that Lopinto engaged in excessive and unsuitable trading in at least five customer accounts and improperly exercised discretion in another customer’s account without prior written authorization.
Lopinto worked as a financial advisor with Worden Capital Management, LLC, from November 2016 to November 2019. FINRA states that during this timeframe:
Lopinto worked as a financial advisor with Worden Capital Management, LLC, from November 2016 to November 2019. FINRA states that during this timeframe:LoPinto recommended high frequency trading and his customers routinely followed his recommendations and, as a result, LoPinto exercised de facto control over the customer’s accounts. LoPinto’s trading was excessive and unsuitable given the customers’ investment profiles. As a result of LoPinto’s excessive trading, the customers suffered collective realized losses of $240,331 while paying total trading costs of $205,523, including commissions of $161,706. The findings also stated that LoPinto exercised discretion to effect trades in a customer’s account without prior written authorization. LoPinto charged the customer a total of $21,632 in commissions to place the trades. The customer did not provide written authorization for LoPinto to exercise discretion in the account and LoPinto’s member firm did not accept the account as a discretionary account.
Under the law, brokers are prohibited from making unsuitable and excessive trades in customer accounts and making trades without proper authority. While Lopinto neither admitted nor denied FINRA’s allegations, he consented to a nine-month bar from working in the securities industry and a $7,500 fine. He was also ordered to pay restitution in the amount of $135,333.
Brokerage firms like Worden Capital are required under securities industry rules to monitor trading activity in customer accounts to detect and prevent unsuitable and excessive trading and unauthorized transactions. Brokerage firm customers may be entitled to compensation if it can be shown that a firm failed to take adequate steps to prevent and respond to possible improper trading activity in the customer’s account.
The latest sanctions are not Lopinto’s first run-in with regulators. In September 2020, Lopinto was the subject of a Securities & Exchange Commission cease-and-desist order, which included a public censure and $40,000 fine. The SEC accused Lopinto and another colleague of various violations of the Investment Advisers Act of 1940 relating to Keyport Venture Partners, LLC, an unregistered investment fund. The SEC accused Lopinto of misrepresentations relating to the fund’s purported investment in a pre-IPO offering.
An investigation of Lopinto’s regulatory record also shows a history of numerous tax liens in excess of $350,000.
If you are a former customer of John Lopinto and suspect misconduct in your trading account, contact the investment fraud lawyers at Meyer Wilson for a complimentary case evaluation.
James Flynn Customers Complain About Real Estate and Annuity Investments
Former broker James Flynn was recently barred by FINRA after failing to respond to the agency's requests for information. He has been the subject of at least ten customer complaints alleging unsuitable investments and unauthorized trading. The majority of the complaints surrounding Flynn are related to real estate investment trusts or other illiquid investments. Alternative investment products like REITs are rarely appropriate for investors because of their high costs, illiquidity, risks, and extensive redemption charges. Unfortunately, they are a strong temptation for many brokers because of their high commissions. Because these products are almost never beneficial for investors, many states impose limitations on the amount that can be invested by a consumer.
From February 2017 to February 2018, Flynn worked as a broker with IFS Securities in Greenville, South Carolina. He was fired from IFS over allegations that he engaged in trading ahead of authorization. Flynn worked with Voya Financial Advisors from 2013 to 2017 when he was fired for allegedly providing the firm with misleading information during an investigation.
According to his BrokerCheck report, he has one pending dispute from August 24, 2018 alleging that he transferred client assets from a 401k account into liquid and unsuitable investments in August 2015. In addition to the pending dispute, he also has eight settled disputes on his report. The disputes alleged unsuitability and unauthorized trades related to alternative investments and direct participation products (DPPs) like REITs.
Did You Lose Money While Working with James Flynn?
If you lost money while working with James Flynn, Meyer Wilson would like to hear from you. When investors choose to work with brokers like Flynn, there's a level of expectation that their funds will be well looked after and invested in a responsible manner. If you believe James Flynn misappropriated your money, give our office a call at (800) 738-1960. Our team of experienced investment fraud attorneys may be able to help you recoup some or all of your losses.
Defrauding Investors by Inflating Fund Performance
Broker-dealers who inflate investment fund performance to retain business and gain new clients deny investors the opportunity to make informed investment decisions.
Inflating Fund Performance is Illegal
In May 2018, the Securities and Exchange Commission (SEC) filed charges against Premium Point Investments, a New York investment firm, for inflating fund performance to retain and attract investors. The SEC alleges that the firm engaged in a high-level, six-month investment scam where a firm's adviser exchanged trades with a broker-dealer who inflated valuations on mortgage-backed securities. The firm allegedly inflated fund performance even further by using mid-point valuations. The scam allegedly inflated the value of Premium Point’s securities holdings and grossly exaggerated investment returns to investors.
The recent SEC complaint filed charges against the CEO and chief investment officer of Premium Point Investments, Anilesh Ahuja, as well as a former portfolio manager, Amin Majidi, and a former trader, Jeremy Shor. All three men were charged with fraud and aiding and abetting fraud. The SEC is seeking permanent injunctions against the men, as well as the return of illegally obtained gains including interest and civil penalties.
