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If a broker manages a client account, are they able to swindle money out of a client's account if they short sell stocks in that account?

My mother had a friend who handled her Schwab account. He short sold IBM stock and instead of it going down, it went up like crazy and he never took her out of it. It cost my mother a lot of money that she had to pay back to Schwab.

Does this sound like she got swindled and the broker was making money off her or did the broker just have no clue what he was doing?

This happened in the early 90's and the broker is dead by now. Any info would be something I could tell my mother.

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    "and the broker is dead by now" Good job dealing with "the broker situation"! – void_ptr Aug 15 at 19:57
  • Short selling IBM in the early 90s was a good way to end up with exactly what she got. – Carey Gregory Aug 15 at 19:57
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    This is the worst-case scenario to give consent to any third party to short the stock. – mootmoot Aug 16 at 12:09
  • This has nothing to do with the broker. The friend that was managing your mom's account made a bad trade, couldn't minimize the damage (or just didn't care because it's not his money) and is now trying to blame the broker. Brokers are very tightly regulated in what they're allowed to do, your mom's friend isn't. – Money Ann Sep 3 at 16:26
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Your mother was not swindled. She was just the recipient of bad advice and bad money management. The broker made money from the commission or from an annual money management fee. He made nothing from the actual trade.

Out of curiosity, was your mother informed about this potential trade and she gave assent to go short? As a managed account, did the broker have full trading discretion? Or did she have no idea whatsoever about this at all? If no idea, she might have had an arbitration case at the time, with potential reimbursement.

  • The broker was actually a friend of the family and yes he had full discretion of the account.My mother was not made aware of what he was doing at the time. She didn't realized what was going on until schwab asked for money. – John Aug 15 at 19:44
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    With friends like that, who needs enemies? A long, long time ago before the internet, my first broker was the husband of a friend of mine. I gave him discretionary trading authority. He churned my account to generate commissions and I had no clue what that was. While the losses paled in comparison to what your mother experienced, when I caught on it made me realize that you can't trust people with unsupervised discretion with your money and I proceeded to learn how to DIY. I was not unhappy when his firm went under (Bear Stearns). – Bob Baerker Aug 15 at 19:57
  • In fact, unscrupulous brokers can make money from rapid trade commission kickback. – mootmoot Aug 16 at 12:08
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    What is "rapid trade commission kickback"? And how is that different from a broker receiving a commission for doing a client trade or churning an account to generate multiple commissions? – Bob Baerker Aug 16 at 12:11
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    In the US, brokers can be salaried (no commission cut) or running their own book. If the latter, their fee can be an annual account management fee or based on commission per trade. For commission per trade brokers at fool service firms, they tend to have a tiered level of sharing. IOW, they receive a basic drawer and the more commissions they generate for the firm annually, the higher the percent of those commissions that the broker receives (breakpoints). – Bob Baerker Aug 16 at 12:43
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You can do little about it but you should write down the lessons and pass it down to the family. Those will be more valuable to the family than mourning over the spilled milk.

  • Books written by Daniel Kahneman (Thinking, Fast and slow) and Richard Thaler (Misbahving) have mentioned Illusion of Validity of the fund manager and investment adviser.
  • Never ever play short unless you know what you are doing, i.e. always have enough fund to cover your ass when shit hits the fan than leverage it.
  • Never allow any "investment adviser" to short your investment
  • High-cost active-managed fund doesn't guarantee the manager will be well-behaving. Most active-managed funds are prone to retrocession. So one must be careful on any investment adviser/agent suggesting an affiliated investment product.
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    Selling short is a powerful tool that is useful in a correction or bear market. The Average Joe investor should utterly avoid it but when used under the supervision of an experience adult, it can be very profitable. – Bob Baerker Aug 16 at 12:37
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    @BobBaerker Even for an experienced adult, short-selling is like playing Russian-roulette. – mootmoot Aug 16 at 12:42
  • Spoken like someone who has no experience with short-selling. Are you a young pup who has never experienced a bear market like 2000 or 2008 when the market dropped about 50% or did you just ride your portfolio down to the bottom? AFAIC, taking that ride is financial malfeasance. I'll take the Russian Roulette because with that, I have my finger on the trigger and I control the result. Markets don't melt up. – Bob Baerker Aug 16 at 12:49
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    @BobBaerker Kudos if you make money during the crisis. But it doesn't apply to people that give consent to hedge funds that play the Russian-roulette. – mootmoot Aug 16 at 13:18
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    You seem intent on taking this convo off on unrelated tangents: broker kickbacks, Swiss market retrocession, Russian Roulette, hedge funds ... – Bob Baerker Aug 16 at 14:01

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