Select a topic below:
( Green: Current Location)

• Introduction
• Background
• Fraud by Conduct
   • Churning
   • Switching
   • Twisting
   • Other
• Fraudulent Acts   and Practices
• Suitability
• Unregistered
  Securities
• Conclusion

Fraudulent Acts and Practices

Overlapping fraud by conduct are fraudulent acts and practices that are more closely related to false and misleading statements. Such acts and practices that might be apparent when reviewing your accounts include the following:

1. The frauds by conduct listed just above;

2. Inconsistent recommendations and recommendations without a reasonable basis. One of the must fundamental duties of a broker/dealer and its representatives is to know their products, their customers, and to make recommendations to their clients based upon current product and customer information, which is to be documented in the firms due diligence files; further

   1. This duty is currently a “hot spot” in the securities industry. In many brokerage firms, analysts compose recommendation lists to be used by managers and the sales force. The recommendation lists typically set out those stocks that the firm’s registered representatives may recommend their clients purchase, hold or sell, assuming all other suitability requirements are met;

   2. Recent news stories indicate that certain firm’s analysts did not have a reasonable basis for their recommendation that customers purchase and/or hold the securities of companies in which the firms were making a market and/or the firms had underwritten. Statements in the articles indicate the analysts were making contrary in-house recommendations support the concern that the analysts’ recommendations were not made in the best interest of the clients;

   3. Those customers who purchased and/or held the securities based upon the firm’s salesmen recommendations, which were in turn based upon such an analysts’ report, may have a claim for any damages experienced as a result of following such recommendations;

   4. A more common fraud of this nature is the recommendation that one customer sell a stock while recommending a similarly situated customer purchase the same stock, often leading to cross trading;

3. Guarantees against losses;

4. Failing or refusing to promptly execute sales orders;

5. Representing that a market in the security will be established (common in private placements);

6. Representing that the security will be subject to an increase in value;

7. Claims that the salesperson has inside, private, or other material information that would impact the value of the security;

8. Charging excess commissions and/or markups/downs (the NASD guideline is a maximum of 5% commission or markup/down, assuming no special circumstances; if the transactions involve a sale to provide funds for a related purchase, the maximum includes both sides of the transaction);

9. Recommending a margin trading account without disclosing the rate of return required to pay the costs of margin and commissions and the risks necessary to achieve those rates of return compared to other investment strategies;

10. Making recommendations to purchase beyond the customer’s capability to meet the financial commitment (this may occur in connection with the excessive use of margin when a customer cannot meet margin calls, in connection with option purchases, and other futures transactions);

11. Failure to deliver a prospectus at or prior to the purchase of a security in any initial offering including mutual funds, variable annuities and variable life insurance;

12. Contradicting or negating the importance of any information contained in a prospectus;

13. Highlighting any provision in a prospectus;

14. "Boiler room" tactics, such as stating that the customer must purchase immediately and the failure to provide written documentation of claims, upon request, of claims made;

15. Failing to disclose the broker/dealers bid and ask price of a particular security at the time of the solicitation;

16. Recording a solicited transaction as unsolicited on the trade ticket and/or confirmation;

17. False and misleading statements in connection with the recommendation to purchase or sell a security, which include but are not limited to the following:

    1. Unfounded claims that a mutual fund or insurance company is in trouble to induce a redemption and a new purchase;

    2. The failure to disclose the risks and economic reality of investing in margin accounts;

    3. The failure to disclose the risks of purchasing and selling options;

    4. The failure to disclose the risks of concentrating ones investment in a limited number of lightly traded stocks;

    5. False claims concerning the company’s products, assets; sales, earnings, financial condition or future prospects; and

    6. Claims of private non-public information concerning the companies at issue; and

18. Allowing a customer to invest inappropriately.

Next topic: Suitability