The CPA’s Guide To Spotting Bad Stockbrokers


It is often the case that a potential client contacts a lawyer complaining about their stockbroker after they have been filing tax returns each year writing off massive losses that have been accumulating over the years.

The potential clients often say the same thing: “I wish I caught it earlier!”  If they had caught it earlier, they may have fired their broker and perhaps avoided some of the losses in their account.  Often times, the client’s CPA has been annually preparing their taxes but never noticed or reported any potential stockbroker misconduct.  Imagine if a CPA were able to identify stockbroker misconduct during the process of preparing a client’s taxes or other accounting.  The CPA’s clients would be grateful and even more satisfied with the CPA’s services.  It would also strengthen the CPA’s clients’ loyalty to them and create more client referrals.

The purpose of this guide is to give you the basic tools CPAs need to spot stockbroker misconduct.  There are four common types of FINRA arbitration claims customers bring against stockbrokers:

 Breach of the Suitability Rule:  The suitability rule simply says that a stockbroker must know his/her client and only recommend individual investments or investment strategies that are consistent with the customer’s investment objectives and risk tolerance.  CPAs likely have some idea of their client’s investment goals and objectives based upon their age, employment status and discussions with them.  For example, if you have an elderly retired client who has experienced significant investment losses from investing in stocks – that is a red flag.

Churning:  When a stockbroker engages in a high volume of trading (usually in stocks) and charges a commission for each transaction, the customer may be the victim of churning.  Typically if the total purchases for a given year divided by the average monthly account balance is between 4 and 6 times (a.k.a. the turnover ratio) – that is another red flag.  This can result in thousands of dollars in commissions being charged each month or year.

Unauthorized Trading:  There are typically two types of brokerage accounts – discretionary and nondiscretionary.  In discretionary accounts, the customer gives the stockbroker the power to buy and sell securities in their account without the client’s consent for each trade.   Nondiscretionary accounts require the stockbroker to obtain their customer’s permission before any buy or sell transaction.  If a customer has a nondiscretionary account and their stockbroker buys and sells without permission – that is unauthorized trading and is actionable conduct.  If a CPA’s client tells them that their stockbroker bought or sold an investment without permission  – that is a red flag for unauthorized trading.

Fraud:  If your client has significant investment losses and when they invested the stockbroker lied to them about something important, they likely have a claim for fraud.  Fraud claims usually arise out of false statements about the risk of the investment, the liquidity of the investment, or the investment return.  Sometimes, it can be an outright ponzi scheme.

For questions regarding the content of this guide, please contact attorney Vincent D. Slavens, at (619) 232-0331 or