Conversion/Theft of Funds
Theft by conversion occurs when a person converts the lawfully obtained personal property or funds of another into funds for that person’s own use without permission. In the broker/investor relationship, conversion occurs when a broker uses his/her client’s funds or investments for the broker’s own personal use or in any other unauthorized manner. Conversion is a form of embezzlement that can result in legal action against the broker for misconduct. Brokerage firms are also on the hook in conversion cases for failure to supervise the broker’s conduct and the customer's account. A broker’s conversion of funds may result in civil liability, criminal sanctions, disciplinary actions, and more. An investor harmed by conversion may recover loss of their assets and other applicable damages.
While it may seem impossible that a broker or advisor can and would steal, convert, or misappropriate your funds, it is quite common. Sometimes a seemingly trustworthy financial advisor will “borrow” or simply move the client’s money or investments to the broker’s account or another unauthorized account. Other times, the broker or advisor will engage in a rather complex set of investments and transactions to conceal the underlying theft or conversion. A broker may even engage in conversion by creating a fictitious promissory note created on the behalf of non-existent company, or by recommending various private investments that are directly or indirectly controlled by the broker, or from which the broker stands to benefit. Similarly, investors often are talked into investing in schemes which ultimately turn out to be a Ponzi Scheme, where new investor money is distributed to prior investors who are told the distributions are profits or investment returns. While PONZI Schemes can be complex they are often just another form of conversion.
Likely targets for conversion include unsophisticated investors, the elderly, and even Catholic nuns. The avenue the broker uses to convert his/her client’s funds does not matter. Conversion is illegal and brokers are prohibited from borrowing money from an investor for any reason.
For current investments, the best protection is to routinely monitor your investments through your monthly or quarterly statements. It is imperative that you know precisely what investments you have and how much money you have in each of them. Further, you should never accept a monthly statement that appears “basic,” and that does not include detailed information about your investments, and is sent by the true custodian of your investments. Also be wary of a monthly statement that appears to be generated from a home computer. Do not take your broker’s word for the amount of your investments; rather rely on the accurate reporting of an independent third party. If your broker cannot produce reliable information concerning your investments, inquire as to why that is the case. If you need to, speak to your broker’s supervisor, or, consult an attorney.
For new or future investments, the best protection is to do your research – especially if you receive unsolicited investment opportunities. Do not take your broker’s word that a potential investment is an incredible opportunity that will make you rich. Research any information you can find concerning the investment, including a company’s annual reports and financial statements. Be sure to research your broker to ensure he/she is licensed and does not have a disciplinary history. Be cautious of investment opportunities offering unusually high returns. Finally, you can confer with another advisor or an attorney about any investment opportunities.
Some of the cases we have seen involving conversion and theft of funds:
- Forged withdrawal forms or letters of authorization (~$2 Million)
- Forged Annuities purchases
- Excessive Advisory fees deducted from brokerage account (~$2 Million)
- PONZI Scheme involving a commodities pool (~ $80 Million)
- Private investments controlled by the broker, ultimately supporting broker's lifestyle
- Unauthorized trading
- Borrowing from Customer (Prohibited by FINRA rules)
- Serving as Executor on Customer Will, or Trustee of Customer Trust, and subsequent theft
- Complex transfers between customer accounts
- Third party transfers to other accounts, often controlled by the broker
- Cybertheft of customer login credentials, followed by unauthorized Electronic Funds Transfers to unknown account
Simply stated, a broker or advisor is prohibited from borrowing, using, misappropriating, converting, or stealing your money or investments under any circumstances. If you suspect that you are being misled about the true nature of your investments, including the amount of any investment or the current value of any investment, investigate the underlying facts and circumstances. Additionally, if you have any questions about the movement of any money or investments between accounts, inquire, investigate, and verify.
If you believe your broker converted your investment funds, please contact us. The Forman Law Firm, P. C. will use its expertise in securities fraud to investigate your situation and to determine the whereabouts of your money and/or investments.