Stock Manipulation and Other Conflicts of Interest

CourtroomStock manipulation attorneys at Mark Anchor Albert and Associates provide high level and experienced representation to individuals and entities in stock manipulation and conflict of interest cases.

A broker, broker/dealer, financial institution, or market maker may face serious liability charges if they attempt or act to artificially change the price of a stock or other security or a market movement with the intent to make an illicit profit. Examples include a so-called “wash selling,” in which an investor both sells then quickly re-buys the same security, hoping to create the impression of increased trading volume, and therefore raise the price. Another is churning, in which an investor makes both buy and sell orders through different brokers to create the impression of increased interest in the security and raise the price. Stock brokers also may be held liable for churning, when they buy and sells stocks or other securities or investment vehicles for a client, not primarily in order to further the client’s investment objectives, but rather for the primary purpose of securing sales and trading commissions.

A “bear raid” manipulation occurs when an investor, broker/dealer, or other market participant uses option contracts to short sell a stock in a coordinated fashion, often in collusion with other short sellers. Big trades often are executed through Wall Street market makers who, in many cases, buy and sell using their own inventories of stock for their own account. The market makers quote a price based on their assessment of the market conditions at the time of the offer and proposed sale. Market makers who receive a buy or sell order from a speculator may assume the speculator has some insight about the firm; otherwise the speculator would do nothing. Speculators who coordinate short sales in order to drive down the price of a company’s publicly-traded shares actually reduce the market’s efficiency, enhancing the prospects for share prices to fall and make the short sale profitable. Short selling can cross the line into prohibited conduct when it is done in a coordinated fashion in order to drive down a company’s stock by creating fear or panic in the market for such stock as a form of stock price manipulation.

Manipulation can be utilized to both decrease and increase prices, depending on the investor's perceived needs. It is illegal under the Securities Exchange Act of 1934.

Investment advisers are required by the SEC to provide their clients with written disclosure about material conflicts of interest. This is because investment advisers are fiduciaries regarding investment advisory services provided to their clients. Disclosure of conflicts of interest is implicitly required of fiduciaries.

Recently, the Financial Industry Regulatory Authority (FINRA) has indicated its proposal that broker-dealer member firms of FINRA, in addition to registered investment advisors, disclose in writing to their non-institutional customers conflicts of interest prior to providing broker-dealer services to their customers. Broker-dealers under this proposal would be required to disclose in writing to their retail customers various items of information, including the types of accounts and services available, the fees associated with such account and service, whether fees are fixed or negotiable, commissions and other incentives the broker-dealers or its representatives have for recommending certain products or services, any other conflicts the broker-dealer has with its customers, and how the broker-dealer intends to resolve those conflicts. In addition, the written disclosure would have to detail any limitations or restrictions on the duties the broker-dealer owes its customers. This new disclosure requirement, if adopted, my impose additional risks of liability on broker-dealers relating to conflicts of interest and non-disclosure of conflict risk factors material to a customer’s decision-making process.