Mutual Fund Fraud

It is a fraudulent and deceptive practice to engage in the sale of back-end loaded, Class "B" mutual fund shares, where a customer would otherwise be entitled to quantity discounts or "breakpoints" from the sale of front end loaded Class "A" shares. This is a form of stockbroker fraud or misconduct.

For example, if a client purchased five different funds totaling $100,000 within any particular family of funds, by investing $25,000 in each fund, in Class B Shares, the broker will receive fees or commissions of typically 5% or $5,000. Should the client sell these Class B shares, there is a surrender penalty associate with the sale of these securities, and this penalty decreases each year. Typically after 5 years, there is no penalty. However, the broker gets paid upon the initial purchase of these shares, in this example, $5,000 or the 5% commission.

Had this same customer purchased $100,000 of Class A shares, and sought to purchase five different funds, within a particular family of funds that customer would otherwise be entitled to quantity discounts, or "break-points" and could pay a commission, albeit front end loaded of less than 2% or in our example, $2,000.

In an effort to maximize commissions, at the expense of a customer, a broker may purchased back-end loaded or "B" shares, as opposed to front-end loaded "A" shares, where the customer would be eligible to earn "break-points." This practice has been declared "fraudulent and deceptive," per se, by securities regulators. ( See, e.g. NASD Press Release, June 25, 2003 ("NASD Brings Enforcement Action For Class B Mutual Fund Share Sales Abuses")).

This is a form of stockbroker fraud or misconduct.