Market timing is the attempt of a broker to predict the fluctuations and direction of the stock market. This is typically attempted by using in depth analysis of trend data and economic information. Some mutual fund stock brokers will then use this data and work to move mutual fund assets around to profit from the various fluctuations. Market time is risky, and some believe that its impossible while active traders believe in it and use market timing for much of their activity.
In November of 2003, the Securities and Exchange Commission announced a civil investment fraud lawsuit being filed against five specific brokers who were employed by Prudential Securities. The brokers were Martin J. Druffner, Justin F. Ficken, Skifter Ajro, John S. Peffer, and Marc J. Bilotti. The investment fraud lawsuit is related to their activities relating to market timing trades. It is alleged that between 2001 and 2003, five former stock brokers misrepresented themselves and their clients while engaging in these trades. They misrepresented themselves because the mutual funds themselves had blocked the brokers and the clients from further trading so rather than ceasing in their activity, they chose to act illegally. Their manager fully supported their activities and is also included in the investment fraud complaint.
Apparently, the mutual fund companies had noticed the market timing trading behaviors of these brokers and had blocked trade as a result to restrict them from continuing in the activity. According to the lawsuit, the brokers not only lied about their own identities by using various broker identification numbers but they also created additional brokerage accounts under client names so they could effectively misrepresent their investors as well.
This is fraud at its most basic level because not only did these brokers misrepresent themselves and their clients, they clearly did it so they could continue to engage in a behavior that was prohibited. The SEC claims that the brokers violated “…Section 17(a) of the Securities Act of 1933 and violated or aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.”
The SEC wants to ensure that these brokers can no longer commit fraud, that they return any money or profit they received as a result of the fraud, penalties for breaking the law and violating SEC acts and any additional punishments considered appropriate by the courts. Essentially, these brokers need to pay for their violation of the trust between not only them and their clients, but also in relation to their professional misconduct relating to the mutual fund companies.
Brokers must be held accountable to their “fiduciary duty” to their clients and to their profession. Their duty includes ensuring the best interests of their clients through appropriate investment management. It includes communicating effectively with clients in relation to their investment portfolio and to any activities relating to it. It also includes safe-guarding their client’s investments and clearly communicating the benefits and risks associated with any investment the broker or the client may be considering. Failing to meet this fiduciary duty, especially if they knowingly and deliberately misrepresent themselves is illegal. If you have been a victim of investment fraud, you should contact an investment fraud attorney who can represent your rights.