How Does The SEC Describe Stockbroker Fraud?
In the USA, the SEC has laid down guidelines to define what is and what is not stockbroker fraud. These rules also offer guidelines for investment advisers to follow that ensure investment advice is being given fairly and consistently and stockbrokers are not engaging in securities fraud.
Investment advisors and stockbrokers are responsible for providing information that is accurate and complete to investors. Stockbroker fraud occurs when an advisor, stockbroker, or brokerage firm offers inaccurate, incomplete, or biased information in an effort to control a market.
There are several types of these crimes and they include:
Biased investment advice: brokers or brokerages may have a bias for or against investments for reasons that are not disclosed
Unfounded advice: advice may be provided based on unqualified or unfounded opinions of the broker made without the benefit of due diligence
Contradictory investment advice: a stockbroker may be giving contradictory advice to different clients
Continuing a risk: stockbrokers may not advise clients to hold securities based on speculation when the risk is apparent and the potential for gains is unlikely
Conflict of interest: brokerage firms that have outside ties to a business may not sell that stock
A recent reading of
The Wolf Of Wall Street
by Jordan Belfort, suggests that much of this legislation has been written over relatively recent years. Much of the finer detail - it appears - was to actually combat him and the actions of his firm.
In his book, Belfort describes how he and his staff agressively sold stock to the public in new IPOs to the NASDAQ in which they held undisclosed interests! He describes the silent third-parties through which he held his interests as 'ratholes'.
Much of the book describes the working environment at his brokerage as a little like a zoo - where only the lions get to survive! The film
shows quite graphically just what this environment was like for the brokers and how they treated clients - which is ultimately their profession and responsibility.
He also goes on to describe other issues such as trying to hide deals profits and money from regulators by using accounts located in Switzerland, using transfer pricing techniques to repatriate his funds tax free and the life of mass excess that huge (ultimately illegal) profits can produce. This lifestyle included drugs, supercars, travel by private jet, prostitutes and eventually rehab and prison.
Needless to say, it is an eye opening read for anyone wondering what might be possible for a stochbroker to 'get away with'. The majority of his actions were illegal - or are now - but it still took many years for the FBI to finally gather enough evidence to shut down his operations - something that he had largely done himself by then anyway!
Other related pages on this site include:
A Question To Ask A Stockbroker
How To Choose A Stockbroker
Best Online Stock Brokers
How Much Should You Be Paying In Stock Market Fees?
For information about the different types of service offered by stockbrokers, please see:
Execution Only Stockbroker
Advisory Management Stockbroker
Discretionary Management Stockbroker
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