Hedge funds commonly use pooled funds from large institutional investors and high-net-worth individuals with private investments. When investors invest in hedge funds, cash is distributed into a variety of investments chosen by fund managers who usually receive a percentage of returns. This often creates an opportunity for hedge fund fraud by unethical hedge fund managers. Since hedge funds do not have to register with the SEC, they are not regulated by mandatory reporting rules like other types of investment funds. It's easier for dishonest hedge fund promoters to entice potential investors by promising fast, high returns on their investments.
Most hedge funds do not engage in unethical or illegal behavior. However, large investments and intense competition can lead to investment fraud. Although hedge funds are not subject to mandated reporting rules, mandated fiduciary duties may still apply. Hedge fund managers and promoters must comply with the same duties as other securities brokers. If they don't, they can be charged with investment fraud.
Investors rely on their brokers to accurately value their investments so they can make informed investment decisions. When the true performance or value of an investment is masked and an investor loses money, he or she can file a lawsuit or arbitration case to hold the broker liable for damages. Investors who lose money may be able to recover the purchase price of the securities, the gains he or she reasonably should have expected to make had the funds been invested appropriately, arbitration costs, and reasonable attorney fees. In some situations, when egregious misconduct is involved, the investor may be entitled to punitive damages.
Dishonest brokers often defraud investors by inflating hedge fund performance to show profits that do not exist. If you have been a victim of securities fraud and need legal assistance with loss recovery, contact the attorneys at Meyer Wilson at 888-390-6491 for a free consultation today.
SEC's Best Interest Standard Causing Confusion Over Undefined Rules, Vague Language
The Securities Exchange Commission (SEC) has proposed a new best interest standard that requires brokers to act in the best interest of their clients, but the rule lacks clarity.
What is the Best Interest Standard?
Recently, a new “best interest standard” proposed by the SEC is creating confusion about broker-dealer rules related to an investor's best interest. The rule addresses the question of whether changes should be made to one of the standards of conduct that may apply to broker-dealers who make recommendations about securities to investors and retail clients. Due to the relationships between brokers and investors, the potential for conflicts of interest is high. Unethical brokers who seek to maximize personal profits sometimes sell products that are not in the client's best interest.
Since broker-dealers provide recommendations and advice on investments, they are subject to certain FINRA rules and regulations under the Exchange Act. While FINRA rules and regulations are extensive, there is no specific obligation under the Exchange Act that broker-dealers must make recommendations that are in their clients' best interest. The new SEC “best interest standard” seeks to make enhancements to current regulations and better clarify the “best interest obligation” for all broker-dealers. Of course, there are other standards of conduct under state statutory laws or common law that may apply in many circumstances.
FINRA is primarily responsible for holding broker-dealers to the appropriate standard of care and enforcing the securities laws and regulations. When violations occur, FINRA can issue steep fines and suspensions against firms and individuals and bar brokers from practicing within the securities industry.
Whatever the standard, brokers have a duty to recommend investment products and trading strategies that are suitable for their clients. When they recommend unsuitable investments, brokers and their firms can be held liable for damages. Those who have lost money from risky investments may have a cause of action against the broker who recommended that investment. Investors may be able to recover some or all of their financial losses.
If you lost money because of your broker’s actions, our investment fraud lawyers at Meyer Wilson may be able to help you fight for the compensation you deserve. We have worked with thousands of clients since we first opened our doors in 1999, and through our efforts have secured more than $350 million in verdicts and settlements. Fill out our online form today to schedule a free case evaluation, or call us at (800) 738-1960 to speak with a member of our firm over the phone.
Did Your Broker Engage in Unsuitable Options Trading on Your Behalf?
Although options can add flexibility to a client's portfolio, clients are often enticed into unsuitable options trading with high risks, speculative returns, and big losses.
Understanding the Basics of Options Trading
An option is a type of security that constitutes a binding contract with specific terms. Options allow buyers the right to buy or sell underlying assets at a certain price by a specific predetermined date. There are two types of options in options trading, call options and put options. The right to buy is called a call option, and the right to sell is called a put option. One option contract controls 100 shares of stock, but clients can buy or sell as many contracts as they want.
Call options give the owner the right to buy a specific number of shares of an underlying stock at a previously determined price. The client must pay the seller a fee, and the option must be purchased by a certain date or it expires. Call options provide opportunities to profit from price gains in the underlying stock at a fraction of the cost of owning the stock.
Put options give the owner the right to sell a specific number of shares of an underlying stock at a specific price on or before a certain date. Put options act like an insurance policy because they allow the client to profit on stocks that fall in value. Put options will offset the losses on the stock by allowing the owner more time to sell safely.
