This hapless investor sent the following e-mail in to Buck Investor: Need advice. I got screwed by (name withheld). I recently opened a cash account with (name withheld). I bought 100 shares of WAMX at 16, and then told the broker to sell at $20 GTC. Then the broker called me to get me to buy two other securities, CXTE and EWEB. He advised they were great buys and I should buy. "Hold for the long term," he said.
I told him I was "sort of interested" but did not actually order the buy. I wanted to look into these securities more. I then received a confirmation of the buys in the mail, CXTE and EWEB. Both of these at $50 commissions, 100 shares each. I told him I didn't order the buys and didn't want the securities. He said not to worry because if I didn't send the money the orders would be canceled in 3 days. I then had to got out of town and didn't send the money knowing the orders would cancel.
I then got a confirmation he sold the WAMX at $14.50 to buy the EWEB without my authorization, at a $100 sell commission. Then he sold the EWEB, at a $50 commission, to buy the CXTE, at a $50 commission, all without my authorization. I then complained to which he said he did nothing wrong and to get whatever I had left in my account out because he didn't want me there any more. I feel I was robbed, not to mention a good sucker for this broker. I never signed any authorization for any sale nor signed any application form or any other document advising me of the procedures involved. Can anyone give me some advice?
What happened to JLC has happened countless times to retail stock investors. His broker engaged in a practice known as "churning," or a rapid turnover of positions in order to generate commissions for himself and the firm. Many securities disputes result over this practice.
When an investor establishes an account with a branch of a retail brokerage firm, the "registered rep," as they're usually called, assigned to him, will require him to fill out an application form. The applicant should carefully examine this form before signing it. Don't hesitate to ask questions about terms or words which aren't fully understood.
An applicant should be on the lookout for any paragraphs on this form which grant his broker the option of making his account discretionary. This can be dangerous. It means the broker can make buy and sell transactions without consulting the customer first.
The account form will also contain an arbitration clause. This means the customer consents to handle all disputes by the arbitration process, not a trial court. A securities arbitration panel, which consists of three members from the brokerage industry, will determine whether the customer's complaint is valid. In most cases, since the panel consists of members from the industry, the chances of a favorable outcome are limited.
In JLC's case, even though he told his broker he wasn't ready to invest in the stocks recommended to him, the broker went ahead and made the buys. The way the broker can avoid a possible dispute is by telling the order clerk the buys were "solicited," which means the customer agreed to the recommendation. The confirmation slip the customer receives in the mail will say whether a transaction was solicited or "unsolicited," which means the customer ordered the broker to make a transaction without first consulting him.
After JLC received his confirmations in the mail, his broker told him the settlement would take three days. In other words, he had to make good on those trades by the third day after their execution. Since he told the broker he didn't authorize those trades, the broker who had already executed them would have been responsible for making them good.
Instead, this unscrupulous broker sold JLC's original position in WAMX stock in order to come up with the funds to make good on the trades in CXTE and EWEB. To make matters worse, he charged JLC a commission for trades he didn't authorize. The commission costs totaled $250 for the broker.
An infuriated JLC confronted this broker, who told him to take his business elsewhere. Why did the broker do this? The most likely reason is the broker didn't want his customer to complain to the branch manager, who possibly could have taken action to resolve JLC's problem by refunding him all his money. The branch manager also could have disciplined this broker, and even fired him.
It's advisable for all account holders to record the time and date of any telephone calls or personal meetings they have with retail stock brokers. They should also take a few notes in case the recommendations made to them don't coincide with their particular investment objectives. These objectives are specified beforehand on the original account application form.
In addition, it's also necessary that one act quickly when a dispute arises. Otherwise, the chances of a favorable resolution diminishes over time.
For information concerning how to make complaints involving unauthorized trades or improper recommendations made by retail brokers, there are online sites available from the Securities and Exchange Commission. The web address is: www.sec.gov.