In fact, when people think of the worst cases of fraud, they think of stockbrokers or financial advisors who cheat senior citizens out of their life savings. The victims may be senior citizens, but they are still adults who have willingly entered into investment transactions.
In what may be described as one of the worst cases of unscrupulous financial advising, a stockbroker in New York has been censured and permanently barred by the New York Stock Exchange (NYSE) for churning accounts. What is horrifying about the incident is not just that he churned the accounts, but that he did so to the custodial accounts of seven children between the ages of 10 and 18. The children were all injured at birth or in childhood and had received medical malpractice settlements. In most cases, the children were cared for by a single parent who spoke very little English and had little or no investing experience.
Account churning occurs when a broker excessively trades an investor's account in order to generate additional commissions. In this case, the broker used the accounts aggressively buy and sell bonds in order to generate large commissions.
In just a few years the broker made $537,153 in commission from the children's accounts while their portfolios decreased in value. According to the North County Times, one of the children's portfolios dropped in value from $850,000 to $634,397, while the broker made $66,000 commission on 30 purchases and sales of Treasury securities. The child's parent, who is reportedly able to speak only a little English, did not authorize the broker to engage in any transactions.
According to a report at Newsday, the court orders for the children's portfolios required that fees and commissions be kept to the lowest possible rates and that there would be no management fees for the accounts, requirements that the broker consistently violated.
The broker, who was based in Morgan Stanley Dean Witter's office, worked with another broker in the same office to churn the accounts. The second broker's registered representative number was used in some of the transactions so that he or she would gain entry into the brokerage firm's exclusive club.
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Meanwhile, an Idaho stockbroker has until August to pay back his victims over $170,000 or he will face jail time. The broker is accused of "selling away" which occurs when a licensed broker does business with clients without the approval of the broker's firm. Doing so means that there is no record of transaction which also means there is no way to track the money involved. Selling away is also known as misappropriation.
Selling away, churning, and misappropriation are all fraudulent activities that can result in investors losing money. However, if money is lost due to fraud, investors may be able to recover losses through stockbroker arbitration, either through the National Association of Securities Dealers or the New York Stock Exchange.