Preferred Stock Fraud Attorneys


You may have been sold preferred stock as a safer alternative than common stock, which can provide you with a larger income stream. There may be more to the investment than meets the eye that the broker may not have shared with you.

When you have been the victim of preferred stock fraud, you can take legal action against the broker through the FINRA arbitration process. Schedule a free consultation with the investment fraud attorneys at Rikard & Protopapas to learn what you may be able to do to hold your broker accountable for your losses.

Preferred Stock Can Be More Complex Than You Think

Many investors do not completely understand preferred stock. They hear the word “stock” without fully knowing the characteristics of these investments. Preferred stock does not have many similarities to common stock.

A preferred stock is more like a bond in many respects. There will be a fixed rate of dividend payment. The dividend is usually much higher than what is paid for common stock.

In turn, the preferred stock has much less volatility than common stock. Preferred stockholders are paid dividends before the owners of common stock. In addition, they would stand ahead of common stockholders in bankruptcy proceedings. If there are any assets left for shareholders, preferred stock comes first.

On the flipside, preferred shareholders do not have any right to vote on their shares of stock.

Common stock owners can vote on issues like directors and shareholder ballot initiatives.

Preferred stock can be called back by the issuer, meaning the company can buy back the preferred stock at a premium to the current share price.

Usually, preferred stock is held by more sophisticated investors. It is less liquid than most shares of common stock, and the average investor may not know much about the features of preferred stock. Nevertheless, their broker may have recommended preferred stock as a way to maximize their dividend income with slightly less risk than owning common stock.

The Four Types of Preferred Stock

There are four main types of preferred stocks that investors can purchase:

  • Cumulative preferred stock requires the company to make sure that preferred shareholders are paid all their dividends, including back payments for missed dividends, before the common stock owners can be paid. If the stock is non-cumulative, the shareholders would not be paid back for missed dividends.
  • Participating preferred stock rewards shareholders when the company meets or exceeds certain goals. The word “participatory” means that shareholders participate when the company does better. The company would pay additional dividends when the company does well.
  • Convertible preferred stock is when the shareholder can convert the preferred stock into shares of common stock at a certain price. The shareholder may convert when the price of the common stock goes up, and they are buying shares for less than the market price.
  • Callable preferred stock allows the company to force the shareholder to sell them the stock at any time before they reach the return price. Most preferred stock has a call date, but the company can issue perpetual preferred stock with no call date

Examples of Preferred Stock Fraud

The fact that preferred stock can have many complex features leaves individual investors susceptible to fraud in many ways. Not only may they not fully understand what they have bought, but their broker could also take advantage of them.

One of the main ways that you can be a victim of preferred stock fraud is when your broker has recommended an unsuitable investment. There may be many complex features that could change the characteristics of the individual stock. While many preferred stocks are thought of as safer, that is not the case for some shares.

For example, your broker may recommend the shares of a very risky company. Preferred shares of a distressed company could trade at a steep discount because of the uncertainty involved.

However, this does not mean that you have gotten a bargain. You have just taken on the risk that the company may not be able to pay dividends or will go bankrupt. You could end up wiped out when the bondholders have received all the assets in bankruptcy, and so then the broker may have made an unsuitable recommendation on multiple levels.

Many people think that all shares of preferred stock are traded on exchanges. Publicly-traded stock offers an extra degree of transparency because of additional reporting requirements.

However, some companies may try to raise capital through preferred share stock offerings before they have gone public. These stocks are better suited for more sophisticated investors, rather than individual investors.

However, your broker may have their own reasons for recommending a stock, such as trying to move firm inventory or receiving undisclosed compensation.

The broker may commit preferred stock fraud by selling you shares of a preferred stock at an excessively high markup. The fact that the preferred stock may be illiquid, or not publicly traded, may mean that the broker charges you excessively to buy the stock. They would profit from the markup.

The complexity of preferred shares offers brokers many other mechanisms to take advantage of you.

If you have been the victim of preferred stock fraud, you may be able to file a claim against your broker. You must file a claim against them through the FINRA arbitration process.

A neutral arbitrator, or panel of arbitrators, would review the facts of your case to determine whether you may be due compensation. An experienced FINRA arbitration attorney can review your case and advise you of the next steps.

Get Legal Help from a Preferred Stock Fraud Attorney Today

The attorneys at Rikard & Protopapas can help you fight your broker for misuse of preferred stock.

Investment advisors and brokers do not have unlimited power. Your broker must follow FINRA rules, and you can hold them accountable when they do not.

If you believe that you have been the victim of preferred stock fraud, contact an attorney today to discuss your case. You can send us a message online, or you can call us today at (803)-805-7546 to schedule your free initial consultation.



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