Misappropriation occurs when an account executive trades stocks or uses funds in an account without the clients' consent or knowledge. Sometimes, the losses were within the means of the broker firm and the clients are fully compensated. In other cases, the results are not as fortunate.
What leads to misappropriation?
Dishonest account executives often take advantage of the inadequate internal control of the broker firm's administrative and settlement procedures to commit fraudulent activities. Lack of supervision over employees and compliance culture are also fuses to these frauds.
On the other hand, investors' lack of awareness and over reliance on their account executives are also key factors leading to misappropriation. For instance, some investors issue blank cheques to settle transactions, or, they just deposit money directly into the bank accounts of their account executives. Others "lend" their accounts to the account executives to make personal trades without considering the risks and consequences. Besides, transaction documents are not checked, so it is often too late when investors realise discrepancies in their accounts.
What are the common tactics used by dishonest account executives?
- Trading on clients' account without the clients' consent or knowledge.
- Withholding clients' settlement slips, contract notes or statements.
- Altering information on clients' transaction documents.
- Producing forged statements to cover up their wrongdoing.
- Inducing clients to issue blank cheques and depositing money directly into their accounts.
- Using clients' monies to settle their own accounts or other outstanding balances.
How can investors protect themselves?
Always be vigilant and closely monitor your investments. Here are some tips:
- Do not give discretionary authority to your account executives without seriously considering whether this arrangement is necessary or suitable for you. Once discretionary authority is granted, your account executive has the authority to act on his initiative without seeking your instructions.
- Even if a discretionary account is desired, sign a formal account opening document and make a written authorization to properly limit authority of the account executive.
- Never allow your account executive to trade his transactions on your account. This will expose you to unnecessary risks.
- Make sure you receive contract notes and statements timely. Broker firms must issue contract notes by the second trading day after a stock transaction has been executed, and provide clients with a regular statement of account which should be at least monthly.
- Verify the information in your transaction documents. If they contain hand-written amendments or any other discrepancies, clarify with the compliance department or management of the broker firm immediately.
- Do not let contract notes and statements to be delivered by your account executive to you. This will create opportunities for interception of these documents and subsequent changes by dishonest persons. Do not agree to hold mail arrangements unless that is absolutely necessary.
- Arrange to receive proper, company-headed hard copies of transaction documents directly from the broker firm. Fax copies can easily be forged.
- Never issue blank cheques to anybody or deposit money directly into the bank account of your account executives. Contact your broker firm if money due is not received, or cheques paid to you are not issued by the firm.
Report to the compliance department or the dealing director of the broker firm if your account executive behaves improperly or suspiciously. If the senior management of the firm cannot give you a reasonable explanation, then alert the SFC at (852) 2231 1222 (Press 3 after language selection).
Unauthorised trades could be part of a scheme to misappropriation. For more information on unauthorised trades and tips to protect yourself, read the next article - "Unauthorised Trades".