Derivative: A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps. For example, futures contracts are derivatives of the physical contract and options on futures are derivatives of futures contracts

Broker Misconduct: A brokerage firm or broker can be held liable if that firm or broker misrepresents material facts or omits to disclose material facts to the investor regarding an investment, and that client subsequently loses money on that investment. Often the misrepresentations or omissions disguise the risk associated with a particular investment. A broker has a duty to fairly disclose all of the risks associated with an investment.

UNSUITABILITY: In making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer's risk tolerance, needs and investment objectives. A broker has a duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a customer does not have the financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor's financial needs or if the customer did not know or understand risks associated with certain investments. A broker has a duty to gather essential information in order to understand the risk tolerance of an investor, the tax considerations for the client, the client's prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client's circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker may be liable to that client.

The issue is not whether a broker picked the right stock, anyone can make a mistake, but whether the broker pick the right type of investment. Example: bonds and lower risk stocks for a retirement account rather than high risk stocks only.

A broker must also have a "reasonable basis for the recomendation". The broker's basis for the recommendation can be the firm's research, in which case the firm must have a reasonable basis for its own recommendation.

OVERCONCENTRATION: One of the most important rules of investing is diversification. If a broker concentrates your portfolio in any individual investment or type of investment, then the risk of losses with that portfolio is dramatically increased. Its the old adage that it is unwise to place all of your "investment" eggs in one basket. A broker who does not diversify his client's portfolio is potentially liable if that investment declines in value

Churning: Churning occurs when a broker engages in excessive trading in an account. A broker churns an account in an attempt to generate commissions. Many times he will sell the winners to show a small profit, and keep the losers. To establish that your broker has churned your account, we will demonstrate that the pattern of trading activity in your account was excessive. This can be done in a number of ways including calculations to determine the annualized rate of return that would be necessary to cover the commissions charged in your account; the number of times the equity in your account is turned over to purchase securities; and the purchase and sale trading activity that occurs in your account.

When brokers buy and sell securities in an account to generate commissions, they usually convince their clients of reasons the clients should quick profits. While these reasons seem valid, these are often simply excuses for the broker to charge excess comissions. In such cases it is often possibile to demonstrate the account was actually being churned.

Failure to Execute Trades: There is little incentive for a broker not to place an order. However, millions of transactions occur each day and mistakes are made, including failures to place orders. As well, although technology has reduced the possibility, orders do get lost. Investment clients can take action for such negligence by the broker or firm. At times, a broker does not want to place an order that the client desires. The client may wish to sell a stock but broker is opposed. The issue is whether, at the end of the conversation, the client believes the transaction will take place. If the broker talks the client out of the transaction then it is difficult for the client to seek damages.

If the broker or firm refuses to place an order the client may have a valid complaint. If the order is an "opening" order - a purchase order or short sale - the broker or firm can refuse to take the order (except under certain circumstances). However, if the order is a "closing" order - liquidating a position or covering a short position - the broker or firm should not refuse the order.

Of course, the failure to place the order must result in damages. Example: The broker does not sell and the price drops. In any event, execution failures should be addressed as soon as possible in order to recover losses.

Failure to Supervise: Each brokerage firm must "design and implement written procedures" in order to properly and effectively supervise the activities of each of its brokers and other employees. When a broker engages in negligence or wrongdoing that causes damages to a client the supervisor is also subject to liability for allowing the act(s) to occur.

Every brokerage firm must supervise every broker licensed by that firm. Even brokers who are "independent contractors", including those who operate out of their Homes must be supervised.

Every broker must complete training and pass an exam administered by the National Association of Securities Dealers (NASD) and, as well, pass a multi-state exam to sell securities in the state(s) where his clients are located. In addition to these licenses, supervisors of brokers must train to pass an even more difficult examination in to be licensed by the NASD as a supervisor.

Firms and supervisors often claim they can not be liable for a failure to supervise unless the broker is found liable for wrongful acts. However, it is quite possible for a supervisor or firm to be liable to the client for damages without the broker being liable. For example, if the broker was improperly trained, given false information by the firm, not properly licensed, et cetera, the firm may be liable to the client for damages even if the broker is not.