Investment Churning Fraud
WHAT IS CHURNING / EXCESSIVE TRADING?
Do you know what “churning” is? If you have an investment account with a stockbroker, you should. Churning is a harmful practice in which a stockbroker executes an excessive and unnecessary number of trades in a customer’s account for the purpose of generating commissions and fees for the broker, and is a form of investment fraud. It’s illegal and unethical – a clear breach of the broker’s duties to the client. It can also inflict large financial costs on brokerage clients in the form of fees and commissions a client should never have to pay, losses on investments and lost investment opportunities, and tax liabilities. In the most extreme cases, churning can wipe out an investment account.
Investors whose broker has churned their account may feel reluctant to take legal action. They doubt they can recover their money, or feel intimidated about the difficulty of proving a broker’s misdeeds. However, with the help of an experienced stockbroker fraud lawyer, in many cases churning victims can not only get their money back, they may also recover additional damages. By confronting a broker’s unethical churning practices, clients will prevent the broker from taking advantage of other, more vulnerable customers.
If you suspect your broker has engaged in excessive buying and selling in your or a family member’s brokerage account, then contact the skilled, sophisticated securities attorneys at Price Armstrong today to discuss options for recovering your losses.
CHURNING / EXCESSIVE TRADING IS A BREACH OF TRUST
Giving a stockbroker authority to make decisions and execute trades in a brokerage account requires a significant leap of faith. A client trusts a broker to make informed, intelligent decisions about how to invest the client’s money. In the language of securities law, the investments the broker makes on the client’s behalf must be “suitable” – that is, consistent with the client’s investment goals, needs, wealth and level of financial sophistication. In exchange for these investment services, the client typically agrees to pay the broker a flat or percentage-based commission on every transaction the broker makes for the client’s account. Some investments carry with them commissions paid directly by the fund or creator of the investment as well.
Commissions are supposed to reflect the value the broker creates for the client by selecting sound, suitable investments for the client. If the broker does a good job and grows the value of the account, then over time the broker will earn higher and higher commissions (because there will be more money for the broker to invest).
Unfortunately, some brokers try to take a shortcut to earning commissions. Instead of trying to grow account value over time by making suitable investments, these brokers execute multiple, unnecessary purchases and sales of securities in the client’s account for the sole purpose of earning commissions on each transaction. This is “churning.” It’s a practice that breaches the client’s trust by draining value out of a brokerage account instead creating value in it.
CHURNING / EXCESSIVE TRADING IS ILLEGAL
Churning breaches a broker’s fundamental legal obligation to select “suitable” investments for the client. In so doing, it constitutes a violation of Securities and Exchange Commission (SEC) regulations and, potentially, state and federal securities laws. It also represents a violation of the rules governing the conduct of securities brokers established by the Financial Industry Regulatory Authority (FINRA). Brokers who break these laws and rules face:
- Revocation of their securities licenses
- Suspension or expulsion from the financial industry
- Civil liability to the clients they harmed
- Breach of fiduciary suits
The purpose of anti-churning (a.k.a. “quantitative suitability”) rules is to protect clients from being taken advantage of by their brokers. Importantly, the rules are not intended to prevent clients or brokers from executing trades. An investment strategy involving frequent trading may be suitable (and even successful) for a certain class of investor. Frequent trading only becomes churning violations when the broker’s chief purpose is to generate commissions, rather than to implement a “suitable” strategy.
CHURNING / EXCESSIVE TRADING EXAMPLES
To illustrate how churning occurs, below are some real-world examples of instances in which FINRA alleged and/or proved a broker had churned an account.
- A semi-retired 70-year old client with no investment experience agreed to invest $350,000 with a broker who had cold-called him. Over an 18-month period, the broker executed 115 trades in the account that realized a net investment loss of $230,000. The broker, meanwhile, collected $188,000 in account costs.
- A retired veteran with a disability invested $82,000 with a brokerage. In the span of just six months, his broker executed millions of dollars of transactions in the account, furiously buying and selling stocks over-and-over. The client paid $67,000 in costs on these trades, while losing $55,000 of investment value on them.
- A husband and wife, retired dairy farmers, invested $1.5 million in a brokerage account, only to see their broker trade so often the account incurred $1.3 million in costs in a single year.
These are just a few examples of what churning looks like. The practice is common, and the effects are sometimes only clearly identifiable with the help of an experienced stockbroker fraud attorney. A search on FINRA’s website for disciplinary action records containing the word “churning” reveals hundreds of actions in the past decade alone.
DETECTING CHURNING / EXCESSIVE TRADING
Not every investment account that loses money does so because of churning/excessive trading by a broker, of course. But, unexpected losses in an account may indicate churning when accompanied by one or more of the following:
- Fees, commissions and other costs that exceed investment losses, or that require unrealistic returns on the investments in order for the account to break even;
- Repeated “round trip” trades of the same security (e.g., buying and selling the same stock or mutual fund over-and-over);
- Frequent identical trades in the same security (e.g., splitting a $50,000 order into fifty, $1,000 orders);
- The total dollar value of trades over the course of a year in excess of twice the value of the account (a measure known as “turnover”); and
- A broker who executes trades against the expressed wishes of the client, or struggles to explain a high-volume trading strategy.
WHY YOU NEED A CHURNING / EXCESSIVE TRADING FRAUD ATTORNEY
If your broker has churned/excessively traded in your account, then hiring an attorney experienced in representing victims of securities fraud represents your best chance of recovering your losses. Challenging the legitimacy of a broker’s trading activity is complicated. It requires familiarity with the record-keeping practices and unique vocabulary of the investment industry, as well as with the procedural hurdles involved in seeking relief under SEC and/or FINRA rules.
At Price Armstrong, we have represented individuals in many securities arbitrations and recovered losses for investors nationwide whose brokers or financial advisors have taken advantage of them by churning and excessively trading in their accounts. If you suspect your broker of these illegal, unethical practices, contact our law firm today to schedule a free consultation with a member of our team.
CONTACT US FOR A FREE CASE EVALUATION
If you are a victim of churning or excessive trading, contact the attorneys at Price Armstrong. We can help you seek justice and protect your rights throughout the process. Call us today at (205) 208-9588 for a free initial consultation and review of your case. Let us fight for you – call now!