of suitability that you can imagine? It would be as follows: “Those
trades were not your broker’s idea; they were your idea.” This brings
us to the last trick or defense we must make you aware of: manipulating
the determination of whose idea the investment was. After a
broker gets her customer to agree to a certain investment, be it a
buy or a sell, the broker fills out information about that trade on
what is called an order ticket. You never see order tickets, as they
are internal brokerage documents and nowadays are often memorialized
on computers. You see something similar to them several days
after your trade when you receive a confirmation of the trade. However,
one piece of information that should be on every order ticket
and every confirmation is whose idea the trade was: the broker’s or
the customer’s. In securities vernacular, the terms solicited and unsolicited
refer to whose idea the trade was.
It’s easy to remember these terms if you always think of them
from the stockbroker’s perspective, solicited by the broker versus
unsolicited by the broker. Brokers are required to designate if a trade
is unsolicited at the time of an order ticket’s entry. If a trade is solicited,
sometimes no marking is required. Therefore, if your confir-
mation shows it was neither solicited nor unsolicited, it is presumed
to be a solicited trade (except with some online brokerage firms).
What you need to watch out for is the word Unsolicited on your
confirmation. That word should be a red flag to you only if that investment
idea was your broker’s, not yours. One major wire house
does a good job of spelling out the difference between a solicited
and an unsolicited trade:
Whenever an account executive recommends a transaction
to a customer and the customer follows that suggestion,
the resulting order is considered to be solicited,
provided that the time that has elapsed between the suggestion
and the actual order is not unreasonable and
there has been no material change in the recommended
security. . . . An order resulting from the mailing of any
research report or written communication concerning a
specific security is also considered solicited.
Tracy and Douglas together are working on a case wherein the
broker misled their client on what a solicited order was. Our client
maintains that the broker told him that unsolicited meant “not enticed
by a prospectus.” Our client sustained a loss of $10 million in
options trading that the broker says was completely our client’s
idea. Our client says it was all the broker’s idea. Somebody is lying.
When a broker marks an order ticket or a series of order tickets
on losing trades as unsolicited, he may say such things as, “I told
the customer not to trade so much, but she insisted” and “I would
never have recommended that stock to the customer.” A broker’s
claim that the trade was the client’s idea and not the broker’s also
helps defend against fraud claims and unauthorized trading claims.
We have heard it in hundreds of hearings, read it in hundreds of answers
to claims, and seen it written in numerous investigations. The
problem is it’s your word against your broker’s, and with mismarked
order tickets/confirmations, the scale is tipped slightly in favor of
the brokerage industry.
Don’t let that deter you, though. Arizona, as well as some other
states, specifically prohibits “[e]ngaging in a pattern of marking order
tickets as unsolicited when the dealer or salesman directly or indirectly
recommended the transaction or introduced the customer to
the security.”3 Some firms make the existence of a series of trades
marked unsolicited a red flag. Think about it: why would someone
who wants to make his own investment decisions sign on with a
full-service, full-commission brokerage?
Many investors have no appreciation of the difference between
solicited and unsolicited. It’s certainly not something that brokerage
firms advise their customers about when they open an account.
It’s surprising to hear the number of definitions given by brokers
and experts of just what constitutes a solicited versus an unsolicited
trade. Even most compliance manuals are devoid of explanations of
the difference. The securities industry can only look inward for
blame.
Fortunately, there exist other facts that may tip the scales toward
the wronged investor. One investor complained that his account
had been wiped out because the broker recommended that he
put all of his money in one stock. The brokerage firm and the broker
responded with the defense that this particular trade had been
unsolicited by the broker. Obviously, someone was lying. Douglas,
who worked as the expert for the investor on the case, demanded
the complete commission run for the broker. A broker’s commission
run shows all of the trades the broker makes in all of the broker’s
clients’ accounts. The brokerage firm fought hard to avoid producing
the document. Finally the fax came. Low and behold, it showed
that almost every one of the broker’s clients had this same supposedly
unsolicited stock in their accounts. Will the broker dare testify
that, coincidentally, all of his other clients called in and wanted to
buy that same stock that day? Hardly. The brokerage firm called and
offered to settle at the same time it was faxing the document.
The sad moral of these stories is that brokerage firms will go to
great lengths to attempt to cover up or hide the fraud and unsuitable
recommendations of their stockbrokers. The firms’ potential
benefit is a double whammy. First, they may not have to pay out any
money to settle a customer’s claim, and second, they ensure the perpetuation
of a broker very skilled at bringing in those coveted commissions
and margin interest.
If this whole issue of solicited versus unsolicited is new to you,
then it’s time to do a little financial housekeeping. Flip through all
of your confirmations to see if you find the word “Unsolicited” on
any transactions. Make sure that the word appears only on trades
that, in fact, were your idea and not brought to you by the broker.
If you find any mismarked trades, you should take action, even if
you have closed that account and no longer do business with the
broker. In that case, write a letter to the brokerage firm management,
even if the broker has since left, advising it of the specific trades
that were mismarked and telling them what your review has disclosed.
It will send a message that the firm’s supervisors were not
doing their job. Also, copy the letter to the firm where the broker
is now employed to alert it that it had better watch the broker’s
marking of order tickets. State in the letter that you just read this
book and received an education, which is what prompted you to go
back and look at your confirmations. If many individuals across the
country took these steps, it would go a long way toward preventing
the misconduct of stockbrokers for future investors. You might be
one of them.
If you discover mismarked confirmations in your current account,
you can pursue several courses of action. You can call and ask
your broker why the trade was marked unsolicited when it was his
idea. If your broker says, “Oh, that was a mistake,” then say, “Fine,
please send me a revised confirmation or a letter confirming that
the trade was mismarked.” Tell your broker to make sure that the
firm management approves the letter. This is important because
otherwise you may have a broker who is trying to hide his mistakes
and misdeeds from management. Again, a supervisor must approve
any correspondence from your broker to you. If your broker tries to
give you a different explanation of unsolicited, confirm it in writing—
either ask him to write a letter or, better yet, write the letter
to your broker yourself: “Dear Ms. Smith . . . This will confirm that
on [today’s date] you told me that the reason XYZ Corporation was
marked unsolicited was because unsolicited meant that I had previously
heard of the company.” Or whatever other crazy definition
you might have been given. That letter should spark an immediate
investigation into the broker’s conduct and your account. This is a
good thing for you.
At some point during this analysis, you may have to make
some judgment calls about whether your broker and her firm are
working in your best interest. It may be based on the way your broker
responds to your questions about why trades are mismarked or it
may be based on the number of trades that are mismarked. If, based
on your review of the confirmations, you are alarmed at how many
of the trades have been mismarked, then in addition to documenting
the problem and sending a letter to the firm, you need to get a
new broker (see Chapter 13). You also need to switch brokers if the
firm doesn’t acknowledge that the trades were mismarked or if you
are otherwise dissatisfied with the firm’s response to the problem.
If you find that a significant percentage of the trades are marked
unsolicited when they should not be, you probably have a real problem.
If you don’t have any significant losses in your account, write
the same letter, and after you get the response, move your account
and get a new stockbroker and a new firm. If you have significant
losses, immediately consult a securities arbitration attorney before
writing to the firm.
Source: Brokerage Fraud: What Wall Street Doesn't Want You to Know
