Mutual Fund Fraud Lawyers — Bakhtiari & Harrison

Mutual fund fraud — the most common forms

Share class abuse — Class B and Class C shares

Share class abuse is one of the most common and well-documented forms of mutual fund fraud. Most mutual funds offer multiple share classes with different fee structures. Class A shares charge an upfront sales load (typically 4-5%) but have lower ongoing expenses. Class B shares have no upfront load but charge higher ongoing 12b-1 fees and carry backend surrender charges. Class C shares have no upfront load and no backend charge but carry the highest ongoing 12b-1 fees.

Brokers frequently recommend Class B or Class C shares over Class A shares — not because they are better for the investor, but because they generate higher ongoing commissions for the broker through 12b-1 fees. For long-term investors, Class B and Class C shares almost always result in higher total costs than Class A shares over a holding period of more than a few years. FINRA has brought numerous enforcement actions against broker-dealers for systematic Class B and Class C share abuse.

Bakhtiari & Harrison has represented investors in share class abuse claims and is familiar with the analytics required to quantify the excess fees paid as a result of improper share class recommendations.

Unsuitable mutual fund recommendations

Recommending mutual funds that are inconsistent with an investor’s risk tolerance, investment objectives, time horizon, or financial situation is a suitability violation under FINRA Rule 2111 and Regulation Best Interest — regardless of the share class recommended. Common unsuitable mutual fund recommendations include: high-risk sector funds recommended to conservative investors, international and emerging market funds recommended to investors with short time horizons, and high-yield bond funds recommended to investors who cannot absorb credit risk.

Mutual fund switching — churning through fund exchanges

Mutual fund switching occurs when a broker recommends frequent exchanges between mutual funds — particularly funds within the same fund family — to generate commissions and sales loads. Because mutual fund trades do not generate traditional commissions, switching abuse is often harder to detect than churning in individual securities. However, the pattern of systematic switching — selling one fund and buying another within days or weeks, with no coherent investment rationale — is actionable as a suitability violation and a form of churning.

Market timing and late trading violations

Market timing — rapid in-and-out trading of mutual fund shares to exploit pricing inefficiencies — and late trading — executing mutual fund trades after the 4:00 PM pricing cutoff while receiving the day’s NAV — are both violations of mutual fund prospectuses and securities regulations. Investors whose accounts were used for market timing or late trading by their broker without consent may have claims for the resulting harm.

Undisclosed conflicts of interest — revenue sharing

Many broker-dealers receive revenue sharing payments from mutual fund companies in exchange for recommending their funds — creating direct financial incentives to recommend certain fund families over others regardless of performance or suitability. FINRA and the SEC have brought enforcement actions against broker-dealers for failing to adequately disclose these revenue sharing arrangements. Investors who were steered toward specific fund families due to undisclosed revenue sharing arrangements may have actionable claims.

Quantifying mutual fund fraud damages

Mutual fund fraud damages require forensic analysis of account records — comparing actual investment results against what a suitable portfolio would have produced, calculating excess fees paid due to share class abuse, and quantifying the impact of fund switching on overall returns. Bakhtiari & Harrison works with financial experts and damages analysts on every mutual fund fraud case to build a complete and persuasive damages analysis for FINRA arbitration.

Frequently asked questions — mutual fund fraud

How do I know if my broker recommended the wrong share class?

Review your account statements and identify the share class of each mutual fund held — typically shown as Class A, B, or C in the fund name. If you hold Class B or Class C shares and have held them for more than two to three years, there is a reasonable probability that Class A shares would have been less expensive in total. Bakhtiari & Harrison can analyze your account records and calculate whether share class abuse occurred.

My broker frequently moved me between mutual funds — is that a problem?

Frequent mutual fund exchanges — particularly within short time periods and without a clear investment rationale — may constitute mutual fund switching abuse. Bakhtiari & Harrison evaluates the pattern of fund transactions in every account review and identifies switching abuse as part of its initial case assessment.

What is a 12b-1 fee and how does it affect my returns?

A 12b-1 fee is an annual fee charged by a mutual fund to cover marketing and distribution expenses — including ongoing commissions paid to the broker who sold the fund. 12b-1 fees reduce the fund’s net asset value annually and compound over time, significantly eroding long-term returns. Class B and Class C shares typically charge 12b-1 fees of 0.75-1.00% annually. Over a ten-year holding period, the cumulative impact of a 1% annual 12b-1 fee on a $500,000 account can exceed $75,000.

Does the firm handle mutual fund fraud claims outside California?

Yes. Bakhtiari & Harrison represents investors in all 50 states. Ryan Bakhtiari is admitted in California, New York, Texas, the District of Columbia, and multiple federal courts.

For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.

Contact a mutual fund fraud lawyer — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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