Mutual Fund Fraud

A mutual fund is a type of investment that originates with the pooling of money from multiple investors for the purpose of investing in securities such as stocks and bond. Investors can then buy shares in the mutual fund. Mutual funds can offer a high level of safety and are preferable for investors seeking to have diversification while seeking any type of return and with any risk tolerance. However, mutual funds are not necessarily safe simply because they are a fund, as compared to individual investments. While mutual funds may offer diversification, liquidity, and professional management, mutual funds can be just as risky as individual investments.

Mutual funds must file a prospectus and regular shareholder reports by law. Before investing in a mutual fund, you should read the fund’s prospectus and shareholder reports, which can be found on the SEC website. Additionally, you want to make sure that the types of mutual funds you own are suitable for you in light of your overall portfolio.

When you purchase a mutual fund, you must select the class of shares to own. The only significant difference among the different shares classes is the amount you will pay in expenses and the amount of commissions your broker will receive for selling you the fund. If you purchased mutual funds and your broker did not explain to you the different share classes (A, B, C, etc.), then you may be a victim of fraud.

Generally, Class A shares impose a front-end sales charge on the customer. The sales charge is subtracted from the principal amount of your investment, and some or all of that charge is paid to the broker. Class B shares do not impose a front-end sales charge, instead charging a contingent deferred sales charge. This contingent charge is determined at the time you sell the fund, and your broker will still receive a commission. Typically, Class B shares impose higher yearly administrative fees.

Critically important is the distinction between Class A and Class B shares. Class B shares charge a significantly higher annual expense (12b-1 fee) to the fund holder than do Class A shares. This means that your investment performance is constantly being charged more in expenses than perhaps is necessary. Also, Class A shares offer investors breakpoints in commissions charged, whereas Class B shares do not. If an investor buys a certain dollar amount of a fund (or from a family of funds), the investor is entitled to a discounted commission. Class B shares may deprive the investor of commission discounts, while charging the customer more than necessary in commissions. Obviously, if the investor is paying less in commissions, the broker is receiving less in commissions.

Before purchasing B shares in a mutual fund, your broker should perform a careful analysis to determine whether Class B shares are suitable for you. Part of this analysis includes the broker determining how long you plan to hold the fund, the size of your investment, the expenses you will pay for each different class of shares, and whether you qualify for commission discounts or other breakpoints.

Another way brokers commit mutual fund fraud is by mutual fund switching. Generally, mutual funds are long-term investments. If your broker is trading your mutual fund as though it is a short-term investment, he/she is likely mutual fund switching and committing fraud.

Most, if not all, mutual fund fraud is committed to generate higher commissions for the broker at the expense of the investor. A broker may misrepresent the risk of the mutual fund so that you believe it is a safe investment, or a broker may fail to adequately explain the associated costs of the investment to you, or may fail to fully explain why the broker is recommending the fund. In some instances, the mutual fund family may be providing bonuses, awards, or other forms of incentives for brokers to sell one fund over another fund. Investors should be informed about these conflicts before investing.

Any misrepresentations or omissions of material fact regarding a mutual fund purchase, sale or exchange could cost you significantly. If your broker committed mutual fund fraud, causing you financial loss, call us at 512-306-8188 or contact us online.