Risks of investing with fraudulent brokers

Investing in the capital markets has been very popular recently, especially in view of the current high rate of inflation. The public, seeing the prospect of relatively easy and quick enrichment, willingly lends their saved funds to a broker who promises them a return that is often many times higher than their own savings.

What are the unfair practices in investing through a broker?

First of all, you should beware if a broker uses a phone line for initial contact, when he presents his potential clients with a “unique” chance to invest their money.

Contracts that fraudulent brokers very often use to abuse the trust of their clients are so-called contracts for difference (CFD). Trading on these contracts involves high risk and is completely unsuitable for novice investors. It is a contract between the investor and the broker, under which the broker is obliged to pay the investor the difference between the current value of the asset and its value at the time the contract is concluded. However, if the difference is negative, the investor pays the difference to the broker. The dishonest broker, after concluding this contract, then pushes the inexperienced investor into many risky and speculative trades under the promise of profit maximization.

Another popular tool is the various types of bonuses that brokers offer to customers to motivate them to make their first investment. These bonuses are usually conditional on the customer investing a larger amount of money or on the number of trades the customer has to make.

The above practices are typically used by brokers who are registered in another EU country, typically Cyprus or Malta, or even outside the EU.

How to defend yourself?

A broker is generally obliged under current capital markets legislation to provide investment services to its clients with professional care, i.e. to act competently, honestly and in the best interests of its customers.

By unfair practices, a broker will usually violate a legal rule and the customer may be able to claim damages and recover his funds. At the same time, the broker in question is liable for an offence for which a fine of up to CZK 150,000,000 may be imposed.

One way to defend yourself is to file a complaint with the financial arbitrator. Proceedings with the financial arbitrator are free of charge and each party bears its own costs. The financial arbitrator is generally obliged to issue an enforceable decision on the matter within 90 days of obtaining all the documents.

Conclusion

Our firm recommends the utmost caution when dealing with suspicious investment offers. It is always advisable to find out in which country the broker in question is registered and under no circumstances send funds after a mere telephone conversation.

If you have been the victim of a broker’s fraudulent behavior, please do not hesitate to contact us and we will initiate steps to recover your savings as soon as possible.