Illegal High-Pressure Sales Tactics Brokers Use

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Illegal High-Pressure Sales Tactics Brokers Use

Films like as Wolf of Wall Street, Wall Street, and Boiler Room illustrate the extremities of dodgy brokers’ dishonest, if not plain criminal, sales methods. However, many brokers, both within and outside of boiler rooms, continue to use similar strategies to market questionable or improper securities to unknowing consumers.

The legality of such sales swindling is up to interpretation and may differ among states depending on their securities regulations. In many circumstances, these strategies may violate Securities and Exchange Commission rules 10b5-1 and 10b5-2, which prohibit the use of manipulative and deceptive methods in the sale of securities. The regulations prohibit using any deceptive method, plan, or artifice to deceive; making any false statement of a material fact or omitting a material fact; or participating in deceptive conduct.

Here are a few questionable sales practices employed by brokers that may be prohibited under federal or state laws, or at the very least result in FINRA penalties.

Key Takeaways

  • Being an aggressive broker may help you get business, but you must be aware of when certain sales practices cross the line and become illegal.
  • FINRA regulates brokers and financial advisers to prevent consumers from being misled or cheated.
  • Violations include omitting key details about an investment, exaggerating performance data, misrepresenting to customers, and making unrealistic promises.

Pushing to Buy Blindly

Many traditional boiler room enterprises rely on long-distance cold-calling to generate sales, with brokers attempting to sell in a single phone call. Brokers often fail to give prospective clients with adequate information to make an informed investment choice. These omissions are particularly deceptive when stocks of minor firms with little or no operational experience are sold without mentioning their lack of income or activities.

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The failure to disclose significant information while selling securities is an obvious violation of Rule 10b-5.

Inflating Past Performance

Brokers may make false statements about their track record in order to acquire a prospective client’s trust in their investment ability. For example, a broker may claim to have just sold equities for triple-digit profits in a few of weeks when, in fact, they have not sold the shares in issue. These track records may be difficult to objectively evaluate, making the deception even more poisonous when closing consumers over the phone.

When selling securities, making an incorrect statement of a substantial fact is also a violation of Rule 10b-5.

Ignoring Client Sustainability

Brokers must have a “reasonable basis to think that a proposed transaction or investment plan is beneficial for a client,” according to FINRA Rule 2111. Of course, brokers who cold-call new prospective customers and promote one-size-fits-all securities haven’t done any due research on the consumer or examined the investment’s appropriateness for the customer. For example, a micro-cap stock traded over the phone lacks a solid foundation.

Although ignorance of appropriateness may not violate a particular provision of Rule 10b-5, it may violate FINRA guidelines and may result in sanctions for the broker.

Using Manipulative Talk

Brokers may use a range of different deceptive sales strategies in order to persuade someone to purchase a securities. For example, in the film Wolf of Wall Street, a sales script played down a potential client’s desire to speak with a spouse before buying by stating, “I’m sure you didn’t get to where you are now by talking with your wife on daily matters.” That deceives a buyer by appealing to their ego.

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These manipulative sales strategies may violate the manipulative practices section of Rule 10b-5.

Making Outrageous Promises

Brokers may market an investment as a guarantee or assurance when there is none, especially with hazardous assets. For example, a broker may depict a merger rumor as a foregone conclusion verified by “insider knowledge,” which may result in “multi-bagger” profits for a prospective customer in the following weeks. Of course, if a merger had been made public or even strongly rumored, the stock would be trading substantially higher.

These assurances may be in violation of Rule 10b-5’s standards on deceptive conduct.

The Bottom Line

The movies focus on severe examples, yet there are smooth-talking boiler room operators out there. Individual investors may avoid losing money to these unscrupulous characters — or any financial expert who has only their own best interests at heart — by being aware of their deceptive techniques and high-pressure gimmicks.

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