Available 24/7There are many ways that a broker can take money from you. Some may be under the guise of what appear to be legitimate trades in the market.
However, the broker may be making those trades not to make you money, but they are doing it to take your money for themselves. There is an illegal practice and form of broker misconduct called churning, where a broker makes trades just to take commissions from you.
If you have been a victim of churning and excessive trading, you can take legal action to recover compensation from the broker. Call the attorneys at Rikard & Protopapas today to discuss your case.
What Is Churning?
Brokers and financial advisers may be paid in one of two ways:
- They receive commissions on trades and a markup or markdown on a securities transaction.
- They are paid a percentage of assets under management.
When a broker is paid on a commission basis, they may have interests that are not in line with yours. Some clients give their brokers discretionary trading authority, where they decide what trades to place for clients and when to do it. While they must operate according to certain restrictions and requirements, they have the ability to decide how to trade on their client’s behalf.
Some brokers abuse this discretion because they want to be paid more from the client’s funds. They know that the more they trade, the more money the broker will personally make. Thus, they will engage in a practice called churning, which is excessive trading in a client’s account to generate commissions for the broker.
Oftentimes, these trades have little to no financial justification, and they are executed with the sole intent of taking money from the customer’s account.
Churning violates the following rules:
- FINRA Rule 2111 imposes a quantitative suitability requirement on the broker, and it forbids trades that “are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.”
- SEC Rule 10b-5 prohibits “manipulative, deceptive, or other fraudulent device or contrivance” in connection with a securities transaction.
Red Flags That Are Indicators of Churning
You should always check your investment statements periodically, both for your situational awareness and to be on the lookout for any possibly illegal practices.
In addition, your broker is obligated to send you a trade confirmation under SEC Rule 10b-10. You should review every confirmation that you receive.
Here are some signs that your broker may be engaging in churning:
- The total amount of fees in your account seems excessively high, especially in comparison to the total value of your account
- There are frequent in and out trades in your account
- The broker is engaging in a trading strategy that does not fit your overall investment profile
- There were trades made that were outside the scope of your authorization that you gave the broker
You should question anything that does not seem right on your statement and ask your broker for an explanation. If you believe that the broker has done something illegal that has cost you money, you should contact an investment fraud attorney to take legal action.
FINRA Arbitration Cases for Churning and Excessive Trading
Based on the terms of your brokerage agreement, you would need to open an arbitration claim through FINRA. An independent arbitrator or panel of arbitrators, selected by both your attorney and the broker’s lawyer, will hear your case and issue a binding ruling.
If you are successful, you may be able to recoup your losses from the illegal practice.
You would need to prove several elements to win an arbitration case about churning. You must show that the broker:
- Had control over the client’s account, whether it was through a written agreement or implied control.
- Engaged in excessive trading.
- Acted with intent to defraud the client or with reckless disregard for the client’s interest.
The broker is not automatically liable for churning just because they made many trades for the customer. The arbitration panel would need to determine exactly what would be considered churning.
They may consider measures, such as the:
- Overall turnover ratio in the account
- Commission to equity ratio in the account
- Client’s overall goals for the account
- Total size of the account
You may need to present additional evidence, such as testimony from an expert witness, to show that the broker engaged in churning.
Compensation in Your Churning Arbitration Case
If your arbitration through FINRA is successful, you could recover:
- The actual damages that you suffered from churning
- The money that you could have made if your account was well-managed
- Legal fees for your arbitration
- Punitive damages assessed against the broker for their own conduct
- Disgorgement of the commissions that the broker illegally made
How Our Attorneys Can Help You
When you have suffered large losses in your account, you suspect that your broker has done something wrong, but you may not know exactly what happened. We can help you get to the bottom of what transpired and put you in a position to take action against your broker. We will review the transactions and help you estimate the damages that you suffered.
Then, we will represent you throughout the arbitration process, making the case that your broker violated the rules and should be obligated to pay you.
When you are dealing with any securities law case, you need the help of an experienced attorney who knows both the rules and the process. That is exactly the experience that we have at Rikard & Protopapas.
Contact a Lawyer About Suspected Churning and Excessive Trading
You can take legal action when your broker has cost you money by violating securities laws and regulations. In order to have the best chance, you should hire an attorney to develop and present your case.
You should speak with our attorneys as soon as possible so you can begin the arbitration process. To contact us at Rikard & Protopapas, you can call us at (803)-805-7546 or you can send us a message online. We offer free consultations to prospective clients.