Stock fraud: A beginner's guide to knowing your rights

Investors - especially small investors - have lost millions upon millions of dollars due to stock fraud. The scandals of recent years are still fresh in the minds of anyone with even a small stake in the stock market. While we're all familiar with the scandals of Enron, most of us don't know the fine print. If you've got money in the stock market, now is the time to learn your rights.

Companies that trade their stocks have legal responsibilities to those who buy their stock. Stock brokers also have legal obligations to the people they sell their stocks to. If either a company or a broker has committed any of the following against you, you may be able to get some of your investment back:

Misrepresentation
If a company or broker lies to you about their earnings, or suggests something they know is not true, they may be liable for your losses, and may face huge penalties.

The Big GAAP
Companies are required to follow "Generally Accepted Accounting Principles" if they wish to trade on the stock market. These rules help keep companies accountable to their shareholders. When those responsible break these rules, they face the possibility of prison.

A lie of omission...
is still a lie. Companies and brokers are required by law to tell you everything and anything that may sway your decision to buy a stock. If bad information came out after you bought a stock, you may be entitled to make a claim.

Insider trading
This is the one that sent Martha Stewart to prison and is a great example of insider trading. Simply put, Martha Stewart got information before the general public. That information allowed her to sell her stock before the price plummeted. Martha made a tidy profit, while the average stock holder lost out.

Brokers' special responsibilities to their clients
Under the law, brokers have special responsibilities to their clients. If your broker has done any of the following, you may be able to get some of your money back:

• Unsuitability: The broker recommends stocks that aren't right for you. For example, you tell the broker you only want very low-risk stocks and he or she sells you something they know has a very high risk.

• Churning: The broker does a number of unnecessary transactions, just to charge you more transaction fees, which can be very costly. To catch this one, keep a close eye on your broker's statements to you. If you have any questions, an honest broker will be happy to explain all the charges in detail.

• Overconcentration: The broker puts too much of your investment into a certain industry or sector.

Some of these forms of stock fraud can be difficult to fully understand and much, much harder to prove. There are lawyers that specialize in stock and securities fraud, so if you think any of the above may apply to you, it's time to seek help.