Things to Watch For

High Pressure Sales: Some disreputable brokerage firms will push what is called a "house stock". A "house stock" is essentially a stock that the firm wants people to buy in order to artificially increase its value. Once the price of the stock is high the disreputable broker will tell "preferred" customers to sell, while letting the other customers who are not in the "loop" suffer the resulting collapse. These “house stocks” are often penny stocks with low revenues and low earnings and are usually not carried by any exchange except the NASDAQ over-the-counter (OTC) market. Often they are pushed with “boiler room” tactics and billed as “can’t loose” stocks. Inexperienced investors are particularly susceptible to the “hard sell”. Pushy sales tactics are not alone a crime, however, if a stock broker has deliberately withheld or misrepresented the material facts in the recommendation or sale of a stock there is a good chance he is in violation of trade laws.

Touting: "Boiler room" firms generally lure clients in by initially making very safe and obvious recommendations. In the first series of calls they will recommend small investments in reputable established companies with a steady and rising stock value. Once they've established the clients trust they will typically refer the client to a "senior account executive" who has "more experience and expertise". In reality the "senior account executive" is simply a seasoned, high pressure sales person who will attempt to sell the client on "house stocks". From that point forward, the firm will only recommend "house stocks". This illegal technique is called touting.

Hot Tips: A broker may not recommend a stock unless he has some legitimate basis to believe that it is in fact a good investment. It is illegal for the broker to withhold critical information from the client. If a broker recommends a stock to a client based on insider's trading information it is possible that this also could be considered fraud, whether or not the "hot tip" is real or false. In either case the broker would be in volition of insider's trading rules. Investors who feel that their broker has violated insider's trading rules should contact a securities lawyer as soon as possible to avoid being implicated and to learn their legal rights.

Pump and Dump: Another type of stock fraud seen frequently in the last few years is a technique called "pump and dump". It works as follows: a fraudulent company floods the internet with misinformation via spam mail and message boards promoting the small company. If the fraud works it will cause a surge in the price and volume of the stock allowing the defrauders to sell their shares at a profit. Meanwhile the investor, who was misled by illegal misinformation, stays in and gets hammered. The defrauder will literally have "pumped" up the stock and "dumped" it.

Late Trading:  When investors illegally buy or sell shares after the 4 p.m. ET close but get the 4 p.m. price. If big news breaks after the close of trading, late traders are virtually assured of a quick profit or of avoiding a loss. Late trading is akin to betting on a horse after the race is completed.

Market Timing: When investors make frequent trades, typically in international funds, to exploit "stale" prices due to time differences. It is legal but might violate fund rules. It can give market timers a profit at the expense of long-term shareholders.

Breakpoints:  Breakpoints are discounts given to investors who make large purchases in mutual funds with front-end fees. For example, American Express Financial Advisors has six levels of breakpoints, ranging from a 5.75 percent fee on an investment of less than $50,000 in stock funds to zero on investments of $1 million or more. If breakpoints exist, the fund must disclose them. In addition, a brokerage firm that is a member of the NASD should not sell you shares of a fund in an amount that is "just below" the fund's sales load breakpoint simply to earn a higher commission.

Class B Sales Abuses: Mutual funds and brokerage firms receive compensation for the sale of mutual funds in the form of a commission or an administrative fee. The majority of Mutual funds are purchased as either a class "A" share or a class "B" share. The commission for class "A" are paid when the purchase is made and with class "A", one receives breakpoints.. The brokerage firm also receives its commission up front with Class "B" mutual funds, however the client pays a back ended surrender fee if the client sells the mutual fund with in five or six years instead of a front ended commission and also does not receive breakpoints. Class "B" funds charge a higher yearly administrative fee. If a client is making a large dollar mutual fund purchase in the same family of funds, then a Class A is more appropriate and if the brokerage firm has solicited a Class B purchase, there may be sales abuse issues.

If your broker has made unauthorized trades without your approval, you should consider seeking legal help as soon as possible. Contact us at 1.800.862.1260
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