Options involve risks and are not suitable for every investor. Using the wrong strategy in options trading can lead to disastrous results. Taking unnecessary risks can result in big investment losses. Stockbrokers have a duty to make suitable recommendations for investments based on certain factors:
- The client's age
- The client's financial status
- The client's short-term and long-term objectives
- The client's investment knowledge
- The client's ability to tolerate risks and losses
If a client loses money in unsuitable options trading, the broker and brokerage firm may be held liable for broker misconduct. An appropriate investment for one person can be a very inappropriate investment for another. To protect investors, the broker must carefully consider an investor’s personal circumstances before recommending investments and options trading. If your broker bought unsuitable put or call options on your behalf and you lost money, contact a securities litigation attorney with Meyer Wilson at 888-390-6491.
FINRA Proposing a Wider Net to Capture Churning Brokers
On April 20, the Financial Industry Regulatory Authority (FINRA) proposed a new rule that expands the liability of churning practices. The new rule states that a broker does not have to be in control of a client's account to be found liable for losses caused from churning. Under current FINRA rules, a broker can only be found liable for churning if he/she has discretion. The current law requires brokers who control client’s accounts to have a reasonable belief that the transactions they recommend are not unsuitable or excessive for their client.
FINRA's new proposed rule is intended to protect investors from unscrupulous brokers who use excessive trading as a way to increase their own profits. FINRA is concerned that a client has little protection against unethical churning tactics since the client relies on the broker's guidance for buying and selling investments. In such cases, clients routinely accept their broker's advice when making investment decisions, and they do not recognize that churning is going on. FINRA states that broker control of a client's account places an unnecessary burden on clients when trying to prove broker churning. Although the new FINRA rule will provide more protection for investors, FINRA will still have to prove that transactions were excessive and unsuitable for the investor.
The Securities and Exchange Commission (SEC) and FINRA have been investigating and targeting churning practices used by brokers for years. Both traditional churning, excessive trading, and reverse-churning, where brokers put buy-and-hold clients into advisory accounts that charge asset-based fees, cost unsuspecting investors millions of dollars in losses each year. Although no single test defines excessive trading activity, there are red flags that include:
- Annual turnover rates greater than six
- Cost-to-equity ratio greater than 20 percent
- In-and-out trading patterns in a short period of time
- Excessive account fees
- Significant tax liabilities associated with investments
If the SEC approves FINRA's new rule, it could expand liabilities and violations for churning beyond brokers who control a client's account. If churning tactics are proven, even brokers who don't have account control can receive violations and penalties. If you have been a victim of broker misconduct, contact the investment fraud attorneys at Meyer Wilson at 888-390-6491 for a free consultation today.
Merrill Lynch, Pierce, Fenner & Smith Inc. Fined $42 Million for Misleading Customers
The Securities and Exchange Commission (SEC) recently announced that Merrill Lynch has agreed to pay $42 million for misleading its customers and its handling of trading orders.
The SEC stated that the wealth management firm told customers that it had performed millions internal orders, when it actually routed them to other broker-dealers for execution, including wholesale market makers and proprietary trading firms.
This is a practice commonly referred to as masking. According to the SEC, Merrill Lynch needed to reprogram its systems to provide misleading responses to customer inquiries, alter reports and records, and falsely report execution venues in order to pull this off.
While Merrill Lynch stopped this practice in May 2013, it failed to inform its customers about its past actions. Instead, it continued to hide its previous misconduct. The SEC’s investigation discovered that the company falsely told its customers that it performed over 15 million child orders comprising comprised more than five billion shares than the company actually completed.
These actions allowed Merrill Lynch to appear far more active as a trading center than it actually was, which in turn reduced the cost of access fees it paid to exchanges at that time.
If you lost money because of your financial adviser’s actions, you may be able to file a lawsuit to secure the compensation you deserve. At Meyer Wilson, our investment fraud lawyers have nearly two decades of experienced handling these types of cases, and will put that knowledge to use fighting for your rights in court or at the negotiation table. Call us at (800) 738-1960 to speak with a member of our firm today, or fill out our online form to schedule a free consultation.
Merrill Lynch, Pierce, Fenner & Smith Inc. To Pay $15.7 Million in Penalties and to Clients
The Securities and Exchange Commission (SEC) recently announced that it ordered Merrill Lynch, Pierce, Fenner & Smith Inc. more than $15 million over charges that its employees mislead customers into overpaying for their Residential Mortgage Backed Securities (RMBS).
According to the SEC, Merrill Lynch agreed to pay $5.2 million in penalties and will repay customers an estimated $10.5 million. The salespeople and traders reportedly deceived customers into overpaying for RMBS by telling them that the company paid more to acquire the securities than it actually did. In addition to that, the SEC also found that the salespeople and traders illegally profited from undisclosed and excessive commissions, also referred to as mark-ups, which as much as doubled the cost for customers in some cases. In the order, the SEC also states that Merrill Lynch did not have the necessary compliance and surveillance procedures in place to detect and prevent this type of misconduct from occurring.
“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “The Commission found that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”
If you were the victim of stockbroker misconduct, you may be able to take your case to court to secure the compensation you deserve. Contact our securities fraud attorneys at Meyer Wilson today to discuss your case by calling us at (800) 738-1960, or by filling out our online form to schedule a free case consultation.