Glossary of Stock Fraud Terms

Reno, NV Attorney serving Nevada & California

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Affinity Fraud

Affinity frauds target members of identifiable groups, such as the elderly, or religious or ethnic communities. The fraudsters involved in affinity scams often are members of the group. These scams frequently involve "Ponzi" or pyramid schemes.

Churning

A broker excessively trades an account for the purpose of increasing his or her commissions, rather than to further the customer's investment goals and such conduct constitutes fraud. 

Derivatives

Financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security or index. For example, a stock option is a derivative because its value changes in relation to the price movement of the underlying stock.

Discretionary account

An account empowering a broker or adviser to buy and sell without the client's prior knowledge and consent.

Diversification

Diversification is a strategy that can be neatly summed up as "Don't put all your eggs in one basket." The strategy involves spreading your money among various investments in the hope that if one loses money, the others will make up for those losses.

Excessive Trading 

A broker excessively trades an account for the purpose of increasing his or her commissions, rather than to further the customer's investment goals.

Financial Planner

An investment professional who typically prepares financial plans for clients. The services financial planners offer can vary widely. Some financial planners assess every aspect of a client's financial life and help the client develop a detailed strategy or financial plan. Others may only be able to recommend investments in a narrow range of products that may or may not include securities.

FINRA

The Financial Industry Regulatory Authority, a self-regulatory organization for the brokerage industry. FINRA  is the largest non-governmental regulator for all securities firms doing business with the United States public—more than 5,000 firms employing more than 660,000 registered representatives. FINRA was created in 2007 through the consolidation of NASD and NYSE Member Regulation.

FOCUS 

Financial and Operational Combined Uniform Single Report
(The FOCUS Report is also called Form X-17A-5) 

Form U-4

A uniform application for security industry registration or transfer. 

Form U-5  

A uniform termination notice for security industry registration. 

Initial Public Offering (IPO)

An initial public offering occurs when a company first sells its shares to the public. Companies making an IPO are seeking outside equity capital and a public market for their stock. (See syndicate, underwriter)

Investment Adviser

A person or entity that is paid to give advice on investing in stocks, bonds, or mutual funds. Some investment advisers also manage portfolios of securities, including mutual funds.

Liquidity (or Marketability)

A measure of the relative ease and speed with which a security can be bought or sold in a secondary market.

Margin Account

In a margin account, your brokerage firm can lend you money to buy securities, with the securities in your portfolio serving as collateral for the loan. As with any other loan, you will incur interest costs when you buy securities on margin. There are risks from purchasing securities on margin that do not come with most other types of loans. For example, if the value of your securities declines significantly, you may be subject to a "margin call."

Mediation

An informal, voluntary process used in securities industry disputes in which a mediator helps negotiate a mutually-acceptable resolution between disputing parties. Unlike arbitration or litigation, mediation does not impose a solution. If the parties cannot negotiate an acceptable settlement, they may still arbitrate or litigate their dispute

Misrepresentation

A false representation of material fact that should have been disclosed, which deceives another so that he/she acts upon it to his/her injury. 

Mortgage-Backed Securities (MBS)

Mortgage-backed securities, or MBS, are bonds or notes backed by a pool of mortgages on residential or commercial properties. As the mortgage borrowers pay the principal and interest on their loans, the investors in MBS receive payments of interest and principal.

NASAA

North American Securities Administrators Association, Inc.  is an association of securities commissioners from each of the 50 states, the District of Columbia, Puerto Rico, and several of the Canadian provinces

NASD

NASD, originally known as the National Association of Securities Dealers, was established in 1939 under the Securities and Exchange Act of 1934. Until 2007, when it consolidated with NYSE Member Regulation to create FINRA, the Securities Industry Regulatory Authority, NASD was the largest self-regulatory organization for the U.S. securities industry, and the world’s leading private-sector provider of financial regulatory services.

Ponzi Schemes

An investment fraud that pays existing investors with funds collected from new investors until the scheme collapses.

Pump and Dump

"Pump and dump" schemes have two parts. In the first, promoters try to boost the price of a stock, typically in a microcap company, with false or misleading statements about the company. Once the stock price has been pumped up, the promoters seek to profit by selling their own holdings of the stock, dumping shares into the market, which typically causes the stock price to collapse.

Pyramid Schemes

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants. The hallmark of these schemes is the promise of sky-high returns in a short period of time.

Registered Representative

The employee of a FINRA firm who gives advice on which securities to buy and sell, and who collects a percentage of the commission income he or she generates.

Risk

In finance, risk refers to the degree of uncertainty about the rate of return on an asset and the potential harm that could arise when financial returns are not what the investor expected.

Risk Tolerance

An investor's ability and willingness to lose some or all of an investment in exchange for greater potential returns.

Section 1035

This part of the U.S. tax code allows you to exchange an existing variable annuity contract for a new annuity contract without paying tax on the income and investment gains in your current account. But you may have to pay surrender charges on your old annuity if you are still within the surrender period.

Suitability

A suitability violation occurs when an investment made by a broker is inconsistent with the investor's objectives, and the broker knows or should know the investment is inappropriate.

Time Horizon

Your time horizon is the number of months, years, or decades you need to invest to achieve your financial goal.

Unauthorized Trading

The purchase, sale or trade of securities in an investor's account without the investor's prior authorization. 

Unit Investment Trust (UIT)

A type of investment company that typically makes a one-time "public offering" of only a specific, fixed number of units. A UIT will terminate and dissolve on a date established when the UIT is created, which may be more than 50 years in the future.

Variable Annuity

A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date.

Volatility

The degree of price fluctuation for a given asset, rate, or index. Usually expressed as a variance of standard deviation.