Stockbroker Arbitration: Always Do Your Research

Sarasota, FLAlthough arbitration may be the best route to take if a stockbroker treats an investor unethically, there is no guarantee that an investor will recover lost money. Investors should always do their homework, researching brokers and brokerage firms before making investment decisions.

In one instance of illegal stockbroker activity, a stockbroker in Florida pleaded guilty to defrauding seniors into giving their money to an organization called All School Kids. The stockbroker lied to investors about where their money was and forged documents claiming that their stocks were performing well.

The seniors thought their money was being invested in stocks when in fact it was being used to fund a nonprofit group. Investors say they became suspicious when they received a letter from the director of All School Kids, who is also on trial for money laundering, thanking them for their donation. One couple was awarded $1.2 million last October for their problems with All School Kids.

Meanwhile, The Dallas Morning News reported on March 25 that the United States Securities and Exchange Commission (SEC) is investigating a possible "pump-and-dump" scam (a person pumps up a stock price and then sells, or dumps, his shares when the price is high, which drops the price of the stocks) that had investors buying into a roofing business, a cancer-treating nose spray, and a video series. The article says that shares of the companies soared on the penny stock market until sell-offs by some investors resulted in the stocks dropping. The SEC is now investigating the matter to determine whether or not investors were actually victims of stock scams. Over 100 companies are being investigated.

Two lawsuits have been filed claiming that people profited by manipulating the stock in companies that are part of the investigation. The SEC investigation resulted in a penalty levied against a stock promoter from Oklahoma. He was accused of sending out 87 million faxes in order to manipulate the stock price of a number of companies. The SEC found that while the man sent out faxes urging investors to buy shares in the companies, he was actively selling his shares. Furthermore, the SEC claimed that the faxes falsified information to make the stocks appear more valuable than they actually were.

According to the article, email spam and online stock trading make small investors vulnerable to scams. The article also quoted research from Purdue University and Oxford University that showed that electronically pumped stocks tend to have significant initial returns but then collapse, resulting in big losses.

The SEC website warns consumers to be wary of spam emails and faxes regarding a company's stock because there they may be part of a fraudulent investment scheme. Companies touted through faxes and emails may have very little information about them available to the public, making it very difficult to research the company.

Trying to make the world of investing a little less complicated to navigate, the National Association of Securities Dealers (NASD) has made it easier for customers to find a potential stockbroker's employment and disciplinary history. The program, which is an improved version of BrokerCheck, has information on investigations and disciplinary actions taken by regulators, specific criminal charges or convictions, customer complaints, and financial disclosures including bankruptcies and unpaid judgments.

Although this information was available before it had to be delivered via email or regular mail, which could take more than a day. It was also difficult to understand, so the reports have been rewritten to be more user-friendly. Brokers' records can be checked at www.nasd.com.

It is very important to properly research a securities broker or firm before doing any business with them. If you invest with an unlicensed broker or firm that then goes out of business you may not be able to recover your lost money, even if an arbitrator finds in your favor.