Types Of SEC Whistleblower Cases:  Misappropriation Or Theft Of Customer Funds Or Customer Securities

The misappropriation or theft of customer funds or customer securities may not be reported as widely in the general media as other types of SEC cases.  Nonetheless, these types of frauds are considered just as serious as other types of corporate and securities frauds, and are often pursued aggressively by the federal government when reported as SEC whistleblower cases.  If potential SEC whistleblowers believe that they have information about a person, financial advisor, or securities firm that is stealing money or stocks from customers’ accounts, they can report it to the SEC through the SEC whistleblower program.

What Constitutes Theft Of Customer Funds Or Securities?

theft of customer fundsBoth FINRA and the SEC have voluminous rules regarding how financial professionals and corporations must act in order to safeguard and protect the handling of customers’ financial accounts.  When a financial advisor or securities firm controls the assets (securities or cash funds) of a customer, they must comply with specific custody rules.

The SEC interprets “custody” as an investment advisor or financial services firm having possession of customer funds or securities, directly or indirectly, or holding the authority or ability to gain possession of the assets.

Generally, investment advisors and securities firms must have processes in place to make sure that a customer’s assets are kept separate from other accounts and are not used in any capacity other than for the benefit of the customer.

There are, however, some cases where a customer’s account is fully controlled by the advisor or firm, and the customer’s assets are not physically separated from other customers’ assets.  In these cases, proper books, records, and reserves must be kept that accurately protect the client’s assets and show what the client’s personal holdings are.

Removal of cash from a customer’s investment or brokerage account for any unauthorized purpose is considered theft of customer funds.  Removal of stocks or other securities from a customer’s investment or brokerage account for any unauthorized purpose is considered theft of customer securities.  Both are securities frauds.

What Constitutes Misappropriation Of Customer Funds Or Securities?

Even if the funds or securities are not physically removed from the customer’s account, they still cannot be used for anything other than purposes authorized by the customer, and for the benefit of that customer.  Rather than theft, this unauthorized use is often referred to as “misappropriation”, and it is a securities fraud.

For example, if, without prior authorization, a securities firm withdraws or loans securities from a customer’s account in order to cover a short position of another client, it is a misappropriation of securities.  Even if the firm or investment advisor only intended to remove or allocate the securities for a short period of time and then to return it, and even if it had no permanent effect on the customer’s account, it is still a violation of the securities laws and is a fraud.

There is no minimum dollar amount or number of violations that must occur for the Commission to initiate an SEC whistleblower case based on a misappropriation or theft of customer funds or customer securities.  SEC whistleblower cases can be brought for as little as one misappropriation or theft in a customer’s account.

Additional Information

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