What are some illegal sales techniques
Movies like Wolf of Wall Street, Wall Street, and Boiler Room show the extremes of high pressure selling tactics by Wall Street brokers in boiler rooms, but the reality is that many unscrupulous brokers use these types of tactics to sell bad stocks to unsuspecting buyers.
The legality of such sales disputes is a matter of interpretation and may vary between states depending on their securities laws. In many cases, these tactics may violate Rule 10b-5 of the Securities and Exchange Commission, which includes the use of manipulative and fraudulent practices in the sale of securities. The rules forbid using any device, scheme, or device to cheat; make false statements about material facts or omit an essential fact; or fraudulent behavior.
Here are a handful of bad selling tactics used by brokers that may be illegal under federal or state laws, or at least instant FINRA violations. (For related reading, see: U.S. Forex Broker Regulations.)
Pushing to Buy Blindly
Many classic boiler room operations focus on long distance calls to make sales difficult to sell in a single call. Brokers often fail to provide the potential customer with sufficient information to enable them to make an investment decision. These omissions are particularly fraudulent when selling obscure securities with limited or no operational history without disclosing the lack of sales or operations.
The omission of material facts when selling securities is a clear violation of rule 10b-5.
Inflating past performance
Brokers can make misleading claims about their previous track record in order to gain a potential client's confidence in their investment skills. For example, a broker may say that he or she recently sold stocks for triple-digit gains in just a few weeks when in reality they didn't sell the stocks in question. This track record can be objectively difficult to verify, which makes the lies especially insidious when trying to shut down customers over the phone.
The false statement of a fact in the sale of securities also violates rule 10b-5. (For related reading see: 8 Ethical Guidelines for Brokers.)
Ignoring the sustainability of the customer
According to FINRA Rule 2111, brokers must have “a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer.” Of course, brokers who call new potential customers have a one-size-fits-all security system set up, failed to perform due diligence on the client, or failed to consider the suitability of the investment for the client; for example, a microcapsule sold in a cold call lacks a reasonable basis.
Ignorance of suitability must not violate any part of rule 10b-5, but it does violate FINRA rules and may result in penalties for the broker.
Using manipulative speaking
Brokers can use various manipulative selling techniques to convince someone to buy a security. For example, the Wolf of Wall Street highlighted a case where a sales script addresses a customer's desire to ask their spouse, prior to making a purchase, "I'm sure you are not where you are today by being with your wife advise on everyday decisions. "This manipulates a customer by playing to his ego.
These manipulative selling techniques may violate the manipulative practices clause of Rule 10b-5.
Make unheard-of promises
Brokers can place an investment as a guarantee or assurance when in reality it is not, especially with risky securities. For example, a broker may portray a merger rumor as a security backed up with "inside information", which could result in "multi-dredger" returns for the potential client in the coming weeks. Trade much higher when a merger is published or even suspected.
These promises could violate the guidelines of rule 10b-5 on fraudulent conduct.
The bottom line
Many films dramatize the extremes of High Pressure Selling Tactics Used in Boiler Rooms, but in fact, many unscrupulous brokers still use these types of selling strategies on a regular basis to sell bad securities to unsuspecting buyers. By knowing these common tactics, individual investors can avoid losing money to fraudulent brokers. For related reading see: Psychopaths in the trading room. )
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