YES VIRGINIA, THERE IS A SANTA CLAUS
December 21, 2001
WIt’s time for a Stock Patrol holiday tradition – the Santa Claus story. In the spirit of the season, we think this cautionary tale bears repeating, year after year.
In the midst of the booming 1990’s a Florida broker was kidnapped from his firm’s annual Christmas party by someone dressed in a Santa Claus costume. Several days later he was found by authorities, alive but naked, and tied to a chair in the garage of one of his customers. And just a little bit shaken up. You see, during his ordeal the broker had been tortured each day with an electric cattle prod. His offense? It seems that the customer didn’t care for the way the broker had handled his account. The investor filed a complaint with the broker’s employer, but when the brokerage firm failed to act, the client decided to take matters into his own hands. That’s when he rented the Santa suit.
As you might expect, that customer was arrested. We don’t know what happened to his brokerage account, but we suspect that he would have been better off skipping the costume rental and using his money to file a claim for arbitration with the NASD.
Which doesn’t mean the Santa story isn’t instructive. Investors should be vigilant in protecting the integrity of their brokerage accounts. If a broker appears to have acted improperly, the customer should act quickly to alert the brokerage firm’s Compliance Department, and, where appropriate, contact regulators and file for arbitration.
Of course, before any of this can occur the customer must be aware of the improper activity. When should investors be concerned about a broker’s conduct? Here are a few warning signs to keep in mind:
1. The broker buys or sells stock without your permission. Unless you have given the broker discretion to buy and sell without consulting you, no stocks can be bought or sold for your account unless you have placed an order.
2. Your account statements (or confirmations) contain transactions you do not recognize. If you receive confirmations for unauthorized trades in your account contact the broker immediately. If the broker does not cancel the trade, or if the problem occurs more than once, go directly to the firm’s Compliance Department. Do not be deterred by a broker who apologizes for the “error” but, at the same time tells you that it is too late to cancel the transaction. If you did not place the order you have the right to demand that it be cancelled.
3. Your broker refuses to sell a stock or aggressively tries to discourage you when you try to place a sale order. Be firm. A broker may well try to discourage you from selling a security because he or she honestly believes in the future prospects of the company. On the other hand, some firms instruct their brokers to discourage any sales of so-called “house stocks.” A “house stock” is generally a company that the brokerage firm has taken public or is promoting heavily. The firm, and its customers, may hold substantial positions in such “house stocks.” Brokers seeking to discourage shares of house stocks may attempt to embarrass, bully or intimidate their clients into holding their positions. They may even agree to sell the shares and then fail to process the order. In any case, if you want to sell, ignore these tactics and insist that the firm place your order.
4. Your account has experienced an unusual amount of activity and you are paying commissions but not seeing any profits. It is possible that the broker is “churning” you account. Churning occurs when the broker engages in an excessive number of trades for the purpose of generating commissions.
5. A broker implores you to buy a stock after telling you he has “inside” information that is not yet known to the public. This one is simple. Investors are not permitted to buy or sell stock based upon material information that is not available to the general public.
6. Your broker tells you that he or she cannot sell you the stock you want to buy unless you also buy shares of another company his firm is recommending. This is a technique sometimes used by unscrupulous brokers to push shares of “house stocks.” If shares of a public company are actively traded you should be able to purchase them without any such preconditions. If your broker declines to follow your instructions, find another broker.
7. Your broker “guarantees” that an investment will be profitable. A broker is not permitted to guarantee profits. Be particularly wary if the broker tells you that a company is about to make a “blockbuster” announcement that will send its stock soaring. Recommending an investment is one thing. Promising “pie in the sky” is quite another.
8. You are told that you must make an investment decision immediately. Stick to a time frame with which you’re comfortable. After all, it’s your money.
What do you do if you are faced with one or more of these “red flags” (or other broker conduct that you believe is improper or suspicious)? Start by talking to the brokerage firm’s Compliance Department – but don’t stop there unless you are completely satisfied that the situation will be remedied to your satisfaction and will not happen again. Don’t be put off by letters telling you that the firm is “looking into the situation.” If your concerns are not addressed immediately, report any improper conduct to the securities regulators in your state and to the NASD. StockPatrol.com provides the addresses and contacts for each of those agencies (SEE, REGULATORS ON PATROL – CONTACT THE REGULATORS). And you should also remember that you have the right to file for arbitration before the NASD if you believe you have suffered losses as a result of broker misconduct.
One more thing – beware of unauthorized Santas carrying cattle prods!
Happy Holidays.
©2001 Stock Patrol.com. All rights reserved.